The Short Answer
Only make purchases with your credit card that you know you can pay back by your next statement.
A little more explanation:
The best way is to set money aside in your bank account to purchase what you want. When you have enough money, purchase the object with your credit card. When your credit card statement comes in, bring your balance down to zero, using the money you saved. This habit will save you money in the long run and keep you from spending more than what you earn.
That's it. But, read on for more.
What is a credit card?
A Quick wikipedia search will give you this definition of credit cards: "A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them." (italics mine). You can only purchase goods and services using a credit card if the person or commerce has the equipment they need to accept that method of payment. |
"(You) pay for goods and services based on your promise to pay for them" |
"Having a good (credit) history can save you tens of thousands of dollars in your lifetime" |
There are many good reasons to get a credit card.You'll hear about rewards, travel insurance, fraud protection and more. But, the number one reason you should get at least one credit card is to build a credit history. A credit history is like your reputation. If you have a good reputation, people say good things about you and others will want to get to know you. If you have a bad reputation, others will want to stay away from you. Your credit activity is usually tracked and reported back to an agency that records your progress. Agencies that do this are referred to as a credit bureau. One credit bureau you may have heard of is called Equifax. Having a good credit history on record will give you access to better financial products when shopping for a house, a car, or any other expensive object. Having no credit history, or a bad credit history, will restrict your access to the best financial products, or bar you from getting them in the first place. Having a good history can save you tens of thousands of dollars in your lifetime, so be very careful with how you handle credit.
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How credit cards work
Credit cards are issued by banks and come with a line of credit. When you use the card to purchase something, you're borrowing money, just like making a small loan.
Limits: These amounts that you borrow accumulate until you reach the maximum allowed by your card. This is your credit limit for a particular card. The amount borrowed on your card, through your line of credit, is also called a balance. What's important to remember is, like any loan, banks charge fees every month for the money you borrowed from your card unless your balance is paid in full. The time between two issued statements is called your billing cycle. All purchases made within your billing cycle will be on your next issued statement.
Interest: The monthly fee charged depends on the balance you currently have on your card, because it is usually a fixed percentage of your balance. This is called interest. The higher the balance the higher the interest fee. You'll be charged interest until you pay your balance completely. In many cases, banks give you until your next issued statement to pay your balance in full to avoid being charged interest. There are certain catches here that you should be aware of when using your first credit card.
The most important catch for most card products is that if you don't pay the balance of your current statement in full by your next statement, you'll be charged interest on the amount of your current statement and not your remaining balance (1). Because of this, it's to your advantage to purchase expensive goods at the beginning of your billing cycle so as to be charged interest for it at the latest possible date, and have the most amount of time to pay for it. Never forget, nothing belongs to you until it's paid in full.
Credit cards are issued by banks and come with a line of credit. When you use the card to purchase something, you're borrowing money, just like making a small loan.
Limits: These amounts that you borrow accumulate until you reach the maximum allowed by your card. This is your credit limit for a particular card. The amount borrowed on your card, through your line of credit, is also called a balance. What's important to remember is, like any loan, banks charge fees every month for the money you borrowed from your card unless your balance is paid in full. The time between two issued statements is called your billing cycle. All purchases made within your billing cycle will be on your next issued statement.
Interest: The monthly fee charged depends on the balance you currently have on your card, because it is usually a fixed percentage of your balance. This is called interest. The higher the balance the higher the interest fee. You'll be charged interest until you pay your balance completely. In many cases, banks give you until your next issued statement to pay your balance in full to avoid being charged interest. There are certain catches here that you should be aware of when using your first credit card.
The most important catch for most card products is that if you don't pay the balance of your current statement in full by your next statement, you'll be charged interest on the amount of your current statement and not your remaining balance (1). Because of this, it's to your advantage to purchase expensive goods at the beginning of your billing cycle so as to be charged interest for it at the latest possible date, and have the most amount of time to pay for it. Never forget, nothing belongs to you until it's paid in full.
"Almost anyone can sign up for a credit card"
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Different banks have different requirements for obtaining their credit card products: Because there are so many products on the market, almost anyone can sign up for a credit card. If you're under 18 years of age, you'll usually need your parents' consent. Most banks will want their clients to be employed before approving them.
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Once you have a credit card though, it's yours until you cancel it. Here is an external link to the Government of Canada's credit card comparison table. You'll immediately notice how many products there are. You'll also be able to see what pourcentage of interest each card charges and if there are any additional fees to them. for example, some banks charge annual fees for their products.
Different brands of cards:
There are also many different brands of credit cards. You may already know a few of them, such as Visa, Mastercard, American Express, Discover etc. Because different brands of cards charge different fees to the merchant to process your transaction, certain merchants will refuse to accept your brand of card.
These are credit card basics. If you'd like this article to cover more information, or have any questions or comments, don't hesitate to leave them below.
There's much more for you to know if you want to get into details on specific cards and their advantages or disadvantages. Be sure to read about different rewards programs, and look into what credit card product might be right for you. Make sure, whatever you do, that you practice healthy habits when start using credit cards, or start practicing them if you aren't yet.
There's much more for you to know if you want to get into details on specific cards and their advantages or disadvantages. Be sure to read about different rewards programs, and look into what credit card product might be right for you. Make sure, whatever you do, that you practice healthy habits when start using credit cards, or start practicing them if you aren't yet.
(1) Concrete example: Supposing you receive a statement in your e-mail that has a balance of 2500$ because you just bought a computer you saved up for. You'll have until your next payment to pay the balance in full and not pay any interest fees. If you mistakenly pay 2499$ and there is a remaining balance of a single dollar by your next credit statement, you'll be charged interest on the full 2500$ of your current statement. If you have an annual interest rate of 19%, this means you'll be charged 40$ of interest on your next statement. That fee will be added to your 1$ balance and your newest statement balance would be 41$.