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Understanding Credit Cards and How They Work

A credit card is a financial tool that lets you borrow money from a card issuer to make purchases. When you use a credit card, you're not spending your own money right away. Instead, the card company pays the merchant, and you receive a bill later—usually at the end of the month. This is different from a debit card, which draws directly from your bank account.

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Credit cards come with a credit limit, which is the maximum amount you can borrow. For example, if your credit limit is $1,000, you can charge up to $1,000 in purchases before you must pay some of the balance down. The card issuer decides your credit limit based on factors like your credit history, income, and existing debts.

When your monthly bill arrives, you have choices. You can pay the full balance, pay a minimum amount, or pay something in between. If you don't pay the full balance, the remaining amount carries over to the next month, and you'll owe interest on it. Interest is the cost of borrowing money, expressed as an annual percentage rate (APR). According to the Federal Reserve, the average credit card APR in 2024 was around 21%, meaning borrowing money this way can become expensive if you carry a balance.

There are different types of credit cards designed for different purposes. Rewards cards give you points or cash back on purchases. Secured credit cards require a cash deposit and are often used by people building or rebuilding their credit. Balance transfer cards offer low or zero interest rates for a set period, which can help people pay down existing debt. Understanding which type might fit your situation is an important first step.

Practical takeaway: Before considering any credit card, understand that credit cards are borrowing tools, not free money. The way you use them—whether you pay off the full balance monthly or carry a balance with interest charges—significantly impacts your financial health.

What Avant Credit Cards Offer and Their Features

Avant is a financial technology company that offers credit products designed for people with varied credit histories. The Avant credit card is structured as a secured credit card, meaning it requires a cash deposit. This design makes it available to people who might have difficulty obtaining traditional credit cards due to limited credit history, past credit problems, or lower credit scores.

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With an Avant secured credit card, you deposit money into a savings account held by the card issuer. That deposit amount becomes your credit limit. For instance, if you deposit $500, you typically receive a $500 credit limit. You then use the card like a regular credit card—making purchases, receiving a monthly bill, and paying it back. The money in the savings account stays separate and serves as security for the card issuer, reducing their risk if you don't pay your bill.

One feature that distinguishes Avant's card is the potential path to unsecured status. Some secured cards allow you to graduate to an unsecured card after demonstrating responsible use over time. This means your deposit could eventually be released, and you'd have a traditional credit card without the deposit requirement. However, the specific terms, timeline, and conditions for this transition vary and should be reviewed in the card's terms and conditions.

Avant reports card activity to the three major credit bureaus: Equifax, Experian, and TransUnion. This reporting means that how you use the card—paying on time, keeping your balance low relative to your credit limit—can positively affect your credit score over time. According to data from Experian, one of the credit bureaus, payment history makes up 35% of your credit score, so consistent on-time payments matter significantly for building credit.

The card also typically includes features like 24/7 account access through a mobile app or website, fraud protection, and customer service. These features allow you to monitor your account, make payments, and get support when needed.

Practical takeaway: An Avant secured credit card can be a tool for building credit history if you use it responsibly, but it requires upfront cash and comes with terms you should understand fully before deciding if it's right for you.

How Credit Scores Work and Why They Matter

Your credit score is a three-digit number that represents your creditworthiness—essentially, how likely you are to repay borrowed money on time. Credit scores typically range from 300 to 850, with higher scores indicating lower risk to lenders. The three major credit bureaus (Equifax, Experian, and TransUnion) calculate scores based on information in your credit report, which includes your payment history, outstanding debts, length of credit history, credit mix, and recent credit inquiries.

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Payment history is the single most important factor, making up 35% of your score. This includes whether you pay bills on time and whether you have any late payments, collections accounts, or bankruptcies on record. Even a single 30-day late payment can lower your score, while consistent on-time payments build it up over time. The amounts you owe—your credit utilization—make up 30% of your score. Using a small portion of your available credit is better than maxing out your cards. For example, if your credit limit is $1,000, using $200 (20% utilization) looks better to lenders than using $900 (90% utilization).

The length of your credit history accounts for 15% of your score. This is why people with longer credit histories typically have higher scores. Credit mix—having different types of credit like credit cards, loans, and a mortgage—makes up 10% of your score. New credit inquiries make up the remaining 10%. When you apply for credit, the lender checks your credit report, creating what's called a "hard inquiry," which can temporarily lower your score by a few points.

Your credit score affects many financial decisions. Lenders use it to decide whether to lend you money and at what interest rate. A higher score typically means lower interest rates, saving you money over time. For instance, according to Federal Reserve data, borrowers with credit scores above 750 might receive mortgage rates around 6.5%, while those with scores below 620 might face rates above 8%. The difference compounds significantly over a 30-year loan. Credit scores also affect insurance rates, rental housing decisions, and even employment in some cases.

Many credit score myths exist. One common misconception is that checking your own credit score hurts it—this is false. Checking your own score is a "soft inquiry" and doesn't affect your score. Another myth is that paying off debt immediately removes negative information from your report; negative information typically stays on your report for 7 years (or longer for bankruptcies), though its impact lessens over time.

Practical takeaway: Building and maintaining a good credit score takes time and consistent responsible behavior, but the financial benefits are substantial. Using a credit card responsibly—paying on time and keeping your balance low—directly contributes to improving your score.

Steps for Using a Credit Card Responsibly

Using a credit card responsibly begins with creating a plan before you receive the card. First, determine why you want the card. Are you building credit history? Consolidating existing debt? Creating an emergency fund? Your purpose influences how you should use it. Next, review the card's terms carefully, including the APR, fees (annual fees, late fees, over-limit fees), and any promotional offers. Understanding these details prevents surprises when your bill arrives.

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Once you have the card, establish a budget that includes your credit card spending. Track what you charge each month so you know exactly how much you'll owe. Many people find it helpful to use their credit card for specific categories—such as groceries or gas—rather than using it for all purchases. This containment strategy makes it easier to manage and pay off the balance.

Pay your bill on time, every time. Set up automatic payments if possible, so you never miss a due date. If you can't pay the full balance, pay at least the minimum payment before the due date. Late payments carry penalties, damage your credit score, and cost more in interest charges. According to the Consumer Financial Protection Bureau, late payments are one of the most damaging credit report items.

Keep your credit utilization low. Financial experts generally recommend using no more than 30% of your available credit. If your limit is $500, try to keep your balance below $150. This shows lenders you're not overly dependent on credit and can manage money responsibly. Try to pay off the balance in full each month if possible. This approach costs you no interest and demonstrates strong financial management.

Monitor your account regularly