Wondering whether you truly understand how credit cards work and how they compare to other financial products? Read more to learn exactly how they work and when to consider using them.
It is never too early (or too late!) to start making good financial decisions for yourself. That includes having credit cards explained and ensuring you understand how to use what can feel like a basic financial product.
It may feel (and it’s partially true) like learning about credit cards, as well as how to use them, is easier than other financial products. We’re not here to tell you that’s wrong. Rather, we’re here to help ensure you know the ins and outs so you can use credit cards responsibly.
Whether your questions are around credit cards vs debit cards, credit cards and their benefits, or even how credit cards and credit score are related, read on! We have a ton of helpful to explain all of this, and even more.
Using credit in an informed and responsible way is a great place to begin. Credit union experts can also be helpful in guiding you through how to know where your credit score stands.
A credit card is a financial tool that allows the card holder to purchase products or services using borrowed money instead of using cash or debit—both of which use money from your account.
That’s the most basic definition. There’s a lot more to it than that, but here’s the good news: The more you understand how it works, the more likely you are to use it responsibly and to your advantage.
Using credit in an informed and responsible way is a great place to begin on your financial journey, and your credit score specifically. This is something that experts at your credit union can tell you more about.
Want to walk through other financial products and terms? Check out our financial terms glossary.
Somewhere down the line, you will need a credit history. And a credit card—when used correctly—is one of the easiest ways to build that. When the time comes to take out a car loan or get a mortgage, your credit union or other lender will review your credit history to decide how reliable you are with borrowing and repaying money.
So even if a credit card seems unnecessary today, making regular purchases with it and immediately paying them off will help you build a positive credit history.
If you want to travel by plane, train, or automobile, or make a purchase from your favourite online retailer, you’re going to need a credit card. Ditto for booking a hotel room, buying concert tickets, and so much more.
A lot of cards actually reward you for using them with bonuses like cash back, travel points, exclusive offers, or hotel upgrades. Different cards use different rewards programs—this is another feature to look for when you’re selecting a card to apply for.
Remember that credit cards and their benefits can appear flashy, but that these features are designed to increase how much money you’re spending. Always make sure you are tracking your spending and consult your budget to track this and other expenses.
Despite our best plans, situations can arise where we need to pay for something out of pocket, but don’t have the cash on hand.
Although you should never put something on your credit card that you don’t have the money to pay for, you can use your credit card to help you through a tough financial situation. If this happens, make sure to create a plan to efficiently pay down your balance.
The card you apply for should suit your specific needs. Here are a few of the different kinds of cards offered.
Credit cards with fees vs credit cards without fees These cards offer the convenience of a credit card without a high annual fee. Most offer basic rewards but may not accumulate perks as quickly as a fee-based card. Some fee-based cards also charge higher interest. Remember to read the fine print when choosing your next card. |
Credit cards and interest Many cards have interest rates upward of 19 to 20%, but there are cards available with lower interest rates in exchange for a low annual fee. They don’t accumulate rewards as quickly, but if you find yourself carrying a balance on your card month over month, this can be the smart choice for you. |
Rewards cards For every purchase you make on your card, you’ll accumulate reward points that can be redeemed for all sorts of different things, ranging from the latest gadgets and gift cards to concert tickets and experiences. |
Credit cards for students These cards are specifically meant for students who are just starting to build their credit. These cards often come with low or no fees and offer basic rewards. Pssst: are you a student, or know someone headed to school? Our guide to student loans vs lines of credit is super informative and compares both of these student financial products. |
Travel rewards cards Similar to a rewards card, but featuring points that can be redeemed for flights, hotels, and car rentals. These cards often include insurance coverage for things like out-of-country medical costs, lost luggage, or changes to travel plans. |
US dollar (USD) cards These cards allow you to make purchases directly in US dollars. |
It’s a good idea to be honest with yourself about your current financial situation, how you plan to use your card, and what’s really important to you. For instance, if you plan to only use your card in case of emergencies, a low or no annual fee card might make the most sense.
If you find yourself travelling often, the protections and perks that come with a travel rewards card might provide you with the best value. Some cards have a minimum income threshold to qualify or are designed specifically for students, so make sure you know what you’re getting yourself into.
Do your homework and find the card that works for you.
Just because you want a credit card doesn’t automatically mean you will get one. There is an application process that requires you to demonstrate that you are financially able to uphold your end of the agreement.
Here is how the application process typically works:
A word of advice: If you receive multiple invitations from credit card companies to apply for a card with them, consider how many you actually need. These offers may seem good, but remember to be realistic about what your credit card needs are.
While using credit cards can help build credit, each application for one creates an inquiry made on your credit history. Lots of inquiries over a short period of time can impact your credit score, and lots of open, available cards can hurt your chances to qualify for more credit in the future.
Congratulations, you’re a credit card holder! Now what?
While using your card is pretty straightforward, there are a couple of important things to know about managing your card and your credit.
First, not every transaction on a credit card is created equal. While most of us tend to think of credit card purchases as tapping your device or swiping your card in a store or filling out your information online, you can also use your credit card to get cash or to make cash-like transactions. This is called a cash advance and, in the long run, it can be a costly way to access cash.
Cash advances often charge a small fee to initiate and almost always charge a higher rate of interest than regular purchases. And when you take a cash advance, interest starts to accumulate right away and will continue to accrue until the whole amount of the advance is paid off in full.
Whether you use your credit card or not, your lender will always send you a monthly statement. This statement provides a detailed snapshot of your transactions and outline details including where and when your purchases were made, how much you owe, the minimum payment due, and when you need to make a payment.
Review your statement carefully each month. If something doesn’t make sense or add up, or if there is a purchase you don’t recognize, contact your lender immediately and ask for more details.
HONEST TIP: There are other ways to borrow
Find you’re putting a ton of money on your card? A personal loan might be something to consider. If you have a certain amount you'd like to borrow, try our personal loan calculator to see what works with your budget.
You can also consult our guide to borrowing to learn more about other ways to borrow.
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Are you wondering if credit cards are better? Many prefer using them as they do not charge transaction fees. But the more you use it, the larger your bill will become. And if it becomes too big, and you don’t pay off its entirety, you’ll be charged interest.
Every credit card has an interest rate that applies to any balance that is not paid off within the 21–25-day grace period (each credit card provider has a different grace period) following the purchase.
If you keep an unpaid balance on your credit card, interest will keep adding up month by month. But if you pay off the full balance on time, you’ll never have to pay interest. And remember, only making the minimum payment required each month still means you get charged interest on the full balance.
Credit cards use encryption technology to protect your data and your finances, but knowing how to protect your card information is probably the most important thing you can do to reduce the likelihood of fraud.
Scammers will often try to create a sense of panic, trying to persuade you to give out your information. Don’t do it!
Your credit card provider or financial institution will never call you and ask for your credit card info over the phone/email.
Fraudulent transactions can be refunded if you report the card missing before they happen.
Regularly check your transactions and balance and don’t be afraid to ask your card provider questions if you don’t recognize something. And when in doubt, call the toll-free number on your statement.
So, what’s your conclusion—are credit cards worth it? They are a great financial tool for a number of reasons. They help build up your credit and can give you access to funds you don’t always have on hand. But remember, many are designed to encourage you to spend and, if that happens, you’ll have to reckon with your monthly statement.
A great way to ensure you feel confident in choosing which credit cards is best for you is to connect with a credit union expert who can help you decide.
Credit union experts are here to support your financial journey, whether you're just starting out or well on your way. Take the first step today.
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