Credit Cards 101

Credit cards are like a power tool for your financial life. If you know how to use them properly, they can reward you with benefits and well-being. Use credit cards recklessly, and you can put your financial health at risk.

Here are 4 things to understand so you can live well with credit cards:

1. What is a credit card, and how does it work?
2. Pros and cons of credit cards
3. What type of credit card is right for you?
4. How to use your credit card wisely

What is a credit card, and how does it work?

A credit card can be issued in fantastic plastic or stored in a mobile wallet*, but its function is the same. It helps you make purchases using money you are approved to borrow from a financial institution. From applying for a card to paying your balance, here’s how a credit card works.

Getting a credit card

Credit cards are issued by financial institutions like Numerica. The first step is to apply**. If approved, your card will be issued with a set credit limit — the maximum amount of money you can borrow using your credit card. Credit limits range widely. As with any loan, the amount you have access to is based on many factors, some of which can include income, credit score, and debts.

The credit card itself is the tool you use to access this line of credit, the amount of credit that has been extended to you.

Using your credit card

Say you have a Numerica Visa Platinum credit card. Over the course of the month, you use it to pay for groceries, fuel, and a streaming subscription. Each time you use it, the credit union loans you money to cover the purchase.

Meanwhile, Numerica is able to send your payment to the grocery store, gas station, and streaming service thanks to its partnership with Visa. Visa serves as the payment network, making sure the correct person gets billed for the purchase and the money gets to the merchant. Other examples of payment networks include Mastercard, Discover, and American Express.

Paying your credit card balance

Each month, all of your credit card purchases are gathered into a statement, and payment is due. Under your credit card agreement, you typically have a couple options for paying back.  

Pay the minimum payment or more.
To stay current and protect your credit, you are required to make at least the minimum payment listed on your statement. If you don’t plan to pay the entire balance you charged, any remaining balance accrues interest***. Interest is the cost you pay for delaying repayment of a debt. It’s paid regularly and at a particular rate.

Pay the balance in full.
This is the best option for your financial well-being. If you pay off the entire balance by the deadline on your credit card statement, you don’t accrue that pesky interest!

Difference from a debit card

What’s the difference between a credit card and a debit card? It comes down to whose money is being used for the transaction.

• Credit card = the financial institution’s money: It is loaned to you to make the purchase, and you must pay it back.
• Debit card = your money: A debit card is connected to your checking or savings account. A debit card transaction deducts money you already have from your account.

Pros and cons of credit cards

Remember the power tool analogy? A credit card can be good or bad, depending on how it’s used.

Pros

Convenience: A credit card is a simple way to pay. You avoid the need to carry around a lot of cash. Online transactions are a breeze. And, in a pinch, you have the flexibility to pay for a major or unexpected purchase over time.

Building credit: Use your card wisely, and you can establish a healthy credit history. The better your credit, the more doors may open for lower rates and new opportunities.

Benefit programs: Many credit cards offer cash back or other rewards like airline miles.

Protection: Credit cards may be a safer, more secure way to pay, offering more protections and the ability to dispute unauthorized charges. Laws like the Fair Credit Billing Act protect cardholders from fraudulent transactions. At Numerica, all cards are protected by Visa’s Zero Liability Policy, guaranteeing cardholders won’t be held responsible for unauthorized charges. Plus, some cards come with added benefits like cell phone protections and trip cancellation coverage.

Cons

Overspending: Credit cards make it easy to spend money, and the temptation is real. Make sure you stay within your budget — and don’t become detached from your spending.  

Debt: Spending money you don’t have can have consequences. Paying off debt is possible, but it’s far from optimal. Live your best financial life. Don’t dig holes you will regret.

Interest and fees: As with any loan, there are associated costs. Credit cards tend to charge higher interest rates. Additional late fees or annual fees are common. Read your cardholder agreement, and use your card wisely.

Damaged credit: If you use a credit card irresponsibly, your credit score plummets. Missing just one credit card payment can plunge your credit score 100 points. A credit score reflects how much you can be trusted with borrowed money. So be careful, because your bruised credit may limit your future opportunities.

What type of credit card is right for you?

Does it seem like everyone wants to offer you a credit card? The commercials are everywhere. Promotions arrive daily by mailbox and inbox. You can’t even shop at your favorite store without being asked to sign up for its branded card.

There are many things to look for in a credit card. As you decide what’s best for you, these 3 types of credit cards typically stand out.

Rewards: These cards promise a variety of perks, often themed around a specific benefit. Examples include travel cards, retail store cards, and general points cards. The Numerica Visa Platinum allows cardholders to earn points toward airline miles, gift cards, and merchandise — in addition to cash back.  

Cash back: These cards give you money back on your purchases.  The Numerica Visa Luna offers 1.5% cash back on all purchases and no foreign transaction fees.

Secured: Turned down for other cards or need to boost your credit score? Cards like the Numerica Secured Visa help people rebuild or establish credit. These cards have credit limits tied to funds you already have. This approach helps you boost your credit and avoid spiraling debt.

How to use your credit card wisely

Want to live well with credit cards? Here are a few pro tips: 

• Make the minimum payment or more on your credit card bill each month. Pay it in full if you can.
• Don’t max out your credit cards. The amount credit you have available to you represents 30% of your credit score.
• Don’t open too many credit card accounts, and wait at least 6 months between credit card applications.
• Keep credit cards without an annual fee open and active. Long, healthy credit relationships reflect positively on your credit score.
• Regularly review your account. Reconciling your spending helps you avoid fraud and stay on budget.
• Looking to grow your credit limit? Many financial institutions are willing to increase this cap after you show a track record of responsible credit card usage.
• Understand your credit card agreement. Knowing the fine print helps you avoid fees and maximize card benefits.
• Ask for help when you need it. Proactively contact your credit card provider, especially if you can’t pay your bills. This may help connect you to payment options and limit dings to your credit.

Remember, credit cards can be a helpful power tool for your financial well-being. It’s all in how you use them.