A credit card can help you build credit1, make convenient payments and meet everyday expenses in your life.
Getting an understanding of how credit cards work can teach you about the benefits of having one over a debit card. Knowing how credit cards work provides useful insight on managing your debt more responsibly.
Credit Cards vs. Debit Cards
Credit cards offer you a line of credit that can be used to make purchases, balance transfers and/or cash advances and requiring that you pay back the loan amount in the future. When using a credit card, you will need to make at least the minimum payment every month by the due date on the balance. If the full balance for purchases is not paid off, interest charges will be applied. Interest charges will be applied from the date of the transaction for balance transfers and/or cash advances.
Debit cards offer you a convenient way to withdraw money directly from your checking account. This money is not a loan, and no interest is charged. You will not have to make any minimum monthly payments. However, you must be careful not to charge more money than you have available in your checking account.
Transactional and Fee Differences
Credit cards may have an annual fee or an introductory annual fee associated with it. The fee amount depends on the card and can vary after an introductory period. If you make a late payment, you may be charged a late fee. Certain credit cards may also have other fees associated with them depending on the activity. These may include cash advance fees, balance transfer fees, and foreign transaction fees.
Most debit cards do not charge annual fees, they may carry overdraft fees if there are insufficient funds in the associated checking account. What makes debit cards convenient is that there are no monthly payments on a balance and consequently, no late fees.
Improving Your Credit Score
Unlike debit cards, credit cards can be used to improve your credit score. A credit card issuer will report each monthly payment that you make to the three credit reporting agencies. With every monthly bill that you pay, you will be contributing to the successful rating of your credit score. Regularly using credit cards responsibly allows you to build credit because it shows lenders that you can manage credit.
Managing Your Finances with Credit Cards
Making credit card payments on time to lower the credit-debt ratio that you currently have will work to reduce your debt and improve your credit score. In managing your monthly credit card bill, it is vital to make at least the minimum monthly payment on or before the due date.