Category: Credit Card 101

A credit card billing cycle is the period of time between billing statements. The length of a billing cycle varies by card issuer, but is typically about one month.

Learn more about billing cycles and how they work.

What Is a Credit Card Billing Cycle?

The billing cycle for a credit card is the time between billings. At the end of the billing cycle, your statement is compiled by your credit card issuer, and you have until your due date to make a payment on your credit card. Credit card billing cycles vary and usually range from 28 to 31 days, depending on the credit card and the issuer.¹

How a Credit Card Billing Cycle Works

Although credit card billing cycles vary by card issuer, they do have to be consistent, according to federal law. According to the Consumer Financial Protection Bureau, the days in your billing cycle can’t vary more than four days from the regular day or the date of your statement.² For example, a billing cycle may start on the 1st day of the month and end on the last day of the month. Or, it may go from the first Wednesday of one month to the first Wednesday of the next.

During your billing cycle, any purchases, credits, fees, and finance charges are posted to your account and added or subtracted from your balance. At the end of the billing cycle, you are billed for all unpaid charges and fees made during the billing cycle. Any activity on your account after the billing cycle ends will appear on your next billing statement.

Check your most recent credit card statement or your online account to find your credit card billing cycle. If you need to calculate the number of days in your billing cycle, count the number of days between the beginning and the end of your last billing cycle.

Checking your online account between billing statements can keep you aware of your available credit and allow you to catch any unauthorized charges.

Payment Due Dates

Your credit card payment due date is generally about 21 to 25 days after your billing cycle ends.¹ The time between your billing cycle end date and your billing due date is known as the grace period. You typically can pay your balance in full before the end of the grace period to avoid paying interest on your balance. You may not receive a grace period if you didn’t pay your balance in full after your last billing cycle or if you’ve transferred a balance or taken out a cash advance.

By law, your credit card due date must fall on the same date every month and does not have an impact on the start and end date of your billing cycle.³

Credit Card Billing Cycles and Credit Reports

Your credit card account will be reported to at least one of the three major credit bureaus: Equifax, Experian, or TransUnion. Your credit report includes an overview of your account and details about how you manage your credit card, including your payment history, credit limit, and monthly payment.

Your credit card issuer will update your credit report at the end of the billing cycle, which is also your account statement closing date. Your account standing on the last day of your billing cycle is how it will be reported to the credit bureaus.

If you want your credit report to quickly show you have a zero balance on your credit card, pay it off before the last day of your billing cycle. Otherwise, it will take another cycle for a zero balance to show up on your credit report, assuming you don’t charge anything else to your card.

A credit card issuer is a bank or credit union that offers credit cards and extends credit limits to cardholders who qualify. When consumers make credit card purchases, the credit card issuer is responsible for sending payments to merchants for purchases made with credit cards from that bank. The top U.S. credit card issuers through the close of 2019, measured by market share were:¹

• Chase, 20%
• American Express, 20%
• Citi, 11%
• Bank of America, 10%
• Capital One, 9%
• U.S. Bank, 4%
• Discover, 4%

What Is a Credit Card Issuer?

A credit card issuer is a type of lender. Card issuers accept a certain amount of risk when they approve credit card applicants and extend a credit limit. Credit card issuers evaluate each application and set the terms for the credit cards based on the applicant’s credit history. Some cards may have rewards or other incentives to entice consumers to sign up for credit cards.

Don’t confuse credit card issuers with payment processing networks like Visa and MasterCard.

Networks authorize and process transactions, set the terms of transactions, and help facilitate payments between merchants, credit card issuers, and cardholders. American Express and Discover act as both credit card issuers and the payment processing network for their credit cards.

Credit card issuers have to follow government regulations to issue credit cards. They must also work with payment processing networks that help facilitate credit card transactions. Lots of sensitive cardholder information is transferred in the application process and credit card issuers must have the infrastructure to handle the number of transactions and keep the information safe from hackers.²

The name of the bank or credit union that issues a credit card often is on the front of the card, along with the logo for the affiliated network, such as Visa or Mastercard. If the issuer is not on the front, it may be printed on the back of the credit card in small print. It’s important to know your credit card issuer so you know who to call if you’re having trouble with your card, spot fraud on your account, or need to ask questions about your account.

How Credit Card Issuers Work

Credit card issuers make money from fees and interest charged to cardholders. Whenever you carry a balance on your credit card, you pay interest to the credit card issuer. Some credit cards come with an annual fee. If you’re late on a payment, you’ll pay a late fee. If you use your card to transfer a balance, you’ll pay a fee for that. There may be other fees your credit card issuer charges based on how you use your credit card.

