What is a credit card? It’s essentially a card that allows you to borrow money from the bank to make purchases. These purchases can range from buying a meal at a restaurant to purchasing a brand new car.
As long as you pay back the money you spent within a certain amount of time, generally around 25 – 30 days, no extra fees will be added to the money you owe. However, if you don’t pay the money you owe back, interest will be added on top of the money you owe the bank.
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- You can make a large purchase now and pay it off in smaller amounts over time.
- Carrying credit cards is more convenient (and safer) than carrying a wad of cash, and credit cards are more widely accepted than personal checks.
- With responsible use, you can build your credit, which will be important later on.
- Many credit cards give you rewards, essentially giving you back 1% or more of the money you spend.
- You can easily dig yourself into debt if you’re not careful about your spending.
- The ease of using credit cards can cause you to overspend.
- Missing payments or maxing out a card can sink your credit score quickly.
- Interest can make even a small debt become large over time.
Choosing the Right Credit Card
Whenever deciding what credit card to choose, it’s always important to determine whether or not you plan on going in debt with that card.
Card holders who pay in full every month should lean towards getting themselves a rewards card. These cards give points and cashback on every day purchases that build up over time to reward the user. One problem is that reward cards have the highest interest rates. High enough to wipe out everything earned. It’s hard determining what card is best for you, so be sure to consider your life style and if a rewards card would even benefit you.
All credit cards are issued by banks such as Bank of America, Chase, or Wells Fargo. The bank determines your interest rate, fees and rewards, so it’s important to find a bank that offers a card you like. Transactions are processed on a network, like Visa Mastercard or American Express.
It’s best to keep your credit score as high as you can. The better the score, the better the card and rewards. The most generous rewards and perks are given to those who have excellent credit scores.
Interest Payments and Fees
Credit card companies have three ways that they make money.
- Transaction Fees: These fees are charged to the merchant every time a credit card is used at their location.
- Interest Payments: As stated earlier, whenever payments are made late, interest, or additional payments, are added to what is owed.
- Fees: Late Payments or annual fees.
The first method is a problem that only merchants have to worry about.
The main concern is interest payments and fees. Have a credit card allows users to use money that they technically don’t have. If one were to spend more than what they were able to pay back, a fee may be issued and interest will be added to the amount owed.
Fees owed can range from annual fees to late payment fees. Some cards don’t require an annual fee unless they offer big rewards. Just be sure to reach the monthly or annual payment or a fee may be issued to your bank account.
APR for Purchases
This is the interest rate that will be charged on anything that hasn’t been paid for before the end of the month. It’s charged on a daily basis – meaning that if your APR is 15%, you don’t get charged 15% once a year, but rather 0.0027% a day.
However, some cards like to draw in new customers and will offer a 0% introductory interest rate that can last from 6 months to a whole year.
APR for Transfers
If you have credit card debt, you can shift it over to a new card. Some cards will let you shift your debt and not pay interest for 6 to 12 months, but others will charge you the same rate as regular purchases.
APR for Cash Advance
Taking out a cash advance can get a card holder charged with an interest rate on the amount of money withdrawn. Unlike regular purchases, where you have a grace period, you start accumulating interest on cash advances the day you take them out.
Missing payments can get higher interest rates issued to your account for up to 6 months.
This is a fee given every year. It’s essentially a fee to the company to allow you carry and use their card. Some cards don’t require this, but others that have nice reward programs usually have some sort of a fee.
- Transfer fee: If you move debt from one card to another, you’ll usually be charged this fee by the card you moved it to. Fees typically range from 3% to 5% of the amount transferred. A few cards don’t charge a transfer fee.
- Cash advance fee: If you take out a cash advance, you’ll pay this fee on top of the interest that begins accumulating immediately.
- Foreign transaction fee: If you use your credit card overseas, you’ll be charged this fee on every purchase made in a foreign country. Foreign transaction fees are typically about 3% of the purchase. Most cards aimed at travelers don’t charge this fee, and some issuers (notably Capital One and Discover) don’t charge it on any of their cards.
- Late payment: If you don’t pay at least the minimum amount due by the due date on your credit card statement, you’ll have to pay this fee. Consequently, if you’re more than 30 days late, it could affect your credit score.
- Over-the-limit fee:If you go over your credit limit, the issuer could still approve the transaction but charge you this fee. However, you have to opt in to over-limit coverage before it can do so. Because of that, over-limit fees are rare nowadays.
- Returned payment: If you try to pay your credit card bill and it doesn’t work for some reason (like the check bounces or the transfer from your bank is declined), you’ll have to pay this fee.
New Credit Card Holders
To get the best credit cards with the best rewards program, a good credit score must be built. Start off by applying and using cards that don’t require high credit scores and have low APR rates. Once that score starts rising, you can start searching for better cards.
Some good methods for new users can be:
- Secured Credit Cards
- Student Credit Cards
- Becoming an Authorized User
- Find a Co-Signer
Be sure to read over all the information given above. Choosing a credit card is a big milestone and improper use can lead to debt and a bad credit score. Understand the fundamentals and proper use and it’ll be a breeze building that score and receive amazing rewards.