What you should know about credit cards

Credit cards require an enormous amount of responsibility if you want to use them without racking up loads of debt that can result in a poor credit score.

If you are just starting out with your first credit card, you might be nervous about the best approach toward responsible spending, or perhaps you’ve been struggling to manage more than one credit card. Keep reading for a list of things to help you understand every credit card in your wallet.

The different types of credit cards

How can you forge a positive and fruitful relationship with credit cards? Before you apply for an account, learn the basics. Understanding the fundamentals — from knowing which types of credit cards exist to the legalities of usage — will help you charge wisely from the moment you receive that powerful piece of plastic.

There are different types of credit cards: general purpose, which you can use anywhere; and private label retail, which you can typically use only at the issuing store or service station.

Most general purpose cards, including some of the top rewards cards, are unsecured, meaning the issuer extends a credit line based mainly on your credit history.

Secured cards, conversely, are backed by funds you put in a deposit account that the creditor can claim if you default. Because creditors assume little risk with secured cards, qualifying for one is relatively easy, so they’re ideal for those with damaged or unestablished credit.

There are four processing networks for credit cards: Visa, Mastercard, American Express and Discover. The card issuer’s name is printed on the front: Capital One, Chase, Citi and so on. If the issuer is not listed on the front, it will be on the back of your card, or you can check your billing statement.

Which credit card is the best for me?

Your best choice will depend on your financial needs.

Do the math and add up how much you think you’ll use your card for purchases — for everything from groceries, gas and dining out to travel, streaming services and your phone bill. If you generally pay your balance in full each month, a rewards card makes sense. If you need to carry a balance from month to month, look for a card with a low ongoing interest rate or a 0 percent introductory APR.

If building or repairing your credit is a bigger priority than earning rewards or spreading out purchases, a secured card can help you maintain a positive credit history.

There’s no perfect number of credit cards

There is no perfect number of credit cards one “should” hold. A couple of general-purpose cards, however, should suit most consumers’ needs.

If you want a retail card, be sure it’s for a store you frequently visit and that it offers an incentive for using it. Retail cards typically charge higher interest rates than general purpose cards.

You should make the decision to get more than one card based on your financial goals and needs. If you can manage more than one responsibly, it could benefit you in the long run.

Understanding your card’s interest rates

Credit card interest rates can range dramatically — from 0 percent, limited-time balance transfer offers to as high as 30 percent. The average credit card interest rate is 18.90 percent.

Creditors use factors including your credit score, income, assets, current debt load, credit inquiries, payment history and economic conditions to set your annual percentage rate (APR).

Who receives the best (lowest) rates? Consumers with positive and proven credit histories.

The contract is binding

Read your credit card agreement carefully because once you sign, you form a legal contract and consent to the terms set by the issuer.

These include:

• Credit line/limit: This is the total amount you may charge, including interest and fees.
• Annual percentage rate (APR): This is the interest charged on carried-over balances. It usually stipulates a higher rate for paying late, charging beyond your limit, balance transfers and cash advances.
• Interest calculation method: Most issuers calculate interest charges by averaging the daily account balance, then multiplying that figure by the periodic rate (APR divided by the number of days in a year).
• Fixed or variable APR: Fixed-rate APRs have consistent interest rates. Variable APRs are tied to an index (often the prime lending rate, which is tied to the federal funds rate set by the Federal Reserve) and thus fluctuate.
• Grace period: The grace period is the number of days (generally between 20 and 30) you have to pay in full before interest accrues.
• Fees: Ordinary fees include those for cash advances, balance transfers, paying late, exceeding your credit limit and sometimes an annual fee.

Be aware that most creditors reserve the right to change any of these terms — so check your mail for adjustment notices.

The annual fee and monthly due date

Each time you charge, you borrow money.

Because credit cards offer a revolving balance option, however, you aren’t required to pay the entire loan — as long as you make at least the minimum requested payment, you can carry the remainder over to the next month. You should avoid paying just the minimum payment because interest will be added to the balance.

Bottom line

Ultimately, there is no secret to using credit cards wisely. If you take advantage of cards with 0 percent intro APR or cards with no annual fee — while also always paying your bill in full each month — charging is free.

The key is to always stay on top of your spending so your balance doesn’t set you back at the end of each billing cycle. And if your card has a good rewards program, you can come out ahead by maximizing what you earn.