If you've never owned a credit card (probably never had a need in a credit card) it might be very helpful to understand how exactly they work.
What Are Credit Cards Originally For
Credit cards were invented by the financial institutions as a convenient way to provide loans to consumers. You can buy nice, expensive things that you wouldn't be able to buy otherwise. Then you pay it back in your own pace, and the credit card issuer gets their interest collected.
For the purpose of this blog, I'll assume you'll only be buying things you can afford, and be able to pay your balance in full.
How Do Credit Cards Work In The US?
You start with a $0 balance. You don't have a bank account directly connected to the card: there's no "cash balance" that gets deducted when you pay with a credit card.
Every time you make a purchase, you loan money from the financial institution, be it a bank or a credit union. So, if you purchase something a $5 coffee your balance will become -$5, which is generally reflected as something like "current balance $5" in the online bank / mobile bank software.
Every month on a specific day a "statement cut" happens. Meaning, a monthly statement is issued, and it makes a "snapshot" of your balance at that day. So, if you've started with $0 balance and spent $300 within the 30 days before the statement cut day, and haven't made a payment during this period, you'll see the $300 balance on your statement. You can always call your card issuer and ask when the statement cut day is for your card. Usually the first statement cut is ~30-40 days from the date your card was issued or activated, and then it occurs every month on the same day.
The balance on the statement cut is (in 95% cases) exactly the balance that gets reported to the credit bureaus. That's the number you should pay a very close attention to when you're just building your credit history.
For most of credit cards (with the exception of charge cards, which are less common), there is usually a credit limit set on the credit card. With limited or no credit history (or bad credit history), you'll probably not be able to obtain a card with a credit limit of more than $500.
Paying Your Credit Card Balance Off
As you might guess, the balance on your credit card won't go away unless you pay it off. Over the time, if you don't pay your balance off, interest charges will be applied.
You should be making a payment on your balance before the statement cut, so that the balance that gets reported to the credit bureaus is as minimal as possible. Note that keeping a $0 balance on all your cards does not help your credit score, although that might sound illogical: for the purpose of credit scores that would mean you aren't using your credit cards.
You want to make sure there's a 1-10% balance reported. 1-10% balance is calculated relating to your credit limit. If you have one card with a $500 credit limit, you want to have between $5 and $50 on your balance by the statement cut date (and pay it off in full right after that). If you have multiple credit cards, this rule applies to the balance on all your cards together, compared to all credit limits together.
What's The Difference Between a Credit Card and a Debit Card?
- Debit cards deduct the expenses you put on them from your checking account directly.
- With credit cards, you loan money from the financial institutions, and you have to pay it off later (usually from your checking account). Usually, if you don't pay it within a few weeks after the statement cut ("carry balance"), interest will be incurred.
Should I Use a Credit Card or a Debit Card?
You should always use your credit card. Debit cards almost never provide the benefits you could get with credit cards, such as:
- You build a relationship with your credit card issuer (potentially allowing you get better products from them)
- Using a credit card, you build your credit history. With proper usage and paying attention to the balance, credit cards help you build great history very quickly
- With many credit cards, you'll be getting significant rewards, from cashback to airline points; sometimes the points come in very significant amounts as a sign-up bonus
As soon as you are in the US, one of your first activities should be getting an SSN – and then getting your first credit card so that you start working on your credit history. You'll be very thankful to yourself later.