Being able to use a credit card doesn’t mean that you are good to go. As with everything else, you should primarily be focused on understanding credit cards. This is in a sense that you should understand how credit cards work, the characteristics of credit cards, different types of credit cards, etc. There are many things which should be comprehended before understanding credit cards. For this reason one starting point would be to be aware about the things you should know when it comes to credit cards.
You might ask – why understanding credit cards is important. Well, the answer is rather simple. You should have enough knowledge about credit cards, for the purpose of protecting yourself against any potential risk that come with the credit cards. One such a risk is to become over-indebted. Meaning that, if not used in the right manner, you can find yourself in a situation with high level of credit card debt. Moreover, keep in mind that credit cards are one of the most expensive form of debt. Thus, understanding credit cards will also help you to better cope with the credit card debt.
Having said that, some of the basic things you should know about credit cards are:
Debit card vs. credit card – is the first thing that should be understood. Namely, when using a debit card to pay for something, you are actually using the money available on your bank account. The limit on you debit card is the amount of money you have available on your own bank account.
With credit cards, on the other hand, you can spend up to the amount of credit limit approved by the issuer. Namely, when making purchase with a credit card, you are basically using issuer’s money to pay for the goods. Afterwards, you have the obligation to pay back the used funds. Summing up, with debt card you are using your own money, while with credit card, you are using issuer’s money.
Types of credit cards – there are couple of different types of credit cards available. They can be different in terms of the issuers, the intended purpose, the need for collateral, the place of usage, the available limit, etc. There are credit cards that can satisfy almost every potential need of credit card holder.
The number of credit cards you should have – is not clearly defined. Namely, the number of credit cards you should have will depend solely on your needs. Keep in mind that a general purpose credit cards will be adequate for almost all needs. But, again, the number of credit cards and type of credit cards you need will depend on your personal preference and situation. You can acquire a retail credit card for making purchases in your local every day store. Maybe a balance transfer credit card will help you to manage your high interest credit card debt.
Credit cards interest rates – an important thing that requires your attention. Namely, credit cards bear one of the highest interest rates. The interest rate and/or APR can be anywhere from 0% (introductory rate) up to nearly 30% (penalty APR). The interest rate you will be charged with depends on numerous factors such as: credit score, debt to income ratio, income level, payment history, credit inquiries, and type of credit card. These factors will be analyzed by the lenders before deciding on the APR you are going to be charged with. In addition, you should understand the different types of APR that can be charged, depending on the way in which you are using your credit card.
Signed contract is obligatory – thus always read your contract cautiously before signing. Once signed, the contract is binding for both sides, and it means that you consent to the terms and conditions defined by the issuer.
Credit line – is the amount of funds you have available on your credit card. The credit line is determined by the issuers. It can be standard for a specific type of credit card for all holders. Credit line can also be determined in accordance to the credit card applicant’s qualifications.
The calculation method for interest rate – is another thing that should be considered. The interest rate can be calculated by averaging the daily account balance, and multiplying the figure with the periodic rate (periodic rate is calculated by dividing the APR with the number of days in a year).
Type of interest rate – can have major impact on your interest rate charge. There are two basic types of rates, fixed rate APR or variable APR rate. The fixed rate APR, as the name implies, is constant interest rate. Variable rate, on the other hand, is subject to changes because it is tied to an index (prime lending rate, LIBOR, etc.).
Grace period – represents the number of days you have available to pay off your balance in full, before interest is charged. The grace period can be from 20 to 30 days, depending on the issuer. If you pay the outstanding balance within the grace period, you will not be charged with interest. If you pay within the grace period, then it could be said that you have had interest free loan.
Credit card fees – can be substantial if you neglect them. Do not apply for a credit card with non-standard fees, and do not sign contract if fees are not clearly defined. The most common fees are: annual fee, balance transfer fee, foreign transaction fee, late payment fee, and a fee if you exceed your balance.
Revolving balance – no need to pay in full – because credit card is a form of a loan. You can choose either to pay your balance in full, or pay the minimum amount due for the billing cycle. Keep in mind though, that if you pay only the minimum amount due, you will be charged with interest rate on the balance you carry in the next month. The money you will pay on your credit card, can be reused again and again.
Minimum payments – represents the minimum amount you must pay each month. Paying the minimum amount will ensure that you do not damage your credit score and payment history. In addition, you will not be hit with a late payment penalty fee. The minimum payments can be calculated with the percentage method or the percentage + interest + fees method .
Credit cards and credit score – are in a close-fitting relation. Namely, credit cards can have positive or negative effect on your credit score in couple of different ways. When you have a credit card you can influence on of the most important credit score factor i.e. the payment history. Thus, failure to regularly pay your monthly payments could negatively impact your credit score, by penalty points for the payment history. Other factors that can have impact on your credit score are: credit utilization, average age of accounts, types of credit currently in use, etc.
Negotiate your fees – if you are a loyal customer, more importantly, if you are good customer. Contact your credit card issuer and ask for better terms if you have a high credit score. Tell the issuer that you can find better deals, and you are thinking to switch to another issuer with better terms.
Withdrawing cash at the ATM – can be done with a credit card. Namely, you can use your credit card at the ATM to withdraw cash, although you should avoid this. Try to avoid it because, withdrawing cash at the ATM with your credit card is rather expensive. The cash advance is charged with higher interest rates compared to the purchase interest rate.
Consumer rights – you are entitled to the consumer right as a card holder under the Truth in Lending Act. According to the Act, issuers are required to explain the contract terms. If you have problems with your bill, then you should be aware about The Fair Credit Billing Act. According to this Act, you are entitled the right to dispute and correct errors.
Credit cards are at the same time very useful and very dangerous financial product. They are a useful product because they could offer you numerous benefits. But, with credit cards you could very easily be in a situation of high levels of credit card debt. For the purpose of enjoying the benefits from credit cards, understanding credit cards is a must do. Always try to understand the different characteristics of this financial product. Collect information and knowledge before making a decision.