Credit card usage is often demonised in the media because this is an attention getter. There have been many people who have damaged their credit ratings and credit history by irresponsible use of credit or just through a plain lack of understanding about how credit and credit scoring works. When is the last time you tried to rent a car or motel room, make a reservation, purchase something online or even apply for something simple like a cell phone plan without being asked for a credit card? It is very hard to function in our world without at least one credit card, and if you can use it responsibly, it will have a tremendously positive impact on your life!
This is why knowledge about credit card basics is so important!
What exactly is a credit card?
A credit card is a plastic card issued to a line of revolving credit. The reason it is called a revolving line of credit is because your credit limit rolls over from month to month. Let’s say you applied for a credit card and were accepted for an initial $1000.00 line of credit. You use your card to pay a bill or make a purchase for $250.00 and you are sent a statement showing the $250.00 purchases after the grace period along with an “available credit” in the amount of $750.00 You could choose to pay the balance off in full or pay less than the full amount. If you pay less than the full amount, you will be charged interest on the outstanding balance.
Interest and finance charges.
Let’s say you paid $50.00 of your outstanding balance. Once your card issuer has received your payment, your new available credit limit will be $800.00 less your finance charge.These finance charges would be based on the Annual Interest Rate, often called the APR, of your unpaid balance. If your annual interest rate or APR were 19% for example, then the monthly equivalent of 19% would be applied to the outstanding balance. In this case that would be $200.00, 19% of which is $38.00. This does not mean you have a finance charge of $38.00! Divide this number by 12 and you get $3.16! Remember, this is an ANNUAL PERCENTAGE RATE!
It’s important to tell you that if you pay the balance off in full during the grace period, then no finance charge will be due. This is like getting an interest free loan every month! What is a grace period? A grace period, stated simply, is the amount of time you have to pay off your entire balance before your charged any interest. In most cases this is about 25 days, but every card issuer can have different plans. This means if you pay your balance in the 25 day period, you get to use someone else’s money interest free!
What should you consider when applying for a credit card?
First of all, you should be looking for an annual fee. If you pay off your balance each month, then the interest rate is less important, but an annual fee will be charged to you no matter what! Many credit cards have no annual fee except those starter cards tailored to those with a checkered or limited credit history. These cards can have annual fees ranging from $19 to $79 or more per year depending on your credit worthiness. Once you begin to build a solid credit history, you will see these fees come off and you will get other credit offers as well.
Second, you should consider the interest rate or finance charge. Many cards have a low introductory interest rate for 3 months to a year as an enticement. Again, if you pay your balance in full, this is not that important, but if you need to carry a balance and you can qualify for a low interest rate, carrying a small balance could be a wise financial decision when it becomes necessary.
Third, you must be aware of the other fees associated with your credit card. For example what is the fee for exceeding your credit limit or having a payment come in late or missed altogether? No one plans on having this happen, but sometimes we are influenced by circumstances beyond our control.
Credit card ownership can open many doors and make your life easier, but it can also lead to financial ruin if you make poor decisions about your credit. The best way to overcome this is to be the most knowledgeable consumer that you can be and learn all you can. Stay tuned for more of my articles on responsible credit usage and visit my website to sign up for my newsletter! I will help guide you through the basics of credit knowledge and into the advanced methods and strategies for getting the most out of your credit!