Credits Cards: What you need to know beforehand.
Getting a credit card in the first place is a huge milestone. For those who have one, need to understand that it is a double-edged sword. It has the potential to do harm and good, depending on the consumer’s habits and knowledge about credit cards.
Numerous family members and friends provide tips and bits such as:
- Keep your utilization under 10%.
- Always pay the balance in full each month.
- If you put anything on autopay remember you are on the hook if something goes wrong. It’s a good idea to double-check each month to make sure the auto pay goes through correctly.
- building good credit takes time. destroying can be done quickly.
- If your credit reports were previously blank it will take 6 months until you get an actual FICO score.
This advice may be useful, but habits are not the only factor that needs to be taken into account. Although choosing a good credit card is a major decision, this blog would be more inclined towards the practical and relatable aspects of credit cards.
Signing a legal contract is vital for owning a credit card.
The credit limit:
Explicitly outlines the total amount of money the card can charge in the name of interest and penalty fees.
Annual percentage rate (APR):
As far as credit cards are concerned, APR is basically the interest charged for not paying the full balance on time. This rate is expressed annually, but the monthly interest rate can simply be calculated by dividing the interest rate by 12. Essentially, there are two types of APRs; fixed and variable.
Credit cards with fixed APRs provide a fixed interest rate for each month that simply gets added up. Whereas the ones with variable APRs have interest that gets compounded each month and eventually reaches a point where the debtor has to pay more in interest than the actual amount borrowed. The simplest way to avoid APR is to pay the balance before the due date.
Refers to the number of days provided to pay in before interest is charged. The grace period for credit cards is typically as long as a month.
Extra information about fees:
Fees are usually hidden behind flashy deals and advertising. Fees are commonly charged for cash advances, money transfers, late payments and exceeding the credit limit. This is the one section that is commonly ignored by most individuals; remember, ignorance can cost a fortune.
Types of Credit Card Users
From a broader view, there are two types of credit card users:
- Transactor: A transactor is one, who pays off all balances before the grace period; As a result, he/she avoids interest, along with additional charges and penalties. This type of user receives additional perks/benefits, such as fraud protection. In fact, transactors are aware of their income and in control of their spending habits. In fact, Gary Herman, President of Consolidated Credit, states:
“Credit cards don’t have to be the enemy of a stable, healthy financial outlook when you use them strategically. If you get all the convenience of credit without the interest charges tacked on, that’s winning.
Transactors are also rewarded with perfect credit scores, which reduces their interest rates, in case they fumble up sometime in the future. Credit scores also allow for reliability, so it would be easier for them to get a loan in the future
2. Revolvers: These are the consumers that the issuer earns the most from. Suppose I bought a toy car for $100, and I could not pay it back before the grace period. This means that I would be charged interest, and if I have a variable APR, my interest would keep compounding until I pay back my balance. Revolvers are usually not up to date with their debt payments and their financial positions are tenacious at best.
One book that I would recommend if you want to learn more about credit cards is