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The world of finance is full of terms and concepts that are unfamiliar to the average person. However, many problems can arise if you do not understand important financial concepts. A FINRA Foundation study on financial insecurity found that people with high financial literacy were less likely to feel insecure about their money than those without a firm grasp on important money topics such as interest rates and inflation. .
When it comes to money, ignorance 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 topics that you don’t understand.
The cheat sheet below is a great place to start and highlights eight basic financial services and credit card concepts you should know.
What is debt?
When you borrow money from a financial institution or credit card company, the amount you owe is called a liability. A debt is an amount of money borrowed from another party that you promise to repay later, usually with interest.
If you commit to managing your debt responsibly, you may be able to use the money you borrow to enrich your life in many ways. For example, you may take out a loan to get a college degree, start a business, or buy a house. These are examples of what many financial experts consider “good” debt. You can also use your credit card to pay off your balance in full each month to earn rewards and other perks without paying interest.
Still, if you’re not careful, it’s easy for debt to get out of hand and strain yourself financially. Imagine maxing out your credit card limit on unnecessary spending, or taking out a personal loan to finance a luxury vacation. Debt can become a burden in such scenarios.
How can I avoid debt?
A budget is the best tool you can use to avoid “bad” debt. Budgeting helps you plan your money so that your spending aligns with your priorities.
Once you’ve set your budget, it’s important to monitor your spending to make sure you’re following your plan. The good news is that there are many apps that make financial management easier, including tools that help you keep track of multiple credit cards.
If you know you have big expenses coming up, such as a wedding, a down payment, or a vacation, you can use a budget to save on those expenses in advance. By planning ahead, you can get what’s important to you while avoiding debt. (Tip: Credit card perks and generous sign-up bonuses can help you reach your travel-related savings goals faster.)
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What is Interest?
There are two types of interest: interest received and interest paid. On the borrower’s side, interest is the price you pay the lender or credit card company to borrow money. In this context, we often see interest expressed as an annual rate (APR). When it comes to financing products such as credit cards, you need to ensure the lowest possible interest rate.
You can also earn interest on the money you keep in your bank or credit union savings account. Financial institutions may express the interest you earn as an annual yield or APY. If you are making money with cash deposited in a bank or credit union, you should aim for the highest possible APY to increase your savings.
Examples of accounts where you can deposit money and potentially earn interest are:
- ordinary savings account.
- checking account.
- Certificate of Deposit.
- money market account.
Is credit card bad?
Credit cards are neither inherently good nor bad. Rather, the choices you make as a cardholder will determine whether these financial tools will improve or harm your finances and credit.
If you make smart decisions about managing your credit card, your credit card can bring you many perks and benefits, including:
Which is better, a debit card or a credit card?
If you use a debit card as your payment method instead of a credit card, you may miss out on many of the above benefits. Most notably, debit cards do not help build a credit history or contribute to your credit score.
Debit cards also lack some of the strong anti-fraud features that credit cards offer.
The Electronic Funds Transfer Act limits liability for fraudulent debit card transactions to $500. However, if you report fraud within 2 business days, the liability is only $50. Personal money can also be held while banks investigate fraudulent charges made on debit cards. The complication can cause serious financial problems if other bills are due before the bank returns the funds.
Credit cards, on the other hand, limit liability for fraudulent transactions to $50 if you report fraudulent charges within 60 days. This is thanks to the Fair Credit Billing Act. Additionally, four major credit card networks now waive the $50 fee. Also, if someone uses your credit card without authorization and reports fraudulent transactions, the card issuer will not seize your personal funds during the investigation process.
How many credit cards are too many?
There’s no magic number for how many credit cards you should keep in your wallet. Some can manage several credit card accounts responsibly and maintain a good credit score at the same time. Some can successfully handle dozens of credit card accounts.
The number of credit cards that are right for you may not be the right number for someone else. As a general rule, open only as many credit cards as you find manageable, with the goal of paying the full balance of your statement across all accounts each month.
Will having too many credit cards affect my score?
Credit scoring models pay less attention to the number of credit cards on your credit report. Instead, credit score factors that are likely to affect you are:
Our advice is to consistently pay your credit card on time, thereby keeping your balance (or credit usage) to limit ratio low. If you follow these rules, you’ll be off to a good start in the credit score department—provided you have no other issues with your credit report. You may also consider paying off your credit card balance early to boost your credit score in some circumstances.
Finally, pay attention to how often you apply for new credit, such as credit cards and loans. Too many hard credit inquiries can lower your credit score. According to FICO, the extra hard credit survey is less than 5 points off most people’s FICO scores.
Will canceling my credit card affect my credit?
Some people mistakenly believe that canceling their credit cards will improve their credit score. In fact, closing a credit card can actually have a negative impact on your credit score.
Canceling credit cards can increase your overall credit utilization. A higher credit report ratio can lead to a lower credit score.
There are ways to keep your credit score safe when canceling your credit card. So, if you have a significant reason why you need to close your credit card account, refer to this TPG guide for tips on how to navigate the process.
Conclusion
Learning the basic financial services and credit card concepts above will help you in many ways. As you gain a better understanding of money and financing, you will be better prepared to make smart financial actions that will pay off for years to come.
Use the right card to maximize your rewards on your daily purchases. Try it now with his TPG app for free.
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