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How Credit Cards Work for You

July 20, 2023

Credit cards can be a valuable tool when it comes to financial planning. Using credit cards appropriately can benefit many aspects of your financial life including raising your credit score. Why are higher credit scores important? Because higher credit scores often mean lower interest rates on other lines of credit such as home and car loans.

Because furthering your financial journey can be a little bit scary, below is a list of some quick-fire answers to a few questions you might have.

What is a credit card and how does it work?

A credit card offers its user a small line of credit that allows the user to borrow money that is repaid at a later date. Because of this, credit cards have spending limits. These limits range widely based on the personal credit history of the cardholder. When paying back these amounts, there is often interest applied to the amount borrowed as well.

How many credit cards should I have?

There is no real limit on how many credit cards one should have but it is best practice to make this decision based on your own personal financial situation. Different credit cards have different credit score requirements, interest rates, benefits and fees among other aspects. Some experts say one card is appropriate, others say three to five and some even say none at all. This is why the decision to use a credit card is based heavily on personal spending habits and past financial experience.

What does a credit card do for me?

Credit cards often are used to build credit. This means that the more you use your credit card, the higher your credit score can go if you have good payment habits on your credit card statements. Credit cards also often have many benefits from cashback to point systems for all sorts of fun stuff like travel. When applying for a credit card, pay close attention to the type of credit card that it is because of the many differences between credit card companies and the cards that each of them offer.

Why do I have payments?

When you use a credit card, you are borrowing money. It’s kind of like you are taking out a mini loan. Because you are borrowing money, you have to make payments to the company you are borrowing from. There is also interest applied to these payments if you don’t pay them within a certain time frame. Your interest rate will vary based on your previous credit history and the type of credit card you have, but it is important to pay attention to how much you’re spending and when your payments are due because the interest will continue to accrue.

What is an interest rate?

An interest rate is a percentage of extra money you pay on top of what you borrow if you don't pay back the full amount you owe. So if you only pay the minimum amount due, you'll end up paying more in interest charges. That's why it's important to pay your credit card bills on time and in full to avoid these extra charges. Late payments can also hurt your credit score, making it harder to borrow money in the future.

There is no one-size-fits-all answer to the question of how many credit cards to have. The appropriate number of credit cards will depend on your individual financial situation, including your credit score, income, spending habits, and the fees and rewards associated with each credit card. By carefully considering these factors, you can choose the right type of credit card, and the number of credit cards to help you achieve your financial goals.

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