Credit card issuers also charge a fee to merchants. Each time you swipe your card, the merchant has to pay a fee between 1% and 3% based on your transaction and the type of card you’re using. Most credit card issuers have to split the fee with the payment processing network.

How Much Do Credit Card Issuers Charge?

How much it costs to use a credit card can vary greatly depending on the creditworthiness of the cardholder, how the card is used, and more. Those with higher credit scores typically have access to cards with lower rates and rewards such as airline miles or cash back.

Focus on improving your credit score to gain access to cards with the best rates and the most generous perks. This means keeping balances low on the cards you already have, paying all debts on time, having a healthy mix of credit, and more.³

Many credit card issuers grace periods on purchases. So, if you pay off your balance every month you won’t be charged any interest.⁴ This means a rewards card actually can be a tool for discounts as long as the cardholder does not carry a balance. However, carrying a balance can lead to interest charges that surpass the value of any rewards received. For example, a cardholder carrying a $5,000 balance on a card with an annual percentage rate of 20% would be charged $83.33 in interest the first month. Additionally, the next month’s interest charge would be higher because it would be calculated based on the new, higher balance of $5,083.33.

A credit line is a type of loan that allows an individual or business to borrow money and repay it, often on a revolving basis without applying for a new loan.

Learn about the different types of credit lines and how they work.

What Is a Credit Line?

A credit line, also known as a line of credit (LOC), is a type of standing loan that allows individuals, businesses, or other organizations to borrow cash when they need it, repay what they have borrowed, and continue borrowing without applying for a new loan.

A credit line can come in various forms, including a credit card, home equity line of credit (HELOC), or a small business credit line.

These loans often make it possible to complete projects or do business when you don’t have the necessary cash on hand. But they can also be risky. Any time you take on debt and delay paying it back, you’re assuming you’ll be able to meet your obligation later.

Alternate name: Line of credit (LOC)

How Does a Credit Line Work?

A line of credit is different from a traditional loan. With the latter, you apply for a sum of money and pay it back in installments within that set time frame. You can’t continually take out new money against the same loan.

With a credit line, however, you are applying for regular access to cash when you need it. It’s usually understood that you may take out money repeatedly throughout the life of your loan.

Secured and Unsecured Credit

Like other loans, credit lines can be secured or unsecured. With a secured loan, your lender requires you to use a personal asset (or assets) as collateral that the bank can seize if you default. A home equity line of credit is a common type of secured credit line. Your HELOC lender will have a claim to that portion of your home’s equity if you default on your loan.

A credit card, on the other hand, is an example of an unsecured credit line. Instead of requiring an asset as collateral, your card issuer grants you access to funds based on your financial situation and credit history. If you become delinquent on payments, the credit card company can send your account to collections, but it can’t go after any of your tangible property without taking you to court.¹ ²

Because secured loans represent a lower risk for your lender, they usually have a lower interest rate than unsecured loans.

Revolving vs. Non-Revolving Lines of Credit

Most lines of credit are revolving or open-end accounts that allow you to continually draw money up to the limit as long as you are making payments according to your account terms.

Some are non-revolving, or closed-end accounts, however. In that case, once you have paid back the balance, you cannot continue drawing funds. A HELOC may work this way once you enter the repayment period, after which you can no longer draw new funds.

Types of Credit Lines

Credit lines can come in several forms, all of which serve different purposes.

With a more traditional line of credit, you might actually have a defined draw period, during which you can repeatedly draw money up to the limit and make interest-only or interest-plus-principal payments. Once you enter the repayment period, however, your balance is due according to the repayment schedule you agreed to with your lender.

A traditional line of credit may be given to an individual or to a business. Other credit lines include:

• Credit cards: A personal account with a set balance limit for open-ended, revolving consumer spending. Any charges that are not paid off at the end of the month begin to accrue interest payments.
• Home equity line of credit (HELOC): A line of credit that uses your home equity as leverage to pay for renovations to your home. HELOCs can sometimes be used for other spending as well.
• Business credit lines: A line of credit with a bank or other lender that a business can use to cover major expenses or operating costs

The best line of credit for you will depend on factors such as your personal or business credit rating, what you have available (and want to) put forth as collateral, and the reason for your loan.

