The financial world is full of terms and concepts that may be unfamiliar to the average person. However, not understanding important financial concepts can cause you some problems. According to a financial anxiety research by the FINRA Foundation, highly financially literate people are less likely to feel anxious about their money than those who are uncertain about important monetary topics such as interest rates and inflation.
When it comes to your money, what you don’t know can hurt you. There is no shame in being confused about financial concepts. But it’s important to try to learn more about money and credit related subjects that you don’t understand.
The cheat sheet below can be a great place to start, highlighting eight financial services and basic credit card concepts you’ll want to know.
What is debt?
When you borrow money from a lender or credit card company, the amount you owe is called debt. Debt is money that you borrow from another party and promise to pay it back later – usually with interest.
If you’re committed to managing your debts responsibly, you can use the money you borrow to improve your life in many ways. For example, you can borrow money to get a college degree, start a business, or buy a house. These are examples of what many financial professionals consider “good” debt. You can also use your credit card to Earn rewards and enjoy other benefits without paying interest if you pay off your full statement balance each month.
However, it is easy to fall out of debt and overspend financially if you are not careful. Imagine you maxed out credit card limit frivolous spending or taking out personal loans to finance a lavish vacation. In such cases, debt can become a burden.
How can you avoid debt?
One budget is the best tool you can use to avoid falling into bad debt. When you use a budget, it helps you plan your money to ensure that your spending aligns with your priorities.
As you set a budget, it’s important to track your spending to make sure you stick to the plan. The good news is that there are many apps that make managing your finances easier, including tools to help you track multiple credit cards.
If you know you have big expenses coming up, such as a wedding, down payment, or vacation, you can use your budget to save up for those expenses in advance. Planning ahead can help you pay for the things that are important to you while avoiding debt. (Tip: Take advantage of credit card rewards and Generous signup bonus can help you reach your travel-related savings goals faster.)
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What is interest rate?
There are two types of interest: the interest you earn and the interest you pay. In terms of borrowing, 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 annual percentageor APR. When it comes to financing products like credit cards, you’ll want to ensure the lowest possible interest rates.
You can also earn interest on money you keep in a deposit account at a bank or credit union. A financial institution may show the interest you earn as your annual percentage return, or APY. If you’re making money with cash that you deposit in a bank or credit union, you’ll want to achieve the highest APY possible to increase your savings.
Some examples of accounts where you can deposit and receive interest are as follows:
- Saving account.
- Check account.
- Certificates of deposit.
- Money market account.
Are credit cards bad?
Credit cards are not inherently good or bad. Instead, the choices you make as a cardholder determine whether these financial instruments can improve or hurt your finances and credit.
If you make wise decisions when it comes to credit card management, credit cards have the potential to offer much privileges and benefits As:
Is it better to have a debit or credit card?
If you use debit card instead of credit card As your preferred payment method, you may be missing out on many of the benefits above. Most notably, debit cards can’t help you build your credit history, nor can they contribute to your credit history credit score.
Debit cards also lack some of the robust fraud protections that credit cards offer.
The Electronic Money Transfer Act limits your liability for fraudulent debit card transactions to $500. However, if you report fraud within two business days, your liability is only $50. Your personal funds may also be tied up while the bank investigates unauthorized charges that occurred. on your debit card. That complexity can cause serious financial challenges if you have other bills that are due before the bank pays you back.
Credit cards, on the other hand, limit your liability for fraudulent transactions to $50, as long as you report unauthorized charges within 60 days. This is thanks to the Fair Credit Payment Act. Furthermore, the four main credit card network currently waiving the $50 fee as a courtesy. In addition, if someone uses your credit card without authorization and you report a fraudulent transaction, the card issuer will not keep your personal funds during the investigation.
How many credit cards is too much?
There is no magic number of credit cards that you should keep in your wallet. Some people can manage several credit card accounts responsibly and maintain good credit score at the same time. Others can handle dozens of credit card accounts with success.
The number of credit cards that are right for you may be different from what works for the next person. As a rule, open only as many credit cards as you’re comfortable managing – with the goal of paying off your full statement balance across every account each month.
Will too many credit cards hurt my score?
Credit scoring models don’t pay much attention to the number of credit cards on your credit report. Instead, credit score factors Most likely to affect you are:
Our advice is to always be consistent in paying your credit card on time and thus keep your upper limit balance (or credit utilization ratio) low. If you follow these rules, you should be off to a good start in the credit scoring department – as long as there are no other problems on your credit report. You can also consider pay your credit card balance early to potentially increase your credit score in certain situations.
Finally, pay attention to how often you apply for new credit like credit cards and loans. An amount too large credit request hard can affect your credit score – although if you have an investigation-related drop in credit score, it may not be as severe. Based on FICOan additional hard credit investigation takes five points less than most people’s FICO Score.
Will canceling a credit card affect your credit score?
Some people make incorrect assumption that canceling their credit card will improve their credit score. In fact, closing your credit card can actually negatively affect your credit score.
When you close your credit card, there’s a chance you can increase your overall credit utilization rate. If this ratio goes up on your credit report, your credit score may drop.
There are many ways to keep your credit score safe when canceling a credit card. So, if there’s an important reason you need to close your credit card account, check this out TPG . Guide for tips on navigating the process.
Key point
Learning the basic financial services and credit card concepts above can help you in many ways. As you understand more about money and finances, you’ll be better prepared to make wise financial moves that can benefit you for years to come.
Use the right cards and maximize your rewards on daily purchases. Try it today with Free TPG app.
