FAQ: Credit Cards

by Timothy Lickteig on December 12 2021

If you’re shopping around for your very first credit card you’re sure to have a lot of credit card questions. But finding all the information you need can be time-consuming. We’ve put together a detailed list of common credit card questions and answers to make it easier for you.

What is a credit card?

A credit card is a line of credit that banks, credit unions, and private financial institutions offer to qualifying customers.

How do credit cards work?

Every credit card has a credit limit that’s set by the issuing company. You can use your credit card to purchase anything up to your specified credit limit. At the end of the 30-day billing cycle, you’ll receive a statement detailing all your purchases, and the amount you owe. You must clear the outstanding balance by the statement due date. Once you do, your credit limit is re-set for the next 30-day billing cycle.

What are the major benefits of having a credit card?

Credit cards offer you the convenience of being able to purchase anything at any time. You can use it to buy items online as well as offline, from anywhere in the world.  No need to withdraw cash from the ATM or carry cash around with you. Just swipe your credit card and pay for the item you want. This is particularly useful when you want to purchase big-ticket items.

Another huge benefit of credit cards is that they help build your credit score. Every on-time payment will add a few points to your credit score. Making on-time payments is the single best way to steadily improve your credit score.

The third benefit of credit cards is the points that can be redeemed for various rewards. These perks differ from one card to another.

What are the downsides of credit cards?

One downside of owning a credit card is the temptation to spend more than you can afford. Want to buy that expensive gadget but don’t have cash on you? Just pull out your credit card and buy it on the spot. The problem with this is there are major repercussions if you can’t afford to payoff the balance. With the hefty fines and interest on the outstanding balances, your gadget will end up costing you much more than the purchase price.

What happens if I miss the payment due date or can’t afford to clear the outstanding balance?

Missing a payment deadline can have several consequences. The card company will charge you a late fee as well as interest on the unpaid amount. Credit cards are notorious for having the highest interest rates. Missing multiple payment deadlines can be an expensive mistake.

The missed payment will also be noted on your credit report. This will hurt your credit score making it difficult to get credit in the future.

What are the requirements to get a credit card?

The specific eligibility criteria will vary among credit card issuers. In general, you’ll need to meet these requirements:

  • Be at least 18 years of age
  • Have a decent, steady income – you’re less likely to default on your payments when you’re earning a decent steady income
  • Have a good credit score – a good credit score indicates that you’re a responsible borrower and make all your debt payments on time

Can I get a credit card if I have a poor credit score or no credit history?

Applying for a credit card can be a Catch-22 situation. You need a card to start building your credit score but card companies want to see your credit history to approve your application. It’s worth spending some time looking for credit card companies that approve applicants with little or no credit history.

If that fails, consider getting a secured credit card. This requires you to make a refundable security deposit, which the credit card company or bank holds as collateral to issue you a credit card. With a secured credit card, the amount of your security deposit acts as the credit limit. That’s the maximum amount you can spend.

Another option is to get a prepaid credit card. A prepaid card requires you to load cash onto the card in advance. You can spend only up to the amount that you’ve loaded. If you want to increase your spending limit, you have to load more funds as you have them available.

Secured and prepaid credit cards are the easiest type of credit cards to get. They’re also a great way to get started with building your credit score when you have little or no credit history. If you need some additional ways to build your credit, check out this article.

What’s the difference between a credit card and a debit card?

With a credit card you borrow money from a credit card company. You then pay for your purchases at the end of each billing cycle, which is usually one month. You can borrow up to the credit limit that your credit company sets for you.

Debit cards are issued only by banks and are directly linked to your checking account. When you use your debit card to purchase something, it deducts the money directly from your account. There is no line of credit. You can only spend up to the balance in your checking account. To get a credit card, all you need is a savings account with a balance. There are no other criteria.

The advantage of using a credit card over a debit card is that credit card usage allows you to build your credit score. Debit card usage does not offer this benefit.

Should I get a credit card even if I don’t really need to borrow money?

It’s advisable to get a credit card even if you don’t need to borrow money for several reasons. Using a credit card offers unparalleled benefits in terms of buying convenience, the ability to build your credit score, and money-saving potential by way of cashback or loyalty points.

The reason you may not want to get a credit card is if you tend to give in to impulse purchases and regularly spend more than you can afford.

How many credit cards do I need to build my credit score?

The number of credit cards you have doesn’t matter. You can build your credit score with just one credit card. What’s important is that you make all payments on time every single month. On-time payments is the single most important factor that goes into improving your credit score. A single late payment can hurt your credit-building efforts.

When using your credit card to boost your score, try not to max your credit limit. Reaching your credit limit every month could be an indication of financial stress. This can impact your credit score. Keeping your card purchases to a minimum will help when you’re building your credit score.

How do I apply for a credit card?

Identify one credit card that’s the best fit for you in terms of eligibility and rewards, fill out the online application and submit it along with the required documentation. Applying for a credit card is pretty straightforward. Different credit card companies have different requirements. They offer different rewards too so make sure you do your research.

One thing to be careful about – never apply for multiple credit cards at the same time. The companies will run a ‘hard credit pull’ to check your credit score. This will cause your score to drop by a few points. Multiple hard credit pulls done at the same time will cause your credit score to plummet.

If you’re not sure about getting approved, it’s a good idea to call the credit card company and ask them.

What questions should I ask when applying for a credit card?

The questions to ask the credit card issuer should be related to whether they’ll approve your application. After you give the company details about your age, income, and credit score, they will let you know if you qualify. Remember, this is only a ‘prequalification’. You’ll received a confirmed approval only after the credit card issuer has checked your credit report.

Why was my credit card application rejected?

Your credit card application may have been declined for any one of these reasons:

  • Low credit score
  • Spotty employment history
  • Too low income
  • Limited credit history
  • Too many negative entries on your credit report
  • Too high loan or credit card balances
  • There’s a charge-off on your credit report, which means an earlier credit card bill went unpaid for 6 months or more
  • You are younger than 18 years of age
  • Recent delinquency

Can I reapply for a credit card?

Yes, you can. Ask the credit card company for an adverse action letter. This will tell you why they rejected your application. That way you can work towards improving in those areas and increase your chances of getting approved when you reapply. Here are some tips on how you can build credit fast.

Can I withdraw cash with my credit card?

You can but it’s never a good idea to do this. Credit card companies charge a steep cash advance fee plus interest on the amount you withdraw. The interest starts accruing from the day you withdraw the money until you pay it off. This can add a substantial amount to your total. It’s best to avoid withdrawing cash using your credit card unless it’s an emergency.

Overall, a credit card is a powerful financial tool that offers several benefits. But only if you use it responsibly. This means using it only for purchases that you can afford and paying off the balance in full before the due date. Reading through credit card questions and answers will help you enjoy the many benefits that credit cards offer while effectively navigating the potential downsides.

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