Pros and Cons of Credit Lines

Pros

• Immediate access to cash
• Only borrow what you need
• Interest-only payments during draw period (if applicable)
• Continue borrowing as needed

Cons

• Higher interest rates
• Interest adds up
• Can put assets at risk
• Financial risks
• Unexpected changes

Pros Explained

• Immediate access to cash: Businesses and individuals can access flexible cash when they need it. A personal credit line can be helpful for something simple such as checking account overdraft protection.
• Borrow what you need: You don’t have to borrow the entire amount allowed. Instead, you can borrow only on an as-needed basis.
• Interest-only payments during draw period: If you have a loan with a draw period, you can finance major projects without having to worry that you need to start paying everything back next month. This can be a great option for financing a home remodel right before you put it on the market, for example.
• Continue borrowing as needed: Rather than having a one-time loan and then applying for another one when that one is done, you can continue borrowing and repaying when you need access to more cash.

Cons Explained

• Higher interest rates: A credit line will often have a much higher interest rate than a traditional loan.
• Interest adds up: If you are not paying off the principal of your loan, the interest payments will continue to add up. You may end up paying far more than the original amount you borrowed.
• Can put assets at risk: A secured line of credit, such as a HELOC, can put your assets at risk if you default. Lenders can seize your property, business assets, home, or other collateral.²
• Financial risks: Like any kind of borrowing, credit lines pose financial risks. If you rely on them without being able to pay back the money you borrow, you may find yourself in significant debt.
• Unexpected changes: The bank issuing your line of credit can decide to cancel your LOC, lower your limit, or change your rate at any time.³

Credit Line vs. Credit Limit

A credit line is a name for a type of loan that allows you to borrow and repay money, usually on a revolving basis, such as a HELOC or a credit card.

A credit limit, by contrast, is a feature of a loan. The credit limit of a loan is the maximum amount you can borrow or use at a time before you must begin repaying. For example, if your credit card has a credit limit of $10,000, the charges you make cannot total more than $10,000.

Once you reach that limit, you must begin paying off your credit card balance before you can use it to make additional purchases.

How to Get a Line of Credit

To obtain a line of credit, you must apply as you would with any other loan. Lenders will decide whether to approve your application and determine your borrowing limits based on your:

• Borrowing history
• Credit score
• Available income to repay the loan
• Assets available as collateral

Before you take out a line of credit for yourself or your business, research the best rate and terms available. That means making sure your credit rating is as strong as possible, eliminating other financial many other obligations, and, if you’re a business, ensuring that you’re on good terms with vendors.

Once you have a credit line, don’t treat it like a cash lifeline you can tap whenever you want. You might receive a checkbook or a payment card that draws from your pool of available funds to help you manage your credit line. It is important to manage your interest payments by paying off your balances on time.

A line of credit can be a powerful tool in your financial toolbox. But, as with any other loan, you should use it with care. A loan is never a free pass to avoid financial responsibility. Make sure you can afford to repay your debts before you enter into them.

What Is Credit Card Churning?

Credit card churning involves frequently applying for new credit cards, not necessarily to use or even keep them, but rather to take advantage of lucrative sign-up or welcome bonuses in the form of cash or rewards miles or points. By opening many cards, you can rack up a significant number of miles or points or a hefty sum of cash within a short period. As such, the strategy can be rewarding for savvy credit card users, albeit risky for the average consumer.

How Credit Card Churning Works

Many credit card issuers offer attractive sign-up bonuses on credit cards to entice consumers to apply for cards and put a significant amount of spending on them soon after account opening. Depending on the card, new cardholders can earn rewards such as cash back, airline miles, or points that they can redeem for purchases if they meet a minimum spending requirement within a certain timeframe—often within three months of opening the credit card.

To receive many of these sign-up bonuses—and rack up many valuable rewards—in a given year, some consumers resort to credit card churning as follows:

1. Identify two or more credit cards that offer attractive sign-up bonuses in the form of your preferred rewards (for example, cash back, airline miles, or points) and don’t impose a requirement to use the card again or keep the account open for a certain period of time after you get the bonus.
2. Apply for the credit cards, either simultaneously or in succession with only a short period of time in between applications (usually less than three months).
3. Meet the spending requirement for the cards and receive the bonuses.
4. Stop using the cards or cancel them before you incur annual fees.
5. Repeat the above process to take advantage of more sign-up bonuses.

