Speaker 1: In this video, we're going to talk about how credit cards work and how we can use yours to earn rewards, build a strong credit history, and get access to better loans and credit cards in the future. But first, the basics. A credit card is tied to a revolving credit account at a bank. When you charge a purchase to your card, you're essentially borrowing money from that bank. The bank pays that store, and you pay the bank back later. You're allowed to borrow up to a certain amount at a time. This is known as your credit limit. Once you've reached your limit, you can't charge any more to the card until you've paid off some of your balance. But before we go any further, let's talk about interest. When you spend money on a credit card, you'll be charged interest on the amount you owe your balance. You won't be charged interest immediately, though, as there's something called a grace period on all your credit card purchases. At the end of the month, your credit card insurer will send you a bill. Your bill tells you your outstanding balance and the minimum amount you need to pay to avoid a late payment fee. If you pay back your entire balance before the bill is due, you won't owe any interest. But if you don't pay back the full balance, the remainder begins to accrue interest. How much interest you'll owe depends on how long it takes you to pay back your balance and your annual percentage rate, or APR. Your APR is the annual cost of borrowing money, but your credit card insurer will actually charge you daily interest once the grace period ends. To figure out how much interest accrues each day, you just divide your APR by 365 and then multiply that by your balance. For example, if you have a balance of $10,000 and a 26% APR, you'd divide the 26% by 365 to get about 0.071%. That's your daily interest rate. Multiply this by your $10,000 balance and you can see that you'd accrue about $7.10 in interest that day, leaving your new balance at $10,000, $7.10, assuming you don't charge any more to the card. But here's where it gets dangerous. The next day, your credit card insurer applies your daily interest to your new balance, in this case $10,007.10. So your balance now grows by $7.11 that day, bringing your total to $10,014.21. The next day, you pay the same interest rate on this larger balance and suddenly you owe $10,021.32. It's easy to see how it can quickly get out of control. Credit card debt can also hurt your credit score, especially if you max out your credit card or spend close to your credit limit every month. Ideally, you should only use 30% or less of your available credit to keep your credit score high. So if you only remember one rule about using a credit card, let it be this. Never charge more to the card than you know you can pay back at the end of each month. If you pay for purchases in the month you made them, you won't have to worry about interest at all. If you do carry a balance, try to pay it down as quickly as possible. To reduce your spending, don't charge any more to the card and consider a balance transfer card or a personal loan. You can find loan and credit card recommendations on the Ascent's website. So if a credit card can be costly, why do we use them? There are a few reasons. First, they're a great way to help build credit and show that you can handle borrowed money responsibly. You might want to take out a loan someday to pay for a house or a car, and you'll find few banks are willing to work with you unless you can prove you've borrowed money before and successfully paid it back. The second reason is security. This is especially important for people who shop online. If an identity thief gets a hold of your credit card number and makes a bunch of fraudulent purchases, all you have to do is call your credit card company, explain the problem, and it'll remove the fraudulent purchases from your bill and send you a new card. This is a lot safer than using a debit card to shop online, as that's tied directly to your bank account. If an identity thief gets that number, they could potentially drain your savings. But most people's favorite reason for using credit cards is the rewards. These vary depending on the type of card you have. You can either get direct cash back or gift cards to popular retailers from cashback cards. Travel rewards cards give you miles you can use towards airline and hotel purchases and sometimes other perks like free travel vouchers. Travel transfer cards have 0% introductory APR periods that are great for those who are trying to pay off their existing credit card debt or finance the cost of a new purchase with a 0% introductory APR for purchases. And then there are some rewards that are less well advertised, things like purchase protection, which will reimburse you if something you bought with the card is damaged or stolen. You can find a full list of benefits for a given credit card by reading through its cardholder agreement. If you want to get the most out of your credit card, you should choose one with the rewards you want that also matches your spending habits. Use this card as often as you can to earn rewards faster, but never lose sight of the bill that will come at the end of the month. It will almost always cost you more to carry a balance than you'll get from any rewards benefits, so you should avoid overspending at all costs. A credit card can be a great tool for building your credit, shopping safely online, and getting rewarded for purchases you were going to make anyway. But you have to use it responsibly or it could end up making your life a bit more difficult. Keep these tips in mind when shopping with a credit card to stay out of debt and get the most out of your card.