Credit card being swiped

How Credit Cards Work & How to Avoid Interest!

When I first graduated from college I didn’t know anything about how credit cards work and I was a little bit afraid of them!

But, once I started doing research and learning about them, it turns out credit cards aren’t so scary after all! And are actually super helpful if you know how to use them properly!

They can also provide an amazing opportunity to travel for very little out of pocket, which is what originally attracted to me the hobby.

Now, I currently have anywhere from 7-12 credit cards in my wallet at any given time and rotate them regularly based on whatever rewards I am aiming to get!

Before you get started on your credit card journey, you have to know that you must treat credit cards just like cash. If you aren’t careful, you can get yourself in trouble and possibly buried in debt.

So let’s dig into how credit cards work!!

If you already know how credit cards work, check out my ultimate guide to credit card hacking!

Colorful pin image with text: everything you need to know about credit cards

Types of Credit Cards

There are a million different credit cards out there and it may be a bit overwhelming at first, but below is a rundown of the most common types:

Cashback Credit Cards:

With this type of card you typically earn a percentage back per dollar spent. Some offer a straight percentage for all purchases, whereas others offer rotating categories that earn higher percentages throughout the year.You then can either apply your cashback to your statement or specific charges on your card or you can get the cashback transferred to your bank account.

Examples of cashback credit cards are the Citi Double Cash card and the Discover IT card.

Travel Credit Cards:

There are many different travel cards out there. You can get a travel-specific card to earn miles/points for a specific thing (i.e. Delta Airlines for flights, Marriott for hotel rooms, etc). Or you can get a more general travel card that earns miles or points that can be transferred to a group of different travel companies.

Check my post on How I Booked a 2 Week Europe Trip for Cheap to see how I used credit card rewards on this trip!

Examples: United Mileage Plus Explorer card, Southwest Rapid Rewards cards, World of Hyatt card

*Learn about how you can get a Companion Pass with the Southwest Credit Cards! I swear it is the most valuable travel reward out there!

Combination Credit Cards:

A lot of cards out there earn rewards and can be cashed out for cashback and/or used for travel and points.

Examples of combo credit cards include the Chase Sapphire Preferred, Chase Freedom, Chase Freedom Unlimted, Amex EveryDay card.

Balance Transfer Credit Cards:

These are great cards if you have debt already and need to get your credit score in line.

Some cards offer no fees to transfer balances from other credit cards, along with 0% interest for an extended period of time. These cards present a great opportunity to pay down large balances for little to no fees and interest!

However, many of the cards mentioned above do come with an introductory offer with 0% interest as well!

Store Credit Cards:

Many stores offer their own branded credit cards. These cards don’t usually come with great rewards which is why I would not typically recommend these.

Figuring out what you want to get out of credit cards will help you figure out which ones to apply for.

If you are just starting on your credit journey with little or no credit I would recommend a basic easy cashback card to start building your credit.

I think the best option is the Citi Double Cash card where you get 1% cashback for all purchases and 1% cashback when you make payments, so essentially 2% cashback total. It also comes with 18 months with 0% interest!

photo of credit card being inserted into credit card reader

So, How do You Avoid Credit Card Interest?

Interest is the cost that a lender charges you to borrow money. However, credit cards work differently than loans in that they have a “grace period”. Credit card companies don’t start charging you interest until the month after the end of your statement month.

For example, your statement billing period may run from July 08 to August 07. You use your card for purchases during that time.

On August 07 you will get a statement showing a summary of the charges you made along with a minimum due amount (usually around $25) and a due date (September 03).

Now, if you don’t use your card for the rest of August/beginning of September, and pay off the full balance of all of the purchases from July to August by September 03, you will not be charged interest.

Wow, isn’t that nice?! That’s about a full month to pay and you don’t have to pay the credit card company anything for it!

how to use credit cards the right way

Now, it’s not likely you won’t use your credit card every month and that’s ok!

You should use your credit card for all purchases you can use your card for (and have the cash in your bank account to pay for). Otherwise, you are leaving free money (rewards, cashback, points) on the table!

If you consistently pay the total balance on your credit card before the following month, you will never pay any interest and you can even build up a (small) balance of larger purchases.

This allows you to pay off the larger purchases a little bit at a time instead of all at once. You can be your own lender and not pay any interest charges to a bank or credit card company.

This is a little hard to demonstrate but I am going to try!

When I know I need to make a larger purchase, I make sure to use that card for all of my everyday expenses and will add in my bills too if needed. Check out my post on how I created my budget to learn more about my everyday expenses!

So let’s say my everyday expenses for February came out to $1,000. I put a larger purchase of around $600 on the card as well. So my balance at the end of the billing period is $1600.

The next month I use that card for my everyday spending plus other items I pay off regularly (like my bills). As long as I pay (any) $1600 before the due date I won’t be charged interest.

I actually pay my cards every week for my everyday spending so I never have a large unmanageable balance to deal with at the end of the month and it helps me to make sure I pay the whole balance down. I talk more about this below!

Check out my post on 6 Steps to Create a Budget that Works to see all the details of how I set up my budget!

brown wallet photo

Paying Your Credit Cards

I highly recommend getting in the habit of paying your credit cards weekly. This is the best way to stay on top of your credit cards and make sure they don’t get out of control.

Also, if you don’t log in to check your accounts every week, they become out of sight, out of mind. This is how you get yourself into debt that becomes very hard to get out of because of high-interest rates.

Checking all of your accounts on a regular basis can help you find fraudulent charges on your account. (**Another great thing about credit cards is that if someone fraudulently uses your credit card, the credit card company will automatically credit your account and you are not missing any cash. If you use just a debit card linked to your bank account you may be out of cash for a while.)

Once you are comfortable with using a credit card properly and are consistent with making your payments weekly, you can venture out and get other cards as well.

how credit cards work 2

Applying for and Closing Credit Cards

People are often afraid of their credit score going down when they apply for a new card.

And, yes, this is true, your credit score will be temporarily affected. The keyword here is temporary.

Once you are approved for the card and the new account hits your credit report, it will boost your credit score by a lot more than the temporary dip it experienced when you initially applied.

This is because your available credit goes up and your credit utilization goes down. These are 2 of the 5 factors that affect your credit score. The others are payment history, length of credit history, and mix of credit.

On the opposite side of the spectrum, I think people are even more afraid of closing a credit card and how that would affect their credit.

I was afraid of this in the beginning as well.

But it is necessary to do when you are serious about credit card rewards. I will go more in-depth on this in a future post.

**Final note on how credit cards work: since the length of credit history is a large factor in your credit score, you never want to close the first credit card you ever opened if you can help it.

How credit cards work pin image

I hope you enjoyed this post and have maybe learned a thing or two about how credit cards work.  And if you have any specific questions or would like to know more about a specific type of credit card, let me know in the comments!

Now that you know the basics of credit cards, you can read the ultimate guide to credit card hacking to learn the exact process to use to accumulate lots of points and miles for free travel!

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