Credit cards are essentially, a loan. A credit card is an account that offers you a line of credit that can be used to buy now and pay later. With a credit card you can make purchases, transfer balances from other credit cards, or make cash advances. At the end of each month, you will receive a statement which is a tally of all your activity. The sum of your purchases is your account balance, or amount you owe back to your financial institution. Each month, you are required to pay a portion of, or all of, your balance, working to eventually pay off the entire balance.
A credit card can be used in place of cash at most retailers. Use your credit card for essentials such as groceries and gas, or spend your credit on clothes, restaurants, and entertainment. No matter what you use your credit card for, if you want to avoid an interest fee, be sure to pay your balance off in full at the end of each month.
A credit card is not free money. You will need to pay back your balance. A good rule of thumb is to make sure you are only buying what you can afford, like your essentials, and pay off the entire balance at the end of the month to avoid interest charges.
A balance transfer is when you move your credit card balance from one credit card to another. This action can help reduce your monthly payments and save you interest. For example, you could move your payments from a credit card with a higher-rate card to a lower-rate card.
USALLIANCE charges a 3% interest fee on balance transfers – $30 per $1,000 transferred. For example, if you transferred $3,000, you would be charged a $90 one-time fee. Depending on how much interest you are currently paying, the one-time fee may be worth it. Check your credit card's current APRs and compare them to the USALLIANCE Visa Classic credit card.
A cash advance is when you withdraw cash against your credit limit through your credit card. Cash advances can be made at an ATM, branch, or online. Cash advances should be used cautiously as they can have higher interest charges. Pro-Tip: If you’re in need of a cash advance, the USALLIANCE VISA Classic credit card has the same APR on purchases and cash advances.
A credit score is a number calculated based on your credit history. This number tells financial institutions how likely you are to pay a loan back on time. Before you are approved for a credit card, an auto loan, a home mortgage, etc. your financial institution will run a credit check to help determine if you are likely to pay back your loans. When you have a good credit score, you are less likely to default on a payment and will end up with a better rate. This means, you will pay less in interest for your loans overall. Additionally, when it comes to those bigger purchase like car loans or home loans, as a credit-worthy individual, you will have a better chance of being approved for an apartment or your first home. The first thing borrowers check when you apply for a loan or an apartment/home is your credit history and your debt-to-income ratio to see if you are a qualified candidate.
Your credit score is calculated by a variety of different factors, including how long you have been using (and paying off) credit, if you pay back your minimum payments on time, how much debt you currently hold. A credit card can help you boost your credit score by showing you are a responsible borrower. Even having one credit card with a small credit limit that you use regularly for small purchases and pay off immediately will help boost your credit. When you buy a car, your first home, or other high-ticket items, they will see you can pay your loan back and in a timely manner.
Credit cards can be intimidating if you do not use them properly. By making small purchases and paying your FULL credit card balance at the end of the month, you will build your credit and not be charged interest. You are only charged credit card interest when you carry over your monthly purchases from month-to-month.
Generally speaking, Credit Cards are more secure than debit cards because they offer more fraud protection. If your credit card gets stolen, a fraudster would rack up charges against your loan, instead of taking money directly from your checking or savings account. In that sense, it is easier to work with your credit card's fraud services to get the credit back on your card, rather than try to recoup the losses of cash within your everyday banking accounts.
Your debt-to-income ratio, or DTI, is calculated by dividing your total monthly debt payments by your gross monthly income.
For example, this month, your total minimum payments on your other credit cards are $200, your auto loan is $300, and your rent is $1,200 for a total of $1,700 monthly obligations. Your gross monthly income is $6,000. This makes your debt-to-income ratio 28.3% ($1,700/$6,000).
Yes, a credit card application does pull your credit. “Pulling credit” is a term used within financial industries to say they are checking your official credit score through one of the top agencies - commonly, Experian, Equifax, or TransUnion. These companies all keep a record of your credit history and score. When you apply for a new credit product, a Financial Institution will pull your credit and essentially make sure you are creditworthy enough to be approved for the loan.
You can check your credit score through the credit bureau's direct website once a year for free without hurting your credit score. For USALLIANCE members, if you have a USALLIANCE MyLife Checking account or a USALLIANCE Visa Classic credit card, you receive a free monthly credit score as part of your account with no hit to your score.
Bottom line, lenders are looking to make sure there is little risk of you defaulting on a loan payment. They do this by reviewing your credit history and how often you make payments on time and how often (if ever) you are late on a payment. They will also check if you have any delinquent (unpaid) accounts on file. They will also check your debt-to-income ratio – to make sure you can afford another credit card based on the amount of money you have coming in as income.
Here is a quick guide to share what an ideal range of DTI would be.
DTI is less than 36%: Your debt is likely manageable & relative to your income. You should be able to access new lines of credit easily.
DTI is 36% to 42%: This level of debt could cause lenders concern, and you may have trouble borrowing money. Consider paying down what you owe.
DTI is over 43%: Paying off this level of debt may be difficult, and some creditors may decline any applications for more credit. If you have mainly credit card debt, consider a USALLIANCE Debt Consolidation Loan.
Realistically, there are only two ways to lower your debt-to-income ratio: you need to either reduce the monthly payments you owe or make more money.
Now that you know the basics and benefits of applying for a credit card, consider applying for a USALLIANCE credit card! Our low-rate Visa Classic Card is a great card for those looking to start building credit. It features: