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Credit card basics

5 things you need to know

Depending on whom you talk to, credit cards can be either a good or bad thing. Some swear by credit cards and others are adamantly against them. Whatever your viewpoint, one thing is for sure: a credit card is just a financial tool. What matters is how you use it.

Unfortunately, here in Hawaii our track record for utilizing credit cards responsibly is not great. We’re ranked the highest credit card debt per capita among the 50 states.(1)

Whether you’re interested in obtaining your first credit card or just want to be better informed on the subject, we’re here to help. Keep reading to learn the most important things to understand about credit cards.

(1) Pacific Business news, “Hawaii’s household debt per capita ranks highest among 50 states,” August 2017

How credit cards work

When you choose to pay by credit card, the merchant you’re purchasing from notifies your issuing bank that you’re making a purchase. The purchase is then added to your credit account. Once a month, your bank compiles all these credit card purchases and sends you a bill.

From here, you have two options:

  1. Pay the full amount
  2. Pay at least the minimum amount required by the bank

If you decide to pay less than the full amount, the bank will charge you interest because the balance left on your credit card is really a loan. This interest will keep accruing until you pay off your entire credit card balance.

The pros and cons of using credit cards

There’s a reason why people have such varying opinions on the use of credit cards. Here are a few of the pros and cons you need to consider:


  • Purchasing power: Credit cards give you the ability to purchase items online, by phone, locally, or overseas.
  • Earn rewards: Most credit cards reward cardholders for their purchases with incentives, like cash-back on certain items, airline miles, or hotel stays.
  • Build credit: By making purchases using no more than 50% of your credit limit and making at least the minimum payment on time each month, you can quickly build a trustworthy credit history.


  • Interest: The most obvious argument against using credit cards is paying back interest.
  • Late fees: If you miss a payment, you’ll accrue a late fee. This fee is typically around $25 to $35, which can start to add up.
  • Damaging credit: If not used properly, credit cards can send your credit score straight to the dump. Your credit score is negatively affected every time you miss a payment or carry a high balance.
How to choose a credit card

Many adults in the US over the age of 18 can qualify for a credit card. In most cases, you’ll need to have some sort of income in order to qualify.

When selecting a credit card, there are a few things you should take into consideration:

  • The benefits. Think about which credit card benefits are most important to you. If you travel a lot—whether island hopping, trips to the mainland or internationally—look for a card that will accumulate airline miles. Or maybe cash-back on groceries is important to you. Make sure the card benefits are in line with your needs. Most importantly, rewards and benefits will only be worth it if you pay off the balance in full each month.
  • Customer reviews. Look at the experiences other cardholders are having with the bank. Are there any glaring issues? Do people like the card? Take all reviews with a grain of salt, but consider any reoccurring issues a red flag.
  • Terms and Conditions. Understand what you’re getting into when you sign up for a card. Are there reoccurring fees? What are the qualifications for rewards?
  • The card’s Annual Percentage Rate (APR). If you have a balance on your card, how much interest will you be charged? Is it a fixed rate? Is it high or low, compared to others you’ve researched?

When completing a credit card application, take the time to understand the fees involved—many cards have an annual fee just for owning the card. You’ll also need to be able to verify your identification. Often, you’ll find out if you’ve been approved for the card within a few minutes of submitting the application.

How credit card interest is calculated

It’s important to understand how interest is accrued on your card. Some people think that interest is assessed based on your card balance after your payment due date. In reality, you accrue interest based on your average daily balance for the month.

To avoid accruing interest, you must pay the balance in full on your credit card statement every month. Paying interest is preventable, as long as you spend within your means.

Best practices for using a card

Owning a credit card is extremely common, but it’s still a big responsibility. As a credit card user, there are some important best practices you should strive to follow.

  • Pay off your entire credit card balance every month, or at least more than the minimum
  • Only buy what you can afford
  • Pay your credit card bill on time
  • Check your statement every month to ensure you’re being charged correctly
  • Keep your balance below 50% of your credit card limit