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 because you should understand how credit cards work, the characteristics of credit cards, different types of credit cards, etc. Many things should be comprehended before understanding credit cards. For this reason, one starting point would be to be aware of the things you should know when it comes to credit cards.
You might ask – why understanding credit cards is essential. Well, the answer is relatively simple. You should have enough knowledge about credit cards to protect yourself against any potential risk associated with credit cards. One such change is to become over-indebted. Meaning that, if not used correctly, you can find yourself in a situation with a high level of credit card debt. Moreover, keep in mind that credit cards are one of the most expensive forms of debt. Thus, understanding credit cards will also help you to better cope with credit card debt.
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 using the money available in your bank account. The limit on your debit card is the amount of money you have available in your 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 purchasing a credit card, you use the issuer’s money to pay for the goods. Afterward, you must pay back the used funds. Summing up, you are using your own money with a debit card, while with a credit card, you are using the issuer’s money.
Types of credit cards – there are a couple of different kinds 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 general limit, etc. There are credit cards that can satisfy almost every potential need of credit cardholders.
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 conditions. But, again, the number of credit cards and the 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 everyday 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 depends on numerous factors: credit score, debt to income ratio, income level, payment history, credit inquiries, and credit card type. The lenders will analyze these factors before deciding on the APR you will be charged with. In addition, you should understand the different types of APR that can be charged, depending on how you are using your credit card.
A signed contract is obligatory – thus, always read your agreement 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.
A credit line – is the number of funds you have available on your credit card. The issuers determine the credit line. It can be standard for a specific type of credit card for all holders. The credit card applicant’s qualifications can also determine credit lines.
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 by the number of days in a year).
Type of interest rate – can have a major impact on your interest rate charge. There are two basic types of rates, fixed-rate APR or variable APR rates. The fixed-rate APR, as the name implies, is a constant interest rate. On the other hand, Variable-rate 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 an 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 a contract if costs are not clearly defined. The most common fees are the annual fee, balance transfer fee, foreign transaction fee, late payment fee, and a fee if you exceed your balance.
Revolving balance – do not pay in full – because credit card is a form of a loan. You can either pay your balance in full or pay the minimum amount due for the billing cycle. However, keep in mind 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 scores – are in a close-fitting relation. Namely, credit cards can positively or negatively affect your credit score in a couple of different ways. When you have a credit card, you can influence 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 impact your credit score are credit utilization, the 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 a 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 of switching 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 some money, 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 cardholder 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, you should be aware of The Fair Credit Billing Act. According to this Act, you are entitled to the right to dispute and correct errors.
Credit cards are at the same time very useful and hazardous financial products. They are a helpful product because they could offer you numerous benefits. But, with credit cards, you could very quickly be in a situation of high levels of credit card debt. To enjoy the benefits of 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.