Know Your Rights

The Truth About Credit Cards

By learning the basic facts about credit cards prior to owning one, you can rest easily knowing you will be a responsible and more financially savvy user.  Understanding the ins and outs of credit cards can make the difference between you using it responsibly or falling into the trap of financial doom.

Store Cards vs. General Purpose Cards

An important fact to understand is that there are numerous types of credit cards to choose from and selecting the card that works for your financial needs is the best way to protect yourself.  The first difference between cards is that there are private cards, which belong to a specific store (J.C. Penney, Home Depot, Macy's etc.) and can usually only be used with that specific retailer and general purpose cards, such as VISA, Mastercard, Discover, American Express which can be used anywhere.

Secured vs. Unsecured

Store charge cards and general cards are most often unsecured, meaning you need to be approved for a credit limit and can only spend up to that dollar amount before charging more.  It is important to understand that a credit limit is just the amount you are permitted to spend.  If you fail to make payment your balance owed can be more than your limit because of fees and interest added by failing to pay off your debt.

Secured cards on the other hand are protected by funds that you deposit into an account so that if you fail to make timely payments the creditor can use your deposit to pay off the balance.  Secured cards are a good way for those consumers with poor credit to get a card and build their credit rating because they are easy to be approved for.

Number of Credit Cards

According to a study conduct by FICO, a company that produces credit scores used to make decisions on whether or not you are considered financially responsible and worthy of extending credit to, the average American consumer carries 9 credit cards.  There is no perfect number of credit cards that FICO claims a consumer should carry but a safe suggestion is not to carry more cards that you can be responsible for.  A responsible consumer should use the card that best suits their needs and not switch cards because one card has reached its maximum credit limit, unless paying off your card in full each month.

Credit Card Interest Rates

Credit card interest rates have a variety of ranges depending on the card you are using and the type of consumer you are. Creditors use factors such as your credit score, income, assets, payment history and current balance of your debt to determine who will receive the best or worst interest rates.  Understand that the interest rate is the amount of money added to the balance owed when you fail to pay off your card in full every month.  Paying the minimum amount owed means the balance of your debt will continue to increase at your card's assigned interest rate until the balance is paid off in full.

Comparing Cards

Comparing cards is crucial to your financial well-being and should be done before signing a contract.  There are a lot of different cards available and finding the card that best suits your needs will serve to protect your bank account and credit rating for the long term.  The best way to decide which card is right for you is to find the card that offers you the lowest interest rate and late fees.  Interest rates will vary depending on your credit rating-the better your rating the lower the interest rate that will be available to you.

The Credit Card Contract

The contract you sign with the bank is binding and enforceable.  Read your agreement carefully prior to signing.  Important factors to look for in the contract include, your credit limit, the Annual percentage rate ("APR"; the interest charged on the balances you carry over month to month), fixed or variable APRs and fees that may apply when making late payments, performing a balance transfer or borrowing from a credit line.  Also look for statements that allow the card to alter any of the terms at any time with notice by mail.

Carrying a credit card is a necessary tool for your credit score but can also be detrimental to your financial well-being.  Be a responsible card holder, learn the facts of owning a card and make wise choices to protect your financial reputation.  If you have any questions or concerns relating to your credit, contact SmithMarco P.C. for a free case review.





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