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How Credit Cards Work

Editorial Note: Articles published are intended to provide general information and educational content related to personal finance, banking, and credit union services. While we strive to ensure the accuracy and reliability of the information presented, it should not be considered as financial advice and may be revised as needed.

If you’re considering opening a credit card, it’s essential to understand how they work. Interest rates, fees, and billing cycles are just a few of the many factors that can affect your financial health.

When used responsibly, credit cards can improve your finances and quality of life through perks like rewards and credit building. However, they require discipline to avoid overspending and potentially falling into debt.

Read on to learn more about the inner workings of credit cards so you can enjoy their many benefits.

The Basics of How Credit Cards Work

Credit cards offer you a line of credit from a lender. For example, if your credit limit is $1,000, you can spend up to that amount. When you make a purchase, your balance increases and your available credit line decreases.

If you buy $100 of groceries, you owe $100. You'll get a bill for $100 at the end of the month. But you don't need to pay it all at once, just the minimum set by your lender. Any leftover balance goes into the next billing cycle. However, it's important to keep in mind that if you only pay the minimum amount, interest will accrue on the remaining balance, potentially increasing your overall debt over time."

Understanding Credit Card Terms & Fees

The credit card company must give you a list explaining all the details of the card. Read these terms carefully. By using the card, you are agreeing to the terms.

Here are a few important terms to look out for:

Credit Limits—The maximum you can charge on the card.

Billing Cycle—This is the period you have to make purchases. When the billing cycle ends, you will receive the bill for what you’ve charged on the card.

Balance—The balance is the amount you owe. You’ll see this listed on your monthly statement at the end of the billing cycle. This amount reflects a combination of what you borrowed as well as any accumulated interest.

Late Fees—Most lenders tack on a late fee if you fail to make your minimum payment on time. Late fees can be expensive and late payments may reduce your credit score.

APR—Perhaps the most complex element of credit cards is the annual percentage rate (APR). This is the amount of interest charged to you for borrowing money. If you pay your balance in full during your billing cycle, however, there is no interest charged to you.

Understanding Credit Card Payments

Making credit card payments can seem confusing, but it doesn't have to be. You’ll need to know several important terms to understand your bill and pay responsibly.

Statement Balance—This is the total balance on your credit card at the end of your billing cycle. Completely paying off the statement balance by the due date allows you to avoid paying interest.

Minimum Payment—This is the least amount you must pay by your due date to keep your account in good standing. However, only making the minimum payment means carrying a balance into the next month and incurring interest charges.

Current Balance—This is the total you owe now, including new charges minus any payments. Your balance can change daily as you make purchases or payments.

Remember, paying your full bill every month helps you avoid extra charges and keeps your credit score higher.

The Perks of Cash Back Credit Cards

You might wonder, “How do cash back credit cards work?

The answer is simple. They offer a tangible reward—cash!—for purchases made.

Cards like Listerhill’s Signature Rewards Card allow you to earn a percentage back on your purchases. The rate at which you earn cash back depends on the card and the spending category. For instance, some cards offer higher cash-back rates for groceries or gas.

Redeeming your cash back is generally straightforward. Some cards allow you to apply the cash back as a statement credit, effectively reducing your monthly bill. Some might let you keep the money or use it to buy things at certain stores or gas stations.

While having multiple cards can be advantageous, responsibly managing them is crucial. Regularly monitor your accounts, make timely payments, and enjoy the benefits that the cards offer.

The Cost of Using Credit

Interest is the fee for using a credit card. If you fully pay off the balance, there’s no interest. But if you carry a balance into the next month, the Annual Percentage Rate (APR) applies. Your credit card issuer will inform you of your interest rate before giving you a card.

Also, be sure you read through the terms to know all of the other potential fees, including:

  • Annual fees

  • Late fees

  • Balance transfer fees

  • Cash advance fees

  • Transaction fees for overseas payments

Using credit can provide financial flexibility but also harbors potential for debt. Misuse or overreliance can lead to escalating interest payments and potentially crippling debt. Careful management and timely repayments are crucial to prevent you from falling into a debt trap.

The Benefits of Using Credit

Credit, when used responsibly, can be a powerful financial tool. It enables you to make purchases and pay them off over time, facilitating budget management. Additionally, using credit can help you handle unforeseen expenses without depleting your savings.

Building credit history is another significant advantage. Consistent, timely repayments improve your credit score, making you a more attractive candidate for loans or mortgages. A good credit score can result in lower interest rates, saving you money in the long run.