Balance transfers and cash advances usually don’t count as purchases and therefore won’t help you reach your spending minimums, so it’s best to forgo them. They just occupy your credit limit, leaving you with less available credit for necessary spending. Plus, both typically incur fees, which you want to avoid to get the maximum benefit from credit card churning.Pros

• Receive more rewards
• Earn rewards faster
• Freedom to stop using the cards

Cons

• Card issuer rules limit the practice
• It can damage your credit
• The odds of credit denial increase
• It can increase your debt
• Annual fees may eat into rewards

The advantages of churning credit cards include:

Pros and Cons of Credit Card Churning

• Receive more rewards: Signing up for several credit cards lets you rack up far more cash back, miles, or points from sign-up bonuses than you’ll get with any one credit card.
• Earn rewards faster: Credit card churning also lets you earn rewards for a given card faster than you would through everyday use of that card. For example, let’s say that a cash-back credit card offers 1.5% cash back on all purchases and a $150 cash-back bonus if you spend $500 within the first three months. You’d ordinarily have to make $10,000 in everyday purchases (which could conceivably take a year or longer) to earn the same $150 you could earn within three months by spending only $500.
• Freedom to stop using the cards: In general, card issuers don’t impose a requirement to use the card again after receiving a sign-up bonus or even keep the account open after you get the bonus. That means that if you applied for a card that had an attractive sign-up bonus but lackluster rewards for everyday spending, you’re not stuck with it; you can always switch back to using other cards.

Pros Explained

Consider combining rewards from loyalty programs or using rewards program shopping portals to maximize the rewards you earn.

Cons Explained

• Card issuer rules limit the practice: Many issuers have enacted policies to discourage churning by limiting the number of cards you can open or the number of bonuses can you receive in a given period. For example, Chase has an unofficial “5/24” rule that keeps consumers from opening more than five credit cards in a two-year period.¹ American Express allows cardholders to earn only one bonus per credit card. Once you’ve earned a bonus for a specific card, you won’t be able to “double-dip” as it were and earn the bonus again for that same credit card.²
• It can damage your credit: Every time you apply for a credit card, the lender makes a hard inquiry into your credit report. Inquiries make up 10% of your credit score, and while a single one will typically only reduce your score by five points, you may see a more significant negative impact on your credit if you incur several in a short period of time. Opening new accounts can also lower your average credit age—a factor that’s 15% of your credit score.³⁴
• The odds of credit denial increase: If you’ve opened or applied for too many credit cards in the past 12 to 24 months, credit card issuers may deny your credit card application even if you have excellent credit. This is because lenders view excessive recent credit applications as a sign that you’re in financial distress and are a credit risk.⁵
• It can increase your debt: Each card you sign up for will require you to meet a spending minimum to earn the welcome bonus. If you take out several credit cards, but can’t afford the spending minimums, you could end up with more debt than you can repay, rendering moot any rewards you may have earned.
• Annual fees may eat into bonuses: Many rewards credit cards come with annual fees—rather hefty ones in some cases. Sometimes, the fee is waived for the first year, but you’ll be on the hook to pay it afterward. If you forget to cancel a card you don’t plan to use, the fee can diminish the value of the sign-up bonus you received for the card.

Increasing your spending just to earn bonuses puts you at risk of building up credit card balances you can’t afford to repay.

How to Succeed With Credit Card Churning

Follow the guidelines below for successful churning.

Look out for new credit card offers. Don’t assume that the offer you see on the card issuer’s website is the best one you can get at the time. Card issuers change their offers often, sometimes offering generous limited-time offers to attract new customers or exclusive offers to retain existing customers. When you’re interested in a credit card, check credit-card comparison websites, review your mail for targeted offers, or log in to your existing account to find the best credit card offers.

The drawbacks of churning credit cards include:

Avoid opening too many cards in a short period of time. If you want to open a few new cards, wait three to six months between applications to minimize the damage to your credit score.⁶

Keep fees in mind. If you’re concerned about annual fees, you might want to target only no-fee cards for churning or cancel the card before you incur the fee. If you plan to keep a card with an annual fee, evaluate whether the benefits make paying that fee worth it. For example, you might earn a free hotel stay each year with the card. If the annual fee is lower than a night at the hotel, the card may be worth keeping if you intend to stay at a hotel. The card may not be worth it, however, if you rarely travel.

Read the fine print. Reading through the credit card terms is a must, not only to understand fees but to ensure you meet requirements. For example, some credit card issuers only allow you to earn a bonus under certain circumstances. Credit card terms are subject to change, so always read the terms and conditions before applying for a credit card.

Make payments on time. Send your monthly credit card payment on time to avoid late fees and the associated damage to your credit. If a late payment dings your credit score, you might find it hard to get approved for rewards credit cards in the future. You’ll also want to pay on time to avoid forfeiting your rewards.⁷

Pay your balance in full each month. Paying the statement balance in full within the grace period allows you to avoid paying interest charges on your balance.⁸ If you can’t afford to pay off your full balance at the end of each month, reconsider credit card churning; the interest charges may outweigh the benefit of the bonuses you earn.

Set goals for rewards. Have an idea of what you want to spend your credit rewards for—a vacation or a flight to visit family for the holidays, for example. Knowing how you want to allocate your points in advance will help you choose the best credit cards and keep you from using your points prematurely.

