How Credit cards work And 10 Things You Didn’t Know
As of 2022 80% of people in the US or 200 million people have a credit card and most have more than one. Advertisements like “What’s in your wallet” might come to mind.
Credit cards are a great convenience for most people as long as they are used responsibly and paid off monthly. Conveniences such as booking hotels, rental cars, plane flights, gas, and groceries are examples. I say this because it’s easy to use them for impulse purchases and get into debt.
According to debt.org, the average credit card debt increases with earnings. Keep that in mind as you admire how much “plastic” you have in your wallet. Now, I’d like to share some basic information on how credit cards work and then jump right into things you didn’t know.
How Do Credit Cards Work
Credit cards are accepted everywhere we shop and allow us the convenience of not having to count cash or write checks. They’re a buy now pay later method but have interest charges and often come with some kind of reward for use of the card.
Credit card issuers typically have a 30 day grace period on unpaid balances and then charge a percentage of what you owe each month that you carry a balance. This is where many get into trouble since they carry balances from month to month and then sometimes roll unpaid balances to new cards to take advantage of new grace periods. Consumer debt problems usually involve credit cards.
Interest rates come back to bite so many consumers. Credit cards have an annual interest rate that’s charged for any balance over the 30-day mark. This interest rate is charged monthly and if unpaid is added to your unpaid balance. Consumers that do not pay their accrued credit card balance that month in full are charged this interest rate. If the balance goes unpaid then the credit card company will have collection agencies pursue payment. They will call the consumer constantly to get payment terms. Consumers can agree to pay the unpaid balance in full or not. This negatively affects their credit rating and causes their interest rates on all other types of loans to go up because of the increased credit risk of lending them money. There are credit workout companies and consultants that can work on behalf of the consumer to work out a deal, and then consumers can do the same. Card companies will accept a payoff amount less than what is owed in most situations. This does not negate the impact on the consumer for their credit rating.
Credit card statistics:
The average US household debt is $14,000.
39% carry balances month to month.
Credit card debt is highest for generation x, more than ⅓ of credit card users never redeem their rewards.
30% of Americans have more in credit card debt than they do in emergency savings.
The average house with credit card debt is charged $1000 in interest each year.
Behaviors to avoid:
Carrying a balance month to month, paying only the minimum balance, no budget to track spending, using too many cards, taking cash advances, missing payments and incurring late fees, impulse buying, exceeding credit line.
Types of cards
Store cards: There are store-branded cards that allow shoppers to participate in discounts at that store and are often promoted at the checkout. Discounts like 15% 30% and sometimes 50% are used to get shoppers to sign up.
Secured cards: These cards require consumers to deposit an amount of cash that allows them to withdraw Up to that amount or sometimes a bit over.
Student cards: These cards have minimum income requirements and also have lower charging limits, typically $500.
Small business cards: Are issued through a company to employees and have tracking and spending restrictions to align with company policies and the role of the user.
Charge cards: These cards don’t have interest fees, require monthly payoff of charged balance, include rewards points, have high spending limits, and require high credit ratings.
Standard unsecured credit cards: Amex, Visa, Mastercard are all credit cards you may have seen before. Many of these cards have reward points awarded once a person pays the balance in full. They have also partnered with different consumer brand companies to provide places to use these points. That could be airlines (airline mile points), hotel stay points, cash deposited into trading accounts like Fidelity or Schwab, or purchase locations at popular brands like GAP. These cards have been the most used and represent a hyper-competitive market all after the consumer's wallet. In addition to this, the card branded companies that work with the card companies have been starting to devalue the points that are accrued via these cards. Marriott and Delta are examples of this.
The Points game
People who play the points game with cards typically have higher incomes and are constantly having to evaluate the best use of their points to maximize the dollar value when they go out to “spend” the points. I know personally that this is not easy and now there are different platforms to help people review the best ways to get a trip completely or mostly paid for by points. There’s also a growing number of niche cards that serve different markets. This could be starter cards for the teen market which has seen a large growth trend due to companies like Greenlight and cards that earn crypto rewards for use through companies like Binance.
What cards are best for you comes down to you as a consumer and your income. The higher the income the more reward point programs and annual fee cards come into play. The lower the income the more starter cards and non-reward card options come into play.
Card rewards apps:
Point.me: $129 per year for travel deals and point suggestions, primarily flights.
Awardwallet.com: Monitors all the reward programs and tracks credit
Travelfreely.com: Best for couples travel rewards. Proposes to earn you $2000 per year
The points guy: Good for seeing travel deals and points value
Cardwiz: helps you find the best card based on your spending habits
MaxRewards.com: Tracks credit usage along with card points rewards
CardPointers.com: helps you choose the right card based on the purchase
UThrive.com: For those with many rewards cards. Tells you which to use and where.
Pointguru.com: $150-$250 one time or $50/mo for points and reward consultation
10 things you didn’t know about credit cards:
Banks market cards to you based on the credit and income data they have on file for you. They will mail you higher interest and fee cards if they think you're a credit risk. The credit rating agencies like Experian, TransUnion, and Equifax sell credit information to the banks. So, it’s up to you to research the best cards versus taking whatever comes in the mail.
Pay your cards a week early. Don’t wait until the last day of the month since credit card companies can delay payment acceptance by a day or two especially if the weekend is involved that causes you to get charged interest.
Have multiple cards at $0 balance but only use the cards that have rewards points and think about the categories and periods that earn you the most points. I like having a regular 2% cashback card with a travel rewards card for larger purchases or category-specific purchases.
Use physical wallets that have the special material (ie tinfoil) woven in that stops thieves from pulling data off your cards remotely
Save money first in a savings account for large purchases then use the reward card to pay for the thing or trip and pay the card off immediately.
Try to use rewards cards that your friends use so you can share ideas on trips and deals that come up so you can coordinate group trips together.
Use a credit freeze for all three of the credit rating agencies and unfreeze when you need to apply for new credit.
Use a free credit monitoring service like Credit Karma to keep tabs on your credit.
Use apps and websites that help you find travel opportunities for your points and book the travel rewards deals. See the list above.
Avoid or minimize sign-up for store-branded credit cards. You’ll shop there less than you think and it’s easy to forget you have accumulated a balance.
Bonus - Most Retail stores work off of a Hi-Lo concept. They have lower-priced items used as loss leaders or as deals to encourage other purchases. Buying psychology encourages other purchases if someone feels they got a deal on something. Remember this when you’re staring at the $50 bottle of wine, $850 jacket, or the $3000 laptop.
Bonus - Big box wholesale retailers like Costco and Sams Club offer items for a reasonable markup of 15% and sometimes have discounts on top of that at the end of the shopping aisles.
Bonus - When traveling internationally make sure you have a card that has no foreign transaction fee and that you always do purchases in the foreign currency and not converted to dollars (most businesses will try). Two cards that are examples are the Capital one venture card and Costco Adventure card.