CREDIT CARDS 101
Theyíre so pretty, and theyíre so convenient, but credit cards are hardly that simple. They can actually get you into deep trouble if you donít know your way around them, so here are some basics to get you started.
How To Get One
You must be 18 years old and have some kind of income in order to get a credit card in your own name. There are alternatives, however:
Types Of Credit Cards
Most credit cards provide "unsecured" credit, which means that they are lending you money based on your promise pay back the debt. Credit cards come in several varieties:
The way you handle your credit cards affects your credit history; a negative credit history is a serious liability. Credit bureaus keep track of your history and assign you a "credit rating", which can be accessedóusually within minutes-- by employers, insurance companies, and apartment managers. If you have a poor credit rating because of a bad credit history, this can keep you from getting things you want, like an apartment or an insurance policy. So as soon as you receive, sign, and use that credit card for the first time, your responsibilities have started. Take time to read through the terms and conditions that come with a credit card account, and become familiar with whatís expected of you.
Choose The Card Thatís Right For You
As soon as you turn 18, the credit card companies will start to "woo" you to open an account. So youíll likely be bombarded with offers, but choosing the right card isnít as simple as picking the best bonus gift or introductory interest rate. Look on the back of the offer to review the interest rates, annual fees, late charges, etc. that each card offers. Your safest bet is to sign up for a card that requires you to may the least amount of interestóespecially after the introductory rate.
Hereís how to decode the terms:
Annual Fee: This is basically a membership fee for having this credit card account. It will range from 0 (no annual fee) to upwards of $50.
Annual Percentage Rate (APR): The interest rate, expressed per year, applied to your purchases.
Finance Charge: The total amount that you pay to use your credit, which includes interest and any other charges related to the transaction. The credit card company will use one of three methods for calculating the finance charge:
Average Daily Balance Method
Most commonly used. Youíre credited for a payment from the day the credit company receives it, and then they figure the interest based on the average amount you owed during the previous month.
Adjusted Balance Method
This method benefits you the most and results in the lowest finance charges. The balance is calculated by subtracting the payments and any credits from the balance you owe at the end of the previous billing period.
Previous Balance Method
This method costs you the most. The finance charge is calculated on the balance owed at the end of the previous billing cycle. Payments, credits and new purchases made in the current billing cycle are not included.
Grace Period: The number of days you have before a credit card starts charging you interest on your new purchases. Most credit cards have a 30-day grace period. If you pay the balance before the grace period, you wonít be paying any interest on it.
Transaction Fees: Any charge other than a purchase usually carries an extra fee, such as a cash advance, late payment, or going over your credit limit. Some credit cards even charge a monthly fee if you havenít used your card at all.
When choosing a credit card you should:
Read each credit contract carefully, be sure you understand all the terms, costs and conditions. The credit card company will give you a credit limit, but donít pay attention to that! Look at your own finances and decide what you can handle as a limit. As your credit history with a card increases, the company will likely increase your credit limit. This should still not affect the way in which you use the card.
All in all, look for the deal that best fits the situation youíre in; as you build a good credit history and your income grows, youíll qualify for better rates in the future.
Every time you purchase something with a credit card, youíre entering into a legal agreement with the credit card company, and this is a serious responsibility. Here are some other responsibilities to keep in mind: