Credit Card Basics
There are a few basic areas you should be familiar with before committing yourself to any credit card. Some of these items may be familiar to you but perhaps you are unaware of every aspect of them. Be sure to understand these basic areas so you can avoid potential problems with your credit cards.
The interest rate is determined based on your credit score. The better your credit score, the lower your interest rate will be. However, the worse your credit score is, the higher your rate will be. If your interest rate is around 10% or lower, than you are doing pretty good. But if it is higher, than you are paying too much and should take the following steps:
1. Call the issuer of your credit card and just ask for a lower rate. If the person you speak to says no, simply call back and talk to another representative. Let them know that you are looking into transferring the balance to another credit card and cancelling the card if they cannot lower your rate.
2. Transfer your balance to another card with a lower interest rate. There will likely be a transfer fee so figure out if this overall cost will be lower than just paying off your balance at a higher interest rate. Many credit card issuers will offer no interest fees for a period of time on balance transfers in an effort to attract new customers. Be sure to read the fine print and see if your interest rate will sky rocket after this introductory rate.
3. Do not open more than one new credit card within a six month period. This will hurt your credit score by applying for new credit card accounts in short periods of time. You need to keep your credit score as high as possible so you will have lower interest rates.
4. If you decide to transfer your credit card balance to another card with no interest introductory period, work to pay this balance off before this introductory rate is over. Do not charge more on this card as the new charges will likely be at a higher interest rate.
Your grace period is the length of time between your statement end date and the due date. You are not charged interest during the time it takes the credit card issuer to print and mail your statement if your balances are paid in full each month prior to the due date. The grace period only works if you pay your balance in full and you will be charged interest if you are making only minimal payments. When researching credit cards, find one with the longest grace period available to avoid additional charges.
Be sure to read the fine print when it comes to billing cycles. There are two methods: average daily balance and two-cycle average daily balance.
When you carry a balance on your credit card rather than paying in full, the two-cycle method will be more of a burden. For the same amount on your account, you’ll end up paying a higher interest charge. The two-cycle method charges interest based on the balance of your previous billing cycle along with the current billing cycle. Regardless of whether you charged more or less on the previous month, your interest will be calculated based on both the larger and the smaller balance.
The average daily balance billing is only computed based on the current billing cycle balance on your credit card. You will only be charged interest on your current balance rather than the combination of two month’s balances.
Minimum Amount Due:
Your minimum amount due each month is based on your balance. It is usually about 1.5% - 3% of your total balance. You should always try to pay more than the minimum balance because a few percentage points really add up in the long run. For example:
If you have a credit card balance of $20,000 with 18% interest with a minimum payment of 2% of the balance, your minimum payment would be $400 a month. If you never paid more than the minimum payment and did not charge anything else on the card, it would take you 69 years to pay off the balance and you will have paid $60,000 in interest alone.
With the same example but with a minimum balance of 3% due, your payment would be $600. You would have this card paid off in 26 years with $20,000 going to interest.
If you do not charge anything additional on the card, your outstanding balance and minimal amount due will decrease. So, sticking with the example above, if you continued to make the original payment of $600 a month, it will only take 4 years to pay off the entire balance.
The due date is the date the credit card issuer must have the payment in office. The due date is not the post-marked envelope date or the date you put on your check or money order. Plan for mail delivery time and give yourself some leeway. Shoot to have your payment arrive at least 5 days before the due date.
Be sure to check with a credit card issuer about annual fees before signing up for their card. With this credit card, you may get frequent flyer programs, cash back, discounts and other perks; however, if you have to pay an annual fee of $50 - $100 to receive these bonuses, it may not be worth it. There are many cards with competitive offers that don’t require an annual fee.
Avoid cash advances at all costs. This should be your last resort to borrowing money. The very day you pull out money as a cash advance on your credit card, you will start paying high interest on it. This can be upwards of 20% with no grace period. In addition, if your card has a balance at a lower interest rate, all your payments will go to the lower interest rate first. After the lower interest rate balance is paid off, than you will start chipping away at the higher rate balance. Moreover, there is a withdrawal fee that can be 2% - 4% of the amount advanced.
Low introductory rates and balance transfer rates are time sensitive. If you make a late payment, you will lose your lower rate. If you are late on any one credit card, this can affect the rate of your other cards. This happens because a late payment can can change your credit score, which creditor check periodically and update your rates with their card.
Only use credit cards with low interest rates, long grace periods, average daily billing cycle and a 3% minimum amount due. Always pay at least at the minimum and be sure it’s on time. Never pay an annual fee or take out a cash advance. Follow these simple guidelines and you will be more equipped to handle your debt.
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State Guides to Credit Card Laws
- North Carolina
- West Virginia