Keep a record of credit card churning. Create a chart or spreadsheet to keep up with important details for each credit card you’re opening, including:

• The credit card issuer and the specific credit card
• The date you opened the credit card
• The credit card’s annual fee and the date the fee will be charged if it’s waived in the first year (if you’re not keeping the account, close the account before this date)
• The bonus amount
• The spending requirement and the date by which you need to meet it
• Your progress toward meeting the spending requirement
• Whether the bonus has been applied to your account
• Whether you’ve used the bonus
• The timing for any promotional interest rate

Monitor your credit. Some credit card issuers include a free credit score within your monthly statement. If none of your cards have this benefit, use a free credit-scoring service like Credit Karma or Credit Sesame to keep tabs on your credit score. Pull back on credit card churning if it’s affecting your credit score.

Is Credit Card Churning Worth It?

Churning may be appropriate if:

• You’re a responsible cardholder: You should have a track record of responsibly using a credit card and paying your balance in full and on time each month before getting into the business of churning.
• You have stellar credit: You typically need good or excellent credit to qualify for the most premium rewards credit cards with the most lucrative sign-up bonuses.⁹
• You’re a big spender: You may have to spend hundreds or even a thousand or more dollars on purchases within a few months to meet the spending requirements for credit card bonuses. If you ordinarily spend in that range, you’re more likely to be able to manage the debt that comes with meeting that spending requirement.
• You have the time or interest to sustain churning: Churning is best for rewards card enthusiasts who don’t mind keeping tabs on multiple cards and their progress toward earning bonuses for them.

As exciting as it may sound to earn bonus after bonus, churning credit cards is a bad idea if:

• You’ve never had a credit card or have a spending problem: Credit card churning isn’t for the uninitiated. It’s too easy for inexperienced cardholders or those with an urge to spend (or worse, a mountain of existing debt) to get into more financial trouble. Once your credit score is damaged, it may be difficult and time-consuming to repair. And it can be equally difficult to climb out of debt.
• You have poor credit: If you have negative events on your credit report, like late payments or debt collections, improve your credit before trying to churn credit cards. This will help you avoid being denied credit.
• You’re preparing for a major loan: You may not want to churn cards (or at least put your churning on hold temporarily) if you plan to take out a mortgage or another large loan within the next year or two. The number of inquiries and newly opened accounts can affect your credit score and make it harder to get approved for new accounts.
• You’re thrifty: If your current spending isn’t high enough to meet the spending requirements, churning could put you in debt and might not be for you.
• You prefer to keep things simple: Ordinary rewards credit cards allow you to earn cash back and other bonuses without churning. If you don’t want to keep tabs on multiple cards, consider opening just one or two rewards cards with simple, consistent reward structures.

Many Americans are unable to qualify for a credit card—or they simply don’t want to. But, in today’s world, it can be difficult to function without one. The good news is, prepaid credit cards offer a way to get many of the benefits of standard cards without some of the challenges.

You can get a prepaid card even if you have bad credit. However, as the name indicates, you can’t use it unless you’ve prepaid money onto the card. Since a prepaid card doesn’t allow you to carry a credit balance and pay later, it’s not a true credit card.

Around 6.5% of American adults don’t have a bank account, but they can rent a car or book a hotel room with a prepaid card instead of having to deal with a bank.¹ Many prepaid cards even have a routing number and an account number, so people can have their paychecks deposited to their prepaid card account. Learn more about how these credit and bank alternatives work.

How Does a Prepaid Credit Card Work?

Visually speaking, it’s pretty easy to mistake a prepaid card for an actual credit card. For the most part, prepaid cards look identical to credit cards, carry a card network emblem, and can be used in most places that accept credit cards.

Before you can use a prepaid card, you’ll have to load money to your account, similar to how you would with a gift card. You can only spend as much as you’ve loaded onto your card. As you use your prepaid card, the amount of your purchases is deducted from the balance. Your available balance is reduced even further as you make more purchases.

Let’s say, for example, you deposit $300 onto your prepaid card. After paying $150 for a car rental, you’d only have $150 left to spend. Once you’ve used your entire balance, you have to reload more money onto the prepaid card before you can use it again.

By comparison, a credit card gives you a credit limit against which you can borrow for purchases. You have the option of repaying your purchases with monthly installments or all at once.

Managing your prepaid card is more like managing a checking or savings account than managing a credit card. You don’t have to worry about monthly minimum payments, finance charges, due dates, or late payments. Your spending limit equals whatever dollar amount your card currently holds. You’ll also have no increased revolving debt balance, minimum required payments, or due dates to think about, and no risk to your credit score.

