Crash Course in Credit Cards
With few people paying in cash, and credit cards seeming to be the payment method of choice for many, you might think everyone knows all they need to know about credit cards. But the truth is that while many people use them, not everyone really understands the basics of how credit cards work.
From interest rates to monthly statements, it’s important to understand credit cards before you start using them. If you’re already using credit cards, you should make sure you understand this method of payment you’ve been using.
Types of Credit Card
The two main types of credit cards are general label and private label. General label cards can be used at any participating outlet, while private label cards can only be used at the business that issues the card.
Most credit cards are unsecured, which means you are extended a line of credit based mainly on your credit history or income. Although these can be very handy, they are also the cards that might get people in trouble. Just because a credit card company extends you a $10,000 line of credit, that doesn’t mean you have the ability to pay that much back.
Secured cards, on the other hand, are backed by funds you have put in an account. These types of cards are good for those trying to rebuild their credit after financial troubles.
Credit Card Fees
There are many fees associated with credit cards and some even charge an annual fee just to carry the card. Other fees include those for balance transfers, cash advances and late payments. Unless the benefits are worth the extra cost, you might decide to avoid credit cards with an annual fee, and that ones that charge unusual fees. Always check the fine print and your monthly statement so you know what fees you are being charged. If you have questions, call your credit card company.
Credit Card Interest Rates
The interest rate on a credit card is the rate at which interest is paid by the
borrower for the use of the money borrowed from a lender. First of all, if you
are using a normal credit card, it is like borrowing money. You may feel like
you’ve paid for an item after the cashier swipes your card and hands you a
receipt, but really, you haven’t paid; your credit card provider has.
Most credit cards have a grace period in which no interest is charged. Usually, if you pay for your purchase in the month after you buy it, no interest is charged. However, after that, the interest begins to add up quickly and the longer you take to pay it off, the more you end up paying.
Interest rates vary greatly on credit cards, ranging from 0 percent to more than 30 percent. The rate depends on things like your credit score, current debt, income and so on. Sometimes a credit card will offer a limited time interest rate which will change to a higher rate after a certain time.
Minimum Credit Card Payment
The minimum payment is the lowest amount you can pay on your monthly bill without breaking your contract with your creditor. The minimum payment is not the total amount you owe. In fact, it is usually only a fraction of the amount you owe. If you pay only the minimum payment on your card, you will be charged interest on the rest of the amount you owe.
For example, say you’ve charged $2,000 on your credit card and you pay the minimum payment of $100 each month. At an interest rate of 18.9 percent, even if you don’t make any more purchases on your card, it will take you 25 months to pay off your card and you will end up paying over $400 in interest.
Monthly Statements
Each month, you will receive a statement from your credit card company.
Although you may be tempted to just pay the amount due or minimum payment, take time to look at your credit card statement. Information on it will include your interest rate, minimum payment, balance (the total amount you owe), your credit limit (the maximum amount you may charge) and any fees.
The statement will also list all your purchases and it is sensible to go over everything to make sure it is accurate. Always check the fees and interest rate to make sure you aren’t being charged more than you should be.
Credit cards can be very convenient to use and being able to charge something can be helpful if you are short on cash. But always keep in mind that whatever you charge, you must pay for. It’s easy to just go to the mall and buy all sorts of things with your credit card, but paying off the bill that comes later isn’t always so easy!
Image by Rareclass
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