Here's
what you need to know about credit cards before you apply... In today's
fast-paced society, convenience has become an essential part of everything we
do - especially when making purchases. One of the most powerful tools available
to consumers is the credit card. When used responsibly, a credit card is a simple
way to process payments and can pave the way to financial success. But before
you go out and choose a new credit card, you need to understand the basics: Types
of Credit
Credit is a privilege and convenience. It gives you the opportunity
to purchase something now, then pay for it later. Credit can come in many forms,
including credit cards. But there are two basic types available to consumers: Secured
Credit is a loan that is secured with collateral of some type which can be
repossess by the lender if payments are not made. Unsecured Credit
is a loan without any collateral required. Because there is no way to recoup their
losses, banks and lending institutions typically charge a higher rate of interest
for this type of credit.
Most 'standard' credit cards are
considered unsecured. If you already have a good credit record, this is the type
of offer you'll be looking for. But for people with bad credit (or no credit),
some banks will offer secured credit card offers to help you build or improve
your credit history. Unlike unsecured offers, secured credit cards require a security
deposit - anywhere from $500 to $5000 - to receive approval. The Cost
of Using Credit
The cost of using credit is determined by the Annual Percentage
Rate and the fees charged for paying late or using the convenience services offered.
The Annual Percentage Rate, or APR, is the interest you're charged for
borrowing money beyond the grace period. It's usually a percentage of the balance
due and expressed as a yearly interest rate. The lower the rate the less it will
cost you to use credit. You will be charged the APR each month that you carry
a balance. Types of APRs: A Fixed APR is a
static rate that can only be changed only if you are informed in writing by the
issuer. A Variable APR automatically fluctuates based on changes
in an index such as Prime Rate. An introductory APR is a temporary
- usually low, interest rate offered by providers to "introduce" you to their
services. It will usually expire after a certain amount of time, normally 6-12
months.
Your APR can vary for different types of balances,
e.g. purchases, balance transfers or cash advances. Cash advances usually have
the highest interest charges. Also, if you're late in making a payment, you may
be penalized with a higher APR. It's also important to note that creditors
use different methods for calculating your finance charge. They may consider one
or two billing cycles, use an adjusted, average, or previous month's balance to
calculate interest and may or may not include new purchases. The least expensive
method is using an adjusted balance, while the most common is average daily balance.
The most expensive method is two cycle. Fees for transactions and services
are charged by all credit card issuers. Full disclosure of all fees is required
by law and will be included in the 'Terms and Conditions' of any credit card you
choose. Here's a list of common fees: - Annual Fee
- Cash
Advance Fee
- Convenience Check Fee
- Late Payment Fee
-
Balance Transfer Fee
- Over-the-limit Fee
- Return Check Fee
Grace
Period
The grace period is the amount of time between the date of a purchase
and the date interest will be charged on that purchase. The number of days in
the grace period will be posted in your credit card agreement and the longer the
grace period - the more money you'll save on interest charges. Take note that
you may not have a grace period for new purchases, if you carried a balance from
the previous month. In addition, balance transfers and cash advances typically
do not have a grace period. Credit Limits
The credit limit or
line of credit is the maximum amount you can charge on the card including all
purchases, balance transfers, cash advances, finances charges and fees. When you
receive a new credit card, you're usually issued a set credit line. Being given
a large credit limit will insure that you don't go over your credit limit and
incur a hefty over-the-limit fee. Your credit limit (along with other factors)
is normally determined by your credit history. |
