8 Financial Services and Credit Card Basics You Need to Know
The world of finance is full of terms and concepts that may be unfamiliar to ordinary people. Still, not understanding important financial concepts could cause you a number of problems. According to a financial anxiety study by the FINRA Foundation, people with high financial literacy were less likely to feel anxious about their money than those who lacked a good grasp of important financial topics such as interest rates and inflation.
When it comes to your money, what you don’t know could hurt you. There is no shame in being confused about financial concepts. But it’s important to try to learn more about the money and credit topics you don’t understand.
The cheat sheet below can be a great place to start, highlighting eight basic financial services and credit card concepts you’ll want to know about.
What is Debt?
When you borrow money from a lender or credit card company, the amount you owe is called a debt. Debt is money you borrow from another party and promise to pay back later, usually with interest.
If you commit to managing your debt responsibly, you may be able to use the money you borrow to improve your life in many ways. For example, you could take out a loan to get a college degree, start a business, or buy a house. These are examples of what many financial experts would consider “good” debt. You can also use credit cards for earn rewards and enjoy other benefits without paying interest if you pay the full balance of your statement each month.
Still, it’s easy to let debt spiral out of control and overstretch yourself financially if you’re not careful. Imagine that you are maximizing your credit card limit on frivolous expenses or take out a personal loan to finance a lavish vacation. In such scenarios, debt can become a burden.
How to avoid debt?
A budget is the best tool you can use to avoid getting into debt. When you use a budget, it helps you plan your money to make sure your spending aligns with your priorities.
Once you’ve established a budget, it’s important to monitor your spending to make sure you’re following the plan. The good news is that there are plenty of apps that make managing your finances easier, including tools to help you keep track of multiple credit cards.
If you know you have big expenses coming up, like a wedding, down payment, or vacation, you can use your budget to save up front. Planning ahead can help you afford the things that matter to you while avoiding debt. (Tip: Take advantage of credit card rewards and generous sign-up bonus can help you reach your travel savings goals faster.)
Subscribe to our daily newsletter
What is interest?
There are two types of interest: interest you earn and interest you pay. On the borrowing side, interest is the price you pay a lender or credit card company to borrow money. In this context, you will often see interest expressed as a annual percentage rate, or APR. When it comes to financing on products like credit cards, you’ll want to get the lowest interest rate possible.
You may also earn interest on money you keep in a deposit account with a bank or credit union. A financial institution may express the interest you earn as your annual percentage yield, or APY. If you’re making money on money you deposit with a bank or credit union, you’ll want to aim for the highest possible APY to grow your savings.
Here are some examples of accounts you could deposit money into and earn interest in return:
- Savings accounts.
- Check accounts.
- Certificates of deposit.
- Money market accounts.
Are credit cards bad?
Credit cards are not inherently good or bad. Rather, it’s the choices you make as a cardholder that determine whether these financial tools can help or hurt your finances and credit.
If you make smart credit card management decisions, credit cards have the potential to offer many advantages and benefits such as:
Is it better to have a debit or credit card?
If you use debit cards instead of credit cards as your preferred payment method, you may miss many of the above benefits. In particular, debit cards cannot help you build a credit history or contribute to your credit score.
Debit cards also lack some of the strong fraud protections that credit cards offer.
The Electronic Fund Transfer Act limits your liability for fraudulent debit card transactions to $500. However, if you report the fraud within two business days, your liability is only $50. Your personal money may also be tied up while the bank investigates unauthorized charges that have taken place on your debit card. This complication can lead to serious financial hardship if you have other bills to pay before the bank returns your funds.
Credit cards, on the other hand, limit your liability for fraudulent transactions to $50, provided you report the unauthorized charges within 60 days. This is thanks to the Fair Credit Billing Act. Additionally, the big four credit card networks currently waiving the $50 cost per courtesy. Also, if someone uses your credit card without authorization and you report the fraudulent transaction, the card issuer will not hold your personal funds during the investigation process.
How many credit cards are too many?
There is no magic number of credit cards you should keep in your wallet. Some people are able to handle a few credit card accounts responsibly and maintain good credit ratings at a time. Others can handle dozens of credit card accounts with success.
The right number of credit cards for you may be different from what works for the next person. As a general rule, open only as many credit cards as you feel comfortable handling – with the goal of paying your entire statement balance on each account each month.
Will too many credit cards hurt my score?
Our advice is to be consistent in paying your credit cards on time and therefore keep your limit balance rates (or credit utilization rates) low. If you follow these rules, you should be off to a good start in the credit score department – provided there are no other issues on your credit report. You could also consider pay your credit card balances sooner to potentially increase your credit score in certain situations.
Finally, pay attention to how often you apply for new credit, such as credit cards and loans. An excessive number of difficult credit applications could hurt your credit score – although if you experience a survey-related drop in credit score, it might not be that bad. According FICOan additional credit investigation takes less than five points from most people’s FICO score.
Does canceling a credit card hurt your credit score?
Some people do the incorrect assumption that canceling a credit card will improve their credit score. In reality, closing a credit card could actually negatively affect your credit score.
When you close a credit card, you may trigger an increase in your overall credit utilization rate. If the ratio increases on your credit report, your credit score could drop.
There are ways to protect your credit score when canceling a credit card. So if there’s an important reason why you need to close a credit card account, check out this TPG Guide for tips on how to navigate the process.
At the end of the line
Learning the basic financial services and credit card concepts above can help you in a number of ways. As you learn more about money and financing, you’ll be better prepared to take wise financial action that can benefit you for years to come.
Use the right card and maximize your rewards on your everyday purchases. Try it today with the free TPG app.