Do Prepaid Cards Build Your Credit?

You can get a prepaid card regardless of your credit history. Providers don’t check your credit because you’re not borrowing money. Unfortunately, that also means prepaid cards won’t help you establish or improve your credit.

Using a prepaid card says nothing about your borrowing or repayment habits, so the card companies have nothing to report to the credit bureaus. In short, if you use a prepaid card, it won’t have any influence on your credit score, good or bad.²

If you’re looking to rebuild your credit, consider a secured credit card as a better option. It’s similar to a prepaid card in that you have to make a deposit, but it’s actually a credit card. The deposit acts as collateral in case you don’t pay your credit card balance, and your payment history gets reported to the credit bureaus.

How Much Does It Cost?

Prepaid cards can come with a variety of fees. Before choosing a card, read the “fine print” to determine which option comes with the least amount of fees, so that they don’t eat up whatever money you deposit to the card.

For example, the Account Now Prepaid Visa charges a monthly fee of $9.95, an ATM withdrawal fee of $3 per transaction, up to a $5.95 fee to reload additional funds to the card, $2.50 for each ACH transaction on your account, and $1.50 to make a balance inquiry at an ATM. Each time you incur a fee, it comes from your balance, giving you less remaining money to spend.

Since the cost plays a big role in the prepaid card you choose, make sure you pay close attention to the fee schedule of any card you’re considering. Many of them come with no monthly fees and also keep other fees to a minimum.

Who Uses Prepaid Credit Cards?

You might use a prepaid card if your bank doesn’t offer debit cards and you don’t have a traditional credit card, or if you can’t get a checking account because you have bad credit with ChexSystems. ChexSystems monitors individuals’ checking and savings account activity to alert merchants about people writing bad checks when paying for purchases.

Children and college students also make good candidates for prepaid cards. Parents can load money on the card for their kids to use and begin teaching them good money management skills. For college students, parents can easily reload money onto the card to pay for books, food, and ongoing expenses.

As prepaid cards become more popular, they’re not just used by people with bad credit or those who can’t get a checking account. Some people use prepaid cards to help manage their budgets.

How Do You Load More Money on the Card?

It’s becoming easier to load money on prepaid cards, and you can fill up your card in the following ways:

• Transfer money from a financial institution or bank.
• Your employer can direct-deposit your wages onto your prepaid card.
• You can transfer money from your PayPal account.
• Reload the card at a retail store such as Walmart or Walgreens.
• Choose a reloadable card such as Vanilla or MoneyPak.

Getting your very first credit card is exciting. For many young adults, it’s the next best thing to getting your driver’s license or turning 18. But, although credit cards can be fun to have, they also bring a lot of new responsibility.

Here’s the short version of what happens when you get your first credit card: The credit card comes in the mail, you activate it, make purchases, get your credit card statement, and pay the bill. Knowing the details that happen in each step will help you avoid a lot of credit card fees, credit card debt, and long-term credit damage.

Activating Your Credit Card

Soon after you’re approved for your first credit card, your card issuer sends a credit card with your name on it to the address on your credit card application.

On the front of your card, there will be a sticker with the phone number to call or the web address to visit to activate your credit card. Activation will require you to enter your credit card number, all or part of your Social Security number, your ZIP code, or some combination of this information.

You won’t be able to use your credit card until you activate it.

Understanding Your Credit Card Agreement

In the envelope with your credit card, you’ll get a credit card agreement. The agreement is a long and detailed document that includes the terms and conditions of your credit card. Your credit card agreement explains features of your account, how and when you’ll be charged any fees or penalties for your credit card, and how to handle disputes with your card issuer. It will also include a few terms that are important to understand:

• Annual percentage rate (APR): The total cost of borrowing with your card, including interest and fees (the lower, the better)
• Credit limit: The maximum amount you can borrow with your card
• Fees: Explanation of any annual fees, penalty rates, late fees, or other costs associated with your card
• Minimum payment: The amount you must pay every month to avoid penalties
• Grace period: The amount of time you will have between the closing date of your billing cycle and the date your minimum payment is due

This isn’t an exhaustive list of terms, but those are some of the most important ones you should know in order to avoid racking up fees and hurting your credit score.

Tips for Using Your Credit Card

Your credit card account has been assigned a credit limit—the maximum total balance you’re allowed to charge on your credit card. You can make purchases or charges up to your credit limit. The only way to exceed this limit is if you opted in to having over-the-limit charges processed. If not, your card will be declined for any purchase that would put you over your credit limit. Even if you’ve opted in, your credit card issuer will likely only let you charge a certain amount past your credit limit, and you might receive a fee or penalty APR.¹

Even though you can charge up to your credit limit, that isn’t the most responsible way to use your credit card. Your card issuer may take back some of your credit limit amount if you run up your balance too soon. Using too much of your credit limit also harms your credit score, the number that tells lenders how risky you are as a borrower. The more of your credit you’re using every month, the more risky you look—even if you pay your balance in full—and your score will reflect that.