Moreover, many credit cards come with rewards programs. From cash back and travel rewards to special discounts, these benefits can enhance your purchasing power. Some credit cards even offer insurance protections, like travel or purchase protection, adding an extra layer of security to your transactions.

How Many Credit Cards Should You Have?

There’s always a new promotion or creative card that allows you to earn rewards, get cashback, or pay 0% interest. However, do you really need different types of cards to maximize your spending power?

The answer to that question depends on your spending habits and the terms of the card.

  • If your card has a hefty yearly fee, but you rarely use it, you may lose more than you gain.

  • Our cards have no annual fees, which is very advantageous for the cardholder.

  • If your card has high interest and no perks, you likely pay much more than you need to.

  • If you collect cards and run their balances up each time without paying them off, you’re damaging your credit.

Determining the Ideal Number of Cards

The number of credit cards you have is less significant than how you manage them. As long as you maintain good spending habits, you can have as many cards as you want. It will show that you can handle credit accessibility without mismanaging your accounts.

Here are a few tips for good credit management:

  • Pay your bill on time every month.

  • Keep your utilization rate at or below 30%.

  • Only close cards if you spend less or the fee is too high for how you use it.

  • Only apply for a new card every six months, so you don’t show too many applications.

Consistently meeting these benchmarks sends positive credit information to the three major credit bureaus each month. Your payment history is the most significant factor in calculating your credit score, making on-time payments crucial.

Two important factors to consider include your utilization rate and the benefits the card offers.

Utilization Rate

The credit card utilization rate is the percentage of your total available credit that you're currently using. Keeping this rate low is vital to maintaining a healthy credit score. Having more cards can lower your overall rate if you keep all balances low.

Earn Rewards

Look at the rewards offered and see if they match up with your spending habits. For example, rewards could include cash back, gift cards to your favorite store, or even 0% interest for a period of time.

How Many Credit Cards Is Too Many?

You’ll find the answer to this question by looking at your spending habits.

If you need help keeping good credit with your current cards, like missing payments or overusing them, don't seek more credit. Only consider applying for a new card when you can manage your credit better.

If your card's annual fees aren't justifiable or affordable, consider downgrading to a no-annual-fee option. Listerhill offers several such credit card alternatives that will allow you to save more money.

If I Have Too Many, Should I Close My Card?

Before considering closing your credit cards, it's essential to understand the potential impact on your credit. Conduct thorough research to ensure that such a decision won't negatively affect your credit in the long run.

Lenders will often look at the age of your credit history when making a decision. If you close a card that you’ve had for ten years, your average credit history will drop significantly. It’s often better to keep the account open and put the card in a safe place.

Finding the Right Credit Card for You

When considering a new credit card, carefully review all options. Choose one that best aligns with your needs and provides the desired features and benefits. You’ll be surprised at the different perks available like zero interest on balance transfers, cashback rewards, points, and more.

At Listerhill Credit Union, we offer two credit card options, the Signature Rewards card, and the Platinum card. Both cards offer low-interest rates, great features, and benefits. In addition, these credit cards do not have annual fees. Plus our Signature card offers 2% cash back on every purchase!

See Our Signature Rewards Card Benefits

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Frequently Asked Questions

  • What are some factors to consider when choosing a rewards credit card?

    Determine whether you prefer cash back, travel points, or other reward types. Then, explore how and when reward points accumulate, if there are spending caps, and how easy it is to redeem your rewards. Financial institutions like credit unions tend to offer great rewards credit cards.

  • How can I compare credit card offers before making a decision?

    Carefully review rewards programs, like cash back or travel miles, when comparing credit cards. Also, consider the rewards rate, interest rates, annual fees, and any additional benefits the card includes.

  • What are the benefits of choosing a credit union's credit card compared to others?

    Our credit cards reward you for making purchases. They feature competitive interest rates and fewer fees than traditional banks. Members benefit from personalized customer service. We work closely with you to understand your financial situation and needs.

  • What if I prefer to make my payments through a pre-authorized automatic payment arrangement (ACH)?

    Please contact TruHome at 844-203-3642 to set up automatic payments or visit here to set them up yourself.

  • What if I prefer to make my payments through the Listerhill Mobile Banking app or Online Banking?

    Unfortunately, when the transfer occurs, mortgages will not be displayed on our app or in online banking, but we are working to bring that functionality ASAP.

    In the meantime, please visit here to view all mortgage information and payment options.