Everything You Need to Know About Credit Cards — Simplified

Cutting Through the Complexity to Build Credit Wisely

Despite the ubiquity of credit cards, many consumers and credit card users still lack fundamental knowledge of how various credit card offerings work. Here’s a primer on credit cards: when and how to use them; best practices; whether or not you need multiple credit cards; what different rewards programs mean and how to choose a credit card that works for your business.

Business vs. Personal Use

It can’t be said enough, if you own a business keep your company charges separate from your personal activity. There are few things harder or more laborious than trying to figure out whether a purchase made 30–60 days ago was for business or personal reasons.

Choosing the Best Card(s) for You

There are several significant factors in determining the best card for you and your business. Before you take the plunge, decide whether you plan to pay the card off every month or you are going to carry a balance.

If you plan to pay it off, look for a credit card with either no fee or a low annual fee. If you plan to carry a balance, then the interest rate should be the deciding factor (the difference between 15% and 20% interest when carrying a $10k balance on your card is around $500/year).

Most credit cards have a variable interest rate. With a variable rate, your interest payment is usually tied to the benchmark rate. In the past year, the Fed has raised the benchmark interest rate three times, which means anyone with a variable rate saw their interest payments go up (since their cards’ rates are tied to the benchmark rate).

Lastly, watch for sneaky/hidden fees. They can be a killer if you don’t pay attention to them. For example, if you go over your credit limit, the bank may charge you a fee. If you are late making a payment, it’s usually a $20–35 late fee. If you take a cash advance on your card, the bank will charge you a fee for the transaction, and then a higher interest rate on it until you pay if off.

Banks also reserve the right to raise your interest rate if you go over your limit or make several late payments. It’s not hard to have your rate jump from 10% to 25% in just a few months. The key to managing your credit cards is to read the full statement each month. Make sure there aren’t any fraudulent charges, that your interest rate is the same, and that you don’t have any unexplained fees.

A Sampling of Rewards Programs

Now that I’ve given you the downside of credit cards, let’s look at a few positive aspects of having credit cards for your business and personal use. One of the biggest pluses in having credit cards is the ability to deal with the ebbs and flows of cash flow. For small business owners, having an extra 25–30 days to pay a bill can be vital, especially when your clients are late paying their bills (my advice here is to be the squeaky wheel when any of your customers are late paying an invoice. Getting your invoices paid on time must be a top priority).

Another perk with credit cards is the rewards! Almost every credit and charge card offers some sort of perk. The question becomes which card offers the best incentives for your business or personal life? Below are a few categories and credit card rewards program.

• Cash Back Credit Cards — The advantage of a cash back card is that it’s relatively simple to calculate the advantages. For example, PayPal’s Cashback Mastercard® offers a credit card with no annual fee and 2% cash back on every single purchase you make wherever Mastercard® is accepted (with no restrictions, which is nice). You need to have a PayPal account in order to apply for their card. Another perk is that you can redeem cash rewards directly into your PayPal account. Other cash back credit cards include Capital One and Discover Card.
• Rewards Cards — A number of credit card and charge card options for customers offer points that can be used to pay for travel, office supplies, and pretty much anything else you need. Typically these cards offer a certain number of points per every dollar spent on the card, which can then be exchanged for goods or services. Some cards even offer double and triple points on your most frequently used categories.
• Travel Credit Cards — Most airlines have credit card offerings that allow cardholders to check 1–2 free bags on each trip (a $25–50 savings). Additionally, cardholders could receive anywhere from 10k to 50k miles for spending a certain dollar amount on the card in the first few months. If you are a frequent traveler or your bucket list is filled with places to travel, then pick an airline with the best options for you. Some examples include JetBlue, Delta, and Southwest Airlines.

The same programs apply for hotels. Hilton Honors, Hyatt, Starwood, and almost every major hotel chain have credit cards designed for frequent (and not-so-frequent) travelers.

• Retail Credit Cards — For some small business owners, it makes sense to have a retail credit card for business purchases. One example is the Home Depot credit card. Landscapers and Contractors can choose from several types of credit cards based on their needs (e.g. a big project credit card vs. a commercial credit card). Home Depot will periodically offer discounts and payment plans with no interest for larger purchases.

Whatever credit card(s) you choose for your business or personal use, make sure you read the fine print and go over your entire monthly statement. If used prudently, a credit card can be an incredibly powerful tool for enhancing your life. Whatever you decide, spend wisely to make sure your credit card works for you, and not the other way around.

Money IQ is a publication that aims to provide simple, no-nonsense personal finance advice. We’re here to dispel myths and demystify personal finance for our readers.