Mastering Your Credit: U.S. Credit Card Guide

Credit cards can provide plenty of spending opportunities, but keeping your purchases in check is an important part of your financial health. After all, you need to incur some debt so you can establish and maintain a credit score, but paying off the debt is what really impacts your finances.

In this guide, we’ll explain some common credit-related terms, how to determine if you have the right number of credit cards, how much you should spend, and why your credit score matters and ways to improve it. We’ll also discuss the optimal credit card mix and ways AAA Banking can assist with your finances.

U.S. credit card guide: definitions

To master your credit, it’s important to understand financial terms. Here are definitions for some of the most commonly used phrases related to credit cards:

• Credit score: A number from 300 to 850 assigned to you based on your credit history, payment history and credit mix. Your credit score tells a lender how likely it is you’ll pay back a loan on time. The higher your credit score, the more likely you’ll receive favorable interest rates, credit card approvals and more.
• Credit card rewards: A loyalty program where you earn points, cash back or other rewards for successfully using your card to make purchases and then pay back those amounts.
• Interest rate: The amount a lender charges a borrower for the loan of funds. The better your credit score is, the lower your interest rate will likely be. Most credit cards have an interest rate.
• Annual percentage rate (APR): What the lender charges you each year in interest rates and fees.
• Annual fee: A yearly amount charged for the use of a credit card. Some credit cards require an annual fee, while others, like the AAA Cashback Visa Signature^® Card, don’t.
• Balance transfer: Moving the amount you owe from one credit card to another. Typically, a balance transfer occurs when a new credit card has a lower interest rate than an existing one. It makes sense to use a balance transfer when you’re making regular, on-time payments and can save by moving the balance to the new card.
• Secured versus unsecured credit cards: If you’re required to put down a cash deposit when you open a credit card, it’s considered a secured account. Secured accounts are typically required for those with a low credit score or no credit history. Unsecured credit cards don’t require a cash deposit.

U.S. credit card guide: FAQ

Applying for a credit card is often a first step in establishing creditworthiness. AAA answers a few of the most common questions members have about credit cards and credit scores.
 

How many credit cards should I have?

You need to have one or more credit cards to create a credit history, which then factors into your credit score. A credit score is important because it’s a metric used by many banks and institutions to assess your financial trustworthiness.

The number of credit cards you have lining your wallet will depend on several factors. If you shop at different retail stores, you may have a store card for each. You may also have one for special purchases or because you get rewards for activities like travel.

But be cautious when opening a number of cards because each one sets off a hard inquiry (a request by the creditor to check out your credit report), and too many inquiries can ding your credit score.

What factors shape my credit score?

Your credit score is calculated using a precise formula of five factors:

• Credit History: How long you’ve had credit. The longer, the better.
• Credit Mix: Your mix of credit cards, your auto loan, your mortgage and other types of loans you have. Creditors want to see a mix of all types of available credit.
• Credit Utilization: The ratio of how much credit you have and what you’re using. The goal is to avoid using all of your available credit—or to pay off as much as possible in a timely manner.
• Payment History: A look at how many times you’ve made a payment on time, how many payments you’ve skipped and how many times you’ve been late.
• New Credit: The number of times you open a new credit card or take out a new loan. Each time you apply, the creditor has to check your history, and that creates a hard inquiry. Too many inquiries can ding your credit score, so be selective about which offers you want to apply for.

The better your habits are within these five categories, the better your credit score will likely be. But if you have a low credit score, there are simple steps you can take to improve the number.

How can I improve my credit score quickly?

Each person with established credit will likely have three unique credit scores—one from each of the three main credit bureaus, which are Experian, TransUnion and Equifax. Your three credit scores will vary because each credit bureau weighs the five contributing factors differently.

While credit scores shift over time, your goal should be to keep them in the same ballpark from month to month. A dramatic drop of 50 points or more should prompt you to take notice—and take action. Here are a few steps you can take to improve your credit score right now:

1. Review your credit reports and correct errors. Each of the three major credit bureaus— Experian, TransUnion and Equifax—produces a credit report. You’re entitled to free copies, so request them and review all details. If you see an error—a wrong name, a wrong address, an inaccurate charge—contact the bureau to report it.
2. Pay off balances. If you can pay off a lower balance on any single credit card, doing so can help reduce your debt ratio and help improve your overall score.
3. Make an extra payment. If you have debt on your credit cards or through a loan, making an extra payment can have a positive impact on your credit score because it will boost your positive payment history.
4. Request a credit increase. Contact your creditor and ask to have your credit limit increased—but don’t increase your balance. In some instances, having a higher credit limit with the same or a lower balance can improve your score. This is because your credit utilization ratio has improved.
    

The best credit card

There’s no shortage of credit cards with great perks—but AAA Members have even more advantages with the AAA Cashback Visa Signature^® Card. See the world and enjoy travel rewards. Save on your home and auto insurance. Enjoy cash back on any qualifying AAA purchase, from household items to tickets and events.

• AAA Cashback Visa Signature^® Card benefits include:
• 4% cash back on qualifying AAA purchases, travel and insurance for the first six months (up to $6,000).
• 3% cash back on everyday spending (groceries, gas, dining).
• 2% cash back on travel and insurance (after the first six months).
• 1% cash back on everything anywhere Visa is accepted.
• No annual fee.
• No foreign transaction fees.
• Contactless payment.

Build your credit with the help of AAA

AAA is your go-to source for assistance with building credit, handling debt management, saving for the future and much more. AAA Banking experts are available to help answer all of your credit card questions—and any others related to savings and savings accounts, certificates of deposit, auto loans and more.