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.