Credit cards offer consumers an alternative way to pay for expenses, consolidate their debt, handle unexpected emergencies, and even earn rewards such as travel miles or cash back.
If you are new to the world of credit, you may not know how credit cards work, how to apply for a credit card, and how to make sure you get approved despite your credit score. We’ve compiled a quick guide to help teach you the basics.
How Credit Cards Work
Credit cards are a method of extending funds to consumers in exchange for an agreement for repayment.
When you open a credit card, you will have access to a revolving line of credit and can use the funds for whatever you would like up to the credit card limit. You will have to pay interest on the amount that you charge to your card.
Credit Score and APR
Lenders typically look for a credit score of 630 or more to approve your credit application, and scores above 700 will give you access to the best rates.
One common area of confusion for many people is the difference between your interest rate and APR. APR stands for “Annual Percentage Rate” and can best be described as the annual cost of borrowing money.
Since your APR is determined largely by your overall financial health, it is important to perform a free annual credit check to ensure your report is accurate and shows your creditworthiness.
For some financial products such as mortgages and other types of loans, the APR can differ from your interest rate. In these cases, the APR is the total cost, including fees such as closing costs and origination fees. This means that the APR of your financial product is almost always going to be higher than the interest rate.
However, with credit cards, there is no difference between the APR and the interest rate. While there may be additional charges for things like late payments and balance transfers, they are not subject to being included in the APR because they are unpredictable.
How to Apply for a Credit Card
There are some basic steps involved in applying for any major financial product, including a credit card.
The first step is to shop around. Since credit card terms and conditions can vary widely, it pays to take your time and compare. You’ll want to look at everything from interest rates and annual fees to rewards programs and card perks like free museum entry. Each card has its unique offerings and terms.
Shopping around to find the lowest APR is extremely important since overpaying in interest can cost you hundreds or even thousands of dollars over time. However, keep in mind that a card with a low APR and high annual fee may not be the wisest choice vs. a card with a high APR and no annual fee.
It is important to run the numbers and weigh the total annual cost of the credit card before making your decision on which is cheaper.
Fill Out An Application
Once you’ve decided on a card or two that you are interested in, you will need to fill out an application from the bank, credit union, or another lender. Many times this can be completed at home via an online application process. However, some lenders may require you to go in person.
The lender will run a credit check to determine your credit score and review the other information on your credit report. Your income and employment history will also be reviewed to help determine your overall creditworthiness. You will likely need to provide documentation as evidence of your job, income, address, and other personal information.
Many times, it pays to become a member of the credit union or financial institution. The lender may be more willing to overlook indicators of poor financial health such as poor credit or lack of job history.
Secured Credit Cards
If you don’t have a credit history or need to rebuild your score, there are still options available to you.
Secured credit cards offer a way for consumers with poor or no credit to have access to credit. With a secured credit card, your line of credit is secured with a deposit of cash for collateral. This way, the lender is protected if you stop paying or default.
The amount of the deposit typically determines your credit limit. For example, if you wish to have a credit limit of $250, you will need to deposit $250 in cash. When you close or upgrade your account, you will then receive this deposit back.
Ready to Apply for a Credit Card?
At Radiant Credit Union, we strive to provide the best financial products and services for all consumers. Our members take advantage of our low introductory rates, cashback rewards, and other card benefits.
Click below to learn more and discover which credit card is right for you.