Credit Cards 101: Picking the Right Card
Podcast Transcription
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Hi everyone, welcome to another episode of PFCU's Money Talk Podcast. I'm your host Maddy. Let's talk about credit cards. Finding the right credit card isn't as easy as filling out the first application you get in the mail, or at least it shouldn't be that easy because you want to use credit to your full advantage and find the right card to fit your unique needs. So, first you want to determine why you want or need a credit card and then how you plan to use it every month. Here are some questions to ask yourself.
- First, do you plan to pay off your balances in full and on time every month? If not, how many months are you going to spread your repayment over?
- Are you looking to transfer the balance of another credit card?
- Are you primarily interested in rewards?
- Do you want to use a credit card to build or repair your credit?
- And do you primarily shop at one store?
These answers can help you get the maximum benefit from your credit card. And really, there's a lot of different types of credit cards. It's not one size fits all.
There's different categories of credit cards and each one works a little bit differently. The first type is the traditional credit card. This is one of the four major networks that we've all heard of, right? MasterCard, Visa, American Express, and Discover. So whichever network your card uses, some retailers may only accept certain networks. So, for example, some may only accept Visa while others only accept MasterCard. So, if you're loyal to a particular retailer and you shop there a lot, make sure to pick a credit card network that they accept, which is something that I don't know if I've ever thought about, right? So, if you shop a lot somewhere, you don't want to get a credit card that you plan to use there that they don't accept. So, the details of how your credit card works, like the interest, the fees, the rewards, are all up to the card issuer. American Express and Discover, those are networks, and they're also the issuer. However, Visa and MasterCard networks, they use a separate card issuer, would be your bank or your credit union. So, if you have a card through your bank or your credit union, it's going to be MasterCard or Visa. But no matter the network, all traditional credit cards have a spending limit that is generally determined on your credit history. You can pay your bill in full every month or pay what you owe overtime. You're going to want to make your minimum payment every month and any balance left over after your minimum payment that you carry over month to month is going to accrue interest which is the cost of borrowing money. So, then you're paying back what you owe plus the interest. And if you don't pay at least your minimum payment every month, that's when you get a late charge or your credit rating's going to take a hit. So, you want to make sure to at least make that minimum payment.
The next type of card is charge cards. Sometimes people use the term charge card and credit card interchangeably, but actually a charge card is a different type of credit card. The difference being that you must pay off a charge card balance in full every month. And most of them don't have a preset spending limit and bill an annual fee. They also aren't available from a wide range of card issuers. Yes, you have to pay your balance in full every month. And if you don't, then it's possible that the issuer is going to close your card or charge you a fee. And generally, charge cards are only available to those with really, really good credit.
Next, we have secured cards. This is a great option for someone who's just starting out with either little to no credit or maybe you're trying to build your credit. Secured cards require a deposit with the issuing financial institutions. So, for example, if you get a secured card from your credit union, the amount that you deposit in a savings account is going to equal your card spending limit. So, if you deposit $500, that's going to be your spending limit on your credit card. This kind of gives security to the card issuer that if you don't pay your bill, your credit card bill, then they're going to take that amount out of your deposit. But as you pay on time and you make your payments, your credit rating is going to improve and then you will eventually qualify for a traditional credit card. So, it's a great option for when you're just getting started.
Co-sponsored cards are when a financial institution partners with another company, like an airline or a retailer, to issue a co-sponsored card under one of the major networks. For example, the bank or the credit union handles the billing, while the other brand, like the airline, handles the perks, like travel points for airline trips or cash back at stores. These cards usually have a large reward bonus when you enroll and meet the bonus requirements. After that, you usually earn rewards on every purchase that you make with that card. You'll probably need to spend a large amount before reaping any major benefits from the card. And they usually charge annual fees and have a higher APR, which is an annual percentage rate. And that's the yearly cost of using credit.
That was a lot about different types of credit cards. Now let's move on to interest and why interest matters. If you pay off your credit card every month, you pay the full balance at the end of the month, your interest doesn't really matter. You're not going to be paying interest on your balance. However, if you don't always pay in full and you spread out your payments over time, your interest rate is going to be a main factor in deciding between cards because that interest is going to add up month to month and you're going to be paying back more than what you originally charged on your card. Looking at APR gives you a true picture of the cost. So, the annual percentage rate is the yearly interest charged on a borrowed sum and credit card companies are required to disclose the APR to any borrowers. It's a good way to compare credit card terms.
So, there you have it. Choosing a credit card might take a little more thought than you maybe originally thought that it might. However, taking that extra time and finding out what might work best for your needs, especially as you're just starting out and building your credit can make a big difference in your financial health and really getting everything you want out of a credit card. Thanks for listening everyone. And we'll see you next time.
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