What is a credit card?
A credit card is issued by a bank. It enables you to pay for things using their money with an agreement to pay the money back, with interest. The credit card will have a credit limit -- this is the maximum amount you can spend on the card. The card carries an interest rate on the money you spend. You can avoid interest by paying your balance in FULL each month. Otherwise, you will be charged interest -- typically around 7-15% -- on the balance you owe.
What should I be careful about when using a credit card?
Avoid spending money that you cannot reasonably expect to repay within a short period of time. Often banks will try to entice you with low "teaser" interest rates. These initial rates expire over time, and if you have not paid off the debt, you will be assessed large interest charges. The best way to see how much interest you may be accountable for is to find out your Annual Percentage Rate, also known as your APR.
Be aware that interest rates on credit cards can be as high as 29%, or in some cases more, depending on the terms and conditions of the credit card.
If you do not pay your balance in full each month, you could owe a staggering amount of interest.
What are some things I should consider when considering various credit cards?
There are several things you should consider when comparing Credit Cards. You should determine what your Annual Percentage Rate (APR) will be, what types of fees and charges are associated with your card. For example is there a transfer fee if you transfer balances from higher interest rate credit cards? Is there an annual fee associated with your card. What are the finance charges? How often is your interest compounded? What is your interest rate on purchases? What type of grace period is available? What types of late fees are there? What will your minimum payment be? What type of fees and interest rates are associated with going over my total credit limit?
How can I make sense of my credit card statement? (Part 1)
There are many important things in your credit card statement that you should be aware of. Please view the following sample credit card statement and follow along.
Account number - Your account number is a unique number assigned to your credit card. Most companies use the account number to search for your credit card account history.
Total credit limit - This is the total amount of credit available to you on your card. You will want to make sure that you do not go over your total credit limit as you may be charged additional fees and a higher interest rate on the amount over your credit limit.
Total credit limit available - This amount is your total credit limit minus any purchases or transactions that you have made on your card.
Statement date - All new purchases, charges and fees that you have acquired since your last statement date.
Minimum payment - The minimum amount due on your total balance that will keep your card in good standing.
Payment due date - the date by which your minimum payment must be received by your creditor. If your payment is not received by this date you may be charged a late fee.
Current payment due - The amount you owe to the credit card company for the statement date. This amount may be the minimum or more depending on your credit balance. You may choose to pay only the minimum payment but may accrue interest on any remaining balance owed.
Previous balance - The balance from your last statement date not including any payments or charges.
Credits/payments - This lists any payments or credits that have been applied to your account from the time of your last statement date and you current statement date.
Purchases and debits - This is a list of any purchases and or debits you have made since your last statement date
Finance charge - A fee representing the cost of using credit. Some credit card companies have a minimum finance charge that is applied every billing statement. Most finance charges are based on the amount owed and your APR.
New balance - your total balance owed including any new charges or debits, finance charges and interest rate amounts.
Rewards summary - Many credit card companies offer rewards or incentives for using their cards. Some of these may include frequent flyer miles, cash rebates, car rental deals and more.
How can I make sense of my credit card statement? (Part 2)
Transaction summary - This is a summary of all transactions made on your card from the time of your last billing statement to the current billing statement.
The transaction summary includes - purchases, payments, debits and returns. The transaction summary includes the date and amount of the transaction and a brief description of what the transaction was. (under Finance Charge Calculations)
Balance transfer - This is a fee that you may be charged for transferring a balance from a different credit card to your credit card.
Purchases - This represents the rates and fees that will be applied to your purchases.
Cash advances - Cash advance fees are charged when a person uses their card for a cash advance. This can be a flat fee or a percentage of the total cash advance. The APR on cash advances are normally higher than the APR on purchases.
Average daily balance - The average of all of the daily balances added together and divided by the number of days in the billing cycle.
Daily periodic rate - This is the interest rate factor that is used to calculate daily interest charges. This is done by dividing your APR by 12, the number of months in a year. The final number represents your daily periodic rate.
Days in billing cycle - The number of days from your last billing cycle to your current one.
Cash advance/transaction fees - The fee that is charged each time you use your card for a cash advance.
Annual percentage rate - The annual rate you will be charged if you carry over a balance. APRs vary on purchase amounts, cash advances and balance transfers. APRs for most credit cards are higher on cash advances and balance transfers.
Amount enclosed - This is where you will indicate the amount you are paying on this billing statement. This amount should be at the very least your minimum amount due.
Payment address - This is the address where you will send your payment and it will be applied to your next billing statement.
Your address - This is the address the credit card company has on file for your card. Make sure you update any address changes.
How can I prudently use a credit card?
Use a credit card cautiously. Use it for items that you can pay for within the month so that you avoid interest charges. Each month your bank will send you a statement indicating your outstanding balance and asking you to make a minimum payment. While the minimum payment may be attractive to you given that it will be a small amount, do not be fooled. Whatever amount of your balance that you do not pay will be assessed interest. It is best -- whenever possible -- to pay off your balance in full each month. Moreover, do not miss any payments as that will result in fees and bad information being added to your credit history.
I have a lot of credit card debt. What can I do to reduce it?
Do what you can to avoid building up a mountain of debt on your card. However, if you have, the best thing you can do for yourself is to put together an action plan to start paying it down each month.
A suggested first step is to immediately stop adding debt to your card. Second, put together a budget that includes paying at LEAST your minimum credit card payment. Do what you can to pay more than the minimum. It's really the only way you will get out of debt. If you receive an introductory 0% interest rate credit card that will allow for free balance transfers, it is a good idea to transfer your higher balance/higher interest rate debt to that card so that you can avoid interest charges during the introductory period. But be sure to read the fine print to confirm that balance transfers are free and included in the 0% introductory offer. And do not make balance transfers to new cards a habit as it can negatively affect your credit score.
What if I go over my credit limit?
Many credit card companies charge a fee for going over your credit limit. Any amount over your total credit limit may be subject to a higher interest rate and additional fees and charges.