Common financial misconceptions: Credit cards

For many, the ins and outs of how a credit card operates is still a mystery: Is it free money? When is interest charged? Can I apply for ANY credit card?

Let's clear the fog around these mysteries so you're in the know with all things credit cards.

Is a credit card free money?

No, a credit card is a short term loan that you need to pay back. It is not free money. For many it can feel like free money because you don't have to pay the card off right away. In fact, when you put money on your credit card you're not even required to pay off the full amount on this loan. Of course this is where many get into trouble with putting more charges on their card than they're able to pay off; what is often called lifestyle creep. When you don't pay off your credit card statement balance you begin to accrue interest charges.

When is interest charged?

Unlike your debit card where the money comes OUT of your checking account and your balance goes down as you use it, your credit card balance increases as you use it because you are charging expenses on credit (i.e. the bank is loaning you the money). Just like you have a monthly statement with your checking account, you will receive a monthly statement with the charges you made with your credit card. As long as you pay the statement balance in full you will not have any interest charged on your purchases. Visit our credit card article for more details on HOW to make sure your credit card is being used responsibly.

Can I apply for ANY credit card?

You can apply for any credit card you desire. One misconception many have is that your credit card(s) have to come from the same institution you bank at. This is not true. The main factor in determining whether or not you get approved for a credit card is your credit score. Many factors affect your score, but the bottom line: The better the score the better the chance of getting approved. And generally speaking, the fancier the rewards a card has the higher the score is required for approval. If you need some help researching credit cards before applying, Nerdwallet provides the latest information about credit card rewards and features for you to explore.

As more and more people use credit for every day purchases, it is more important than ever to have a solid foundation on how it works. When used responsibly, credit can be a powerful tool for smoothing over cash flow issues and getting rewards. And credit cards are generally more secure than using a debit card as most have built-in fraud protection.

For more credit insights, check out Credit Myths: Discredited where more misconceptions are busted!