Lenders like to see your credit card utilization ratio—the percentage of your credit limit you spend each month—stay below 30%. The lower you can keep this percentage while still actively using your credit card, the better it will be for your credit score.²

When you make a purchase, the credit card terminal will check with your credit card issuer to make sure your credit card is valid and that you have enough available credit for the purchase. Once your transaction is approved, you can sign the screen or the printed receipt, complete the transaction, and take your purchase home.

How to Make a Credit Card Payment

A few weeks after you get your credit card, you’ll receive your first bill in the mail. Your billing statement will detail the purchases or charges you’ve made to your account and list the minimum amount that’s due. It will also show your payment due date. Be sure you review your statement and confirm every transaction listed. If you see anything you don’t recognize, alert your credit card issuer immediately.

You have to pay at least the minimum payment by the due date, or you’ll be charged a late fee. Miss two payments in a row and your issuer may apply the penalty rate to your balance.³ If you never pay your balance at all, your credit card will eventually be charged off—meaning your lender stops allowing you to use your card while still requiring you to pay it off—and eventually sent to a collection agency.

Make sure you send your payment far enough in advance so that the credit card issuer receives it before the due date. The credit card issuer can charge a late fee up to $39 if your payment is received after the due date.⁴ Because of mailing and processing delays, this can happen even though you mailed it before the due date.

If you make an expedited payment on your due date and it requires extra help from a customer service representative, your card issuer might charge you an expedited-payment fee.⁵

Paying Your Card by Phone or Online

For added convenience, most credit card issuers also let you make payments by phone and online. To pay by phone, call the number on the back of your card and follow the prompts.

To pay online, you’ll need to visit your card issuer’s website to set up an online account and connect a bank account for making payments. This usually only takes a few minutes, but you may need to go through additional steps to verify your bank account. When you are ready to make an online payment, your card company will usually explicitly state the date and time your payment must be scheduled in order to be counted on time (for example, “Payment must be made by 8 p.m. ET on the payment due date”). You can also set up your account to pay automatically on a certain date each month.

Even though you’re allowed to make only the minimum payment, it’s best to pay your balance in full at the end of every month. That way, you avoid paying interest on the account, and you keep yourself from accumulating credit card debt. The habits you establish now can significantly affect your long-term financial health.

A credit card is a plastic form of payment that lets you make everyday purchases without carrying cash. But while these cards seem easy to use, you can get into debt and damage your credit without knowing the basics. With a solid financial foundation in place, you’ll be better prepared to use a credit card responsibly. 

Analyze Your Spending to Avoid Going Into Debt

Unlike a debit card purchase, where the money comes out of your checking account, a credit card works like a loan.¹ When you use it, the card issuer lends you the money for the purchase with the agreement that you’ll repay it.²

Not seeing money come out of your account makes it easy to spend more than you earn. If, as a result, you can’t pay your balance in full by the due date, you’ll incur interest charges on your balance. If you don’t pay at least your minimum balance by the payment due date, you might also get hit with late-payment fees.³ Likewise, if you exceed your available credit limit, you could incur over-the-limit fees.

The amount you pay in interest depends on the interest rate, expressed as an annual percentage rate (APY). Assume that your credit card has an APR of 15.1%—the average interest rate for cards for current accounts as of February 2020.⁴ That figure rises to 20.2% for new accounts. Carry an average balance of $6,190 on that card for one year, and you’ll pay a whopping $935 in interest. As your balance balloons to an amount you can’t repay, you might default on payments or go deep into debt, both of which can hurt your credit score.⁵

To avoid debt, total your income and expenses in a typical month and set a budget. This monthly spending plan will prevent you from spending more than a set amount on your credit cards, keeping your balances low. Ideally, spend less than you earn each month so you have money left to save for other financial goals.

Usually, you’ll have a grace period of 21 to 35 days to repay what you borrow interest-free. If you don’t make payment in full within that grace period, you will be charged interest.

