Your First Credit Card
Credit cards can be convenient but they are not quite as simple as a swipe at the checkout counter. In fact, you can get in serious trouble if you are unable to control your credit card charges. Review the basics of credit cards so you are more equipped to handle your debt.
- Credit cards can offer protection against theft of cash.
- You can make larger purchases and buy items when you need them if you don’t have the cash readily available.
- They are helpful in emergency situations, such as car repairs, gas, emergency phone calls, etc.
- Managing your credit cards properly can build a solid credit history and give you lower interest rates in the future for larger purchase, such as a house or car.
- The practice managing credit cards smoothly will make you a better money manager.
- Credit cards make it easy to buy items you can necessarily afford, rather than waiting and saving up money.
- When you carry credit cards, it’s easy to buy impulse itmes that you don’t need or can’t afford.
- If you only pay the minimum amount due each month, it will take many years to pay off the balance, which is accruing interest. In the long run, you will be paying much more for the item you purchased than if you had paid in cash.
- If you are late on a payment or fall behind in your bills, it will damage your credit score and make it hard for you to get loans in the future.
Types of Credit Cards
The majority of credit cards provide “unsecured” credit, which means that you do not have to have physical collateral in order to borrow on the card. The credit is given to you only on the promise that you will pay the debt back. There are many types of credit cards and are as follows:
- Bank cards, such as Visa, Discover, MasterCard. These are credit cards that are sponsored by individual banks and can be used to pay for nearly any type of goods and services. The individual bank sets the credit limit, annual fee, terms and conditions.
- Travel and Entertainment cards, such as American Express or Diner’s Club. These are primarily used for businesses and consumers for travel and entertainment expenses. They usually have an annual fee but also come with perks, such as frequent flyer programs, points and rewards.
- Retail and Company cards, such as for gas stations and department stores. These can be only used at the company that issues the card. They have no annual fee but may have higher interest rates and lower credit limits than bank credit cards.
The way to you manage your credit cards will affect your credit history and ultimately your financial future. A negative credit history can be a serious liability when it comes to needing a loan, taking out a credit card, or even affect the rates of your auto insurance. Credit bureaus monitor your credit history, compile the information and create a credit rating and credit score. This number can be quickly and easily accessed by employers, insurance companies and apartment managers. A poor credit rating because of a bad credit rating can increase your interest rate a loan or credit card or even prevent you from getting one all together. In addition, employers and apartment managers will use this rating as addition information with your application process. Insurance companies will also use this as an indicator of responsibility and whether they will receive payments on time, thus increasing or decreasing your rates.
As soon as you receive, sign and use a credit card, your responsibility as began. Read the terms and condition of your card and make sure you are familiar them. If you don’t fully understand something, ask. Know what is expected of you. Something as simple as a missed payment or a high purchase can affect your life in ways that you may have never associated with a simple swipe of your credit card.
Start the Road of Financial Responsibility by Choosing the Right Credit Card
Just after you blow out the candles on your 18th birthday cake, credit card companies will start to bombard you will offers so you choose them. You will get great deals on interest rates, bonus gifts, reward points and more. Be sure to read the fine print so you know just what you are getting in to. Review the interest rates, especially after your low introductory rate. Understand the annual fees, the late charges, how your interest rate will change if you are late, and all the other details. When you sign up for a credit card, you are agreeing to all the terms and conditions of that credit card. Make sure you fully understand your responsibilities.
A credit card can be a great way to establish a good credit history and it can help you get lower interest rates on your car and home loan in the future. However, this can also affect you in the opposite way. If you do not pay your bills on time or you miss any payments, you could be setting yourself up for a difficult and expensive situation concerning your financial future.
Here are a few terms you should understand when looking at credit card offers and applications.
Annual Fee: The annual fee is much like a membership fee for having a credit card. It is more typical on entertainment and business focused credit cards like American Express and Diners Club Cards. This fee will range from $0 (no annual fee) to $50 or more.
Annual Percentage Rate (APR): The APR is the interest rate expressed per year and is applied to your balance. You will want to look for the lowest APR, but be sure to find out if this is just an introductory rate with the APR skyrocketing after a certain period of time.
Finance Charge: The finance charge is the total amount that you pay in order to use your credit card. This includes interest and other relating charges. Be sure to read the fine print when it comes to the finance charges in relation to your billing cycle. There are three methods that are commonly used, which are Average Daily Balance, Adjusted Balance, and Previous Balance.
Average Daily Balance Method is the most commonly used type. When you make a payment, the credit card company will credit it as soon as it receives it. Then, the interest is figured based on the average amount you owed on your account the previous month.
Adjusted Balance Method is the type that will benefit you the most because you will have the lowest finance charges. Any payments and credits will be subtracted from the balance that you owe at the end of the previous billing period.
Previous Balance Method is the method that will cost you the most and one which you should avoid. The finance charge is calculated on the balance that you owe at the end of the previous billing cycle, with payments, credits and new purchases made in the current billing cycle not included.
Grace Period: The grace period is the amount of time you have before a credit card starts charging you interest on a new purchase. Most credit cards have a 30 day grace period, in which you can pay off any new charges to the account without being charged interest.
Transaction Fees: A transaction fee is any extra fee other than a purchase that is charged to a credit card. This can include a cash advance, a late payment fee, or going over the credit limit. Be aware of all fees that can be charged to your credit card before signing up so you can avoid them.
Tips for Choosing the Right Credit Card
- Look for the lowest interest rate but be sure to find out if it is fixed or if it will change over time.
- Learn about how the credit card issuer calculates finance charges.
- Look for any addition charges and fees the credit card issuer may have associated with use of the card.
- Find the longest grace period possible and for a card that charges you interest the day the purchase is posted to your account – not the day the purchase is made.
- Look for additional perks with the card such as rewards, offers, specials, frequent flyer programs, cash back, etc. Make sure you are not paying extra for them and let them only sway you one way or another if you are sure to use the extra perks.
Your Responsibilities with your New Credit Card
Every time you make a purchase on your credit card, you are entering into a legal binding agreement with the credit card company to pay back the amount you charge. This is a serious responsibility that should not be taken lightly. It can be a great way to build a good credit history, but it can also destroy your credit and cause you problems. Here are a few tips to get started on the right track.
- Keep your credit card with you or in a safe place
- Never give your credit card or credit card account information to friends.
- Make sure the charges on your statement and receipts are accurate. Call your credit card issuer or talk to the person giving you the receipt if there are any discrepancies.
- Destroy carbon copies and keep receipts to check against your billing statements.
- If you lose your credit card, notify the credit card issuer immediately.
- Become familiar with the consumer credit laws that protect you from unfair practices.
- Read the contract carefully and make sure you fully understand the terms, costs and conditions of the credit card.
- You will be given a credit limit but you do not need to charge to that amount. Only charge purchases on a credit card that you can afford to pay back. Review your finances and decide how much debt you can handle to take on.
- If you remain a customer in good standing, your credit card limit will likely increase. Do not let this change the way you use the credit card.
When researching different credit cards, make sure you find the one that’s right for your situation. Everybody’s situation is different, depending on what you can afford each month and what perks you are looking for in a credit card. This is a big responsibility. Having a credit card can help you establish good credit and help you in the future or it can destroy your credit and hurt you. Make sure you start down the path of your financial future on the right foot.
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State Guides to Credit Card Laws
- North Carolina
- West Virginia