Woman holding a credit card

Many people who are scared of debt are also scared of credit cards. While credit card debt is a real and very scary thing, it can easily be avoided by properly understanding credit cards and how they work.

To use credit cards responsibly, you must first follow the rules of credit cards. When you’re aware of your spending, stick to your budget, and know the financial rules surrounding credit cards, you’ll actually be better off for using credit cards.

Today, I’m breaking down some of the most common credit card questions I hear. By the end, you should know the basics about properly using your card!

Must-Know Terms For Understanding Credit Cards

If you’re just beginning with credit cards, you might be confused by all the credit lingo. Here are some of the most common terms you may encounter when applying for a card or reading your statement. Consider it your cheat sheet!

Annual Fee

The yearly fee you are charged for having the credit card. You may find incentives where companies waive the annual fee for your first year with the credit card.

Annual Percentage Rate

Also referred to by its acronym APR. This is your yearly interest rate if you do not pay off your balance in full each month. To get your monthly interest rate, you can divide this number by 12.


The total amount of money you owe on your credit card bill. It includes the money you’ve spent as well as any fees, interest charges, late payments, etc.

Billing Cycle

This is the amount of time from the end of one statement to the next. The statement date is the day that the cycle ends, and you receive your credit card statement.

Credit Limit

Each credit card has a maximum amount of money that can be charged to the card. A credit limit also can be called a line of credit or credit line.

Credit Report

This is a summary of your credit history. It includes detailed information that can be summed up into a credit score.

Credit Score

A three-digit number that summarizes your financial standing and history. The higher, the better! This allows you to secure better rates and loans.

Credit Utilization Rate

Displayed in a percentage, this is the amount of credit you have versus the amount you use. For example, if you spend $500 on your credit card, but it has a credit limit of $2500, then your CUR would be 20%. Ideally, your CUR should be below 30% to maintain a good credit score.

Grace Period

The amount of time between the end of a billing cycle and when the payment is due for the balance. During this time, you won’t be charged interest.


The charge you can accrue for not paying off your credit card balance in full. Commonly shown as an APR.  

Minimum Payment

This is the smallest amount of money you are required to pay for your credit card to avoid late fees.

5 Common Questions About Understanding Credit Cards

When people ask me about credit cards, I get some of the same questions. Here are the most common ones I hear and hopefully will clear up the air and improve your understanding of credit cards.

1. How much of my balance should I pay every month?

A common question and myth about credit cards are that you should leave a balance on your card to build credit. This is very false! In fact, you want to do the complete opposite.

If possible, always pay your credit card bill in full at the end of each month. Carrying a balance forward will actually cost you interest and, therefore, more money down the line.

Your credit card bill will also have a minimum payment listed. This is the minimum requirement you need to pay, but you should try to pay off the full balance every month. By only paying the minimum, you will get interest charges on your next bill. The more interest accrues, the more debt you’re in. Essentially, only paying the minimum payment is your shortcut to getting into debt.

You want to make your payments before the due date. When looking at your credit card, you’ll see that you have a statement date as well as a due date. The statement date is the last day of your billing cycle. The payment is the due date to avoid late fees and interest. Typically, you have 21 days between these dates to make your payment.

2. Does checking your credit score lower it?

Another common myth, checking your credit score will not lower your credit score. There is a major difference between soft and hard inquiries.

Hard inquiries occur every time you apply for a new line of credit. This can include everything from taking out a loan for a car, applying for a new credit card, to having a potential landlord check your credit score. Hard inquiries DO lower your credit score. However, it’s only by around five points and takes a couple of months to bounce back.

When you check your own credit score, this is known as a soft inquiry. It won’t affect your credit score. Most lenders now offer easy ways for you to check your own credit score. A big part of being financially responsible is checking your credit score frequently. It’s especially important to know your credit score if you’re working to improve it or need to apply for a new line of credit soon.

3. What should I look for when choosing a credit card?

There are so many credit cards on the market that it can be challenging to narrow down which options are best for you. To help, consider these key points:

  • Requirements: Those with higher credit scores will get the best credit cards. If you have no credit history or a poor credit score, you may not be accepted. In this case, look for ones aimed toward students or those with poor credit.
  • Annual fees: Some credit cards have annual fees that you must pay. As an incentive, some may waive the first year’s annual fee. Even if they do this, make sure the fee isn’t too big for you to pay off in the following years.
  • Annual interest rate: The lower, the better. In the event that you can’t pay off your credit card balance, you want your interest payments to be as small as possible.
  • Rewards: Just about every credit card offers rewards as an incentive to use the card. This can include cash back, travel points or miles, and other point systems. Determine which rewards matter most to you and which company offers the best deal.
  • Credit limit: The higher your limit, the better (only if you can stay within it). A higher credit limit can increase your credit utilization rate if you keep your spending the same.

4. When should I use my credit card?

There are many benefits of using a credit card rather than your debit card or cash.

  • First of all, credit cards allow you to build credit. Good credit allows you to have access to loans and other lines of credit you may need down the road, such as car loans and mortgages.
  • Credit cards also allow you to earn rewards. If you’re spending money, you might as well get rewarded for it, right?
  • Another major aspect of using a credit card is fraud protection. If someone were to get a hold of your debit card, they would have direct access to your account, and the money would come straight from your funds. With a credit card, you can dispute the charge, and the funds won’t ever leave your account.

The benefits of credit cards only occur when you use them responsibly. If you have a habit of overspending or trouble sticking to a budget, credit cards are not your friends. Get your spending under control, and then you can use credit cards instead of cash or a debit card.

If you’re new to using a credit card, start off with just one credit card. Begin by charging a few expenses to it before you put everything on it. Get used to the card and its rule first!

5. What happens if I spend more than my credit limit?

In most cases, your card will get declined if you try to spend above your credit limit. This is thanks to the Credit CARD Act of 2009. Through this law, credit card companies can’t charge you fees for going over unless you specifically consent to it.

If you do consent to over-the-limit coverage, you can do transactions that exceed your limit. Oftentimes, this comes with hefty fees, especially if you do it more than once. Getting that close to your credit limit also hurts your credit utilization ratio. So avoid going close or over if possible!

If you keep getting close to your limit, ask to increase your credit limit. You can also switch to your debit card until you get your credit card under control again.

I hope that answers some of your questions about credit cards! If you have any more questions about understanding credit cards, feel free to leave them in the comments down below so I can either add them to the list or get back to you.

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