Track Your Credit Score

Lenders use your credit score to determine how risky you are as a borrower and decide whether to approve you and at what terms.⁶ Before you go credit card hunting, learn your credit score to narrow your options to cards you’re likely to be approved for. You can get a free annual copy of your credit report with each of the three major credit bureaus from websites like AnnualCreditReport.com.⁷

The higher your credit score, the less risky you appear to lenders, and the more likely you are to get approved for a credit card with attractive rewards or a low interest rate. The card issuer will usually specify the score range you need to qualify for the card; the best credit cards often require a score of 740 or higher, defined as “very good” to “excellent.”⁸

After you get a credit card, monitor your credit score on an ongoing basis; it can go up or down based on your credit card spending behavior. Your payment history, credit in use, length of credit history, new credit, and types of credit can all impact your credit score for better or worse. Maintain a high credit score to improve your prospects of getting new credit cards, a mortgage, or other loans.⁹

Most lenders use the FICO score (ranging from 300 to 850) to determine your credit risk profile.

Understand Borrowing and Paying Back

Whenever you borrow money, know your rights and responsibilities. Importantly, a credit card is a type of “open-end” or revolving loan. This means that you can borrow money continually as long as you abide by the terms. Compare this with a closed-end loan like a car loan, which you can take out only once.¹⁰

Also, find out the APR on the card, how to determine the amount you owe each month, the grace period, and the payment due date.¹¹ And know what happens when you don’t fulfill lender expectations—for example, what fees apply if you don’t pay the money back on time.

Practice Good Checking Account Management

Your checking account isn’t just the place from where bill payments for your credit card will likely get withdrawn. As the hub of your finances, it dictates your monthly cash flow and serves as a proving ground for managing your credit cards.

Fortunately, the same skills you use for smart checking account management will enable responsible credit card use. For example, monitoring your account balance is a necessary skill for both checking account and credit card management.

You should be able to handle your checking account without overspending before considering a credit card. There are several ways to develop good checking habits:

• Make regular deposits into and withdrawals from your checking account.
• Balance your checkbook.
• Check your account balance before spending.
• Avoid writing a check or making debit card purchases in excess of your balance.

Understand How Credit Card Rewards Work

Some credit cards offer rewards to cardholders as an extra incentive to spend. Known as rewards credit cards, these options come with perks like cash, airline miles, or points you can redeem for services or items.¹²

The rewards you earn are proportionate to what you spend; for example, you might earn one point for every dollar you spend on a credit card. Some issuers offer sign-up bonuses that earn even more attractive rewards if you sign up for the card and spend a certain amount within a certain period.

While it can be tempting to get a card for the initial or ongoing rewards, chasing rewards can lead you to rack up account balances you can’t repay. Rewards cards can also come with annual fees that can add to your costs. As you prepare for a credit card, choose one with benefits you can leverage without going into debt.

Know Your Credit Card’s Due Date 

Each month, your card issuer will track your credit card purchases and issue you a bill with the amount you owe. The monthly billing statement may be the only reminder your card issuer offers that your payment is coming due. Fortunately, your credit card payment will be due on the same day every month, making it easier to manage.¹³

To prepare for a credit card, put in place a system for remembering important dates. If your bank offers it, set up an alert to be reminded before payment is due. Or, use another reliable method, like a calendar app.

While credit cards and debit cards look identical, they function in very different ways. With a credit card, you’re borrowing money from the credit card issuer. With a debit card, you’re using money from your checking account to pay for purchases. To use a debit card, you also need to enter your PIN.

You can also use a debit card to take cash out of your checking account. You can do this at an ATM or when you make a purchase. Some credit cards allow you to access cash by taking a cash advance, but these transactions tend to have higher interest rates than purchases and they may not have a grace period. In other words, you must pay interest on the advance.

Credit Card	Debit Card
Allows you to borrow against a credit line	Allows you to electronically deduct purchases from your checking account
You may have to enter your billing ZIP code to make a purchase	You may have to enter your PIN to make a purchase
You may be able to withdraw cash by making a cash advance	You can use it to withdraw cash from your checking account

To avoid paying interest, you typically have to pay your balance in full on or before your due date. However, the credit card issuer usually doesn’t require you to pay back all of what you owe at once. You must pay at least the minimum payment by the due date to avoid a late penalty. Credit card issuers vary when it comes to how they determine your minimum balance, but you can find it in your credit card terms.

It’s important to always pay at least the minimum amount on time each month to maintain a good credit history and avoid late fees.

The credit card issuer gives you a certain amount of time to pay back the entire amount that you’ve borrowed before you’re charged interest. The period of time before the interest is charged is called the grace period, which is typically between 21 and 25 days.

If you don’t pay off your full balance before the end of the grace period, a fee or finance charge is added to your balance. The finance charge is based on your interest rate and outstanding balance.

The interest rate is the annual rate you pay for borrowing money on your credit card. Interest rates are generally based on market interest rates, your credit history, and the type of credit card you own.