What is a Credit card? How do I choose one? Why should I use a credit card instead of cash? I’ve been asked questions like these over and over again, usually by young people who are just starting to learn about the world of credit and personal finance. However it’s never too late (or too early) to learn more about credit cards. Welcome to Credit Cards 101!
What is a Credit Card?
A credit card gives you easy access to a revolving line of credit which you can use to purchase products and services just about anywhere. There are four major credit card companies in the United States: Visa; MasterCard; Discover and American Express. These card issuers, while all structured differently, essentially provide the infrastructure to companies (such as Best Buy) who want to offer their customers the ability to pay with a credit card.
When you use a credit card the purchase amount is debited from your line of credit and paid to the vendor from whom you made a purchase. Within a month of your purchase (credit card bills are generally sent out on a monthly basis) you will receive a bill from your credit card company showing any purchases throughout the previous month, the full balance owed, and a minimum payment amount. The minimum payment is calculated as a percentage of the balance owed on your card, usually between 3 – 5%. Be careful paying only the minimum payment though, and here’s why:
Let’s say you owe $2,000 on a card with 15% interest and a 5% minimum payment rate. This would give you a minimum payment of $100 at first and lower every month as you pay down the principle. However paying only the minimum (without ever using the card again) will take you 84 months to pay the card off and will cost you over $630 dollars in interest!
Choosing a Credit Card
When choosing a credit card you want to read the fine print. The Terms and Conditions of the card you are considering must legally be provided BEFORE a card can be applied for. These are the things you should pay close attention to:
• Annual Percentage Rate
• Annual Fees
• Balance Transfer Fees
• Cash Advance Fees
• Late Payment and Overlimit Fees
• Minimum Finance Charges
You should look for a card with a low APR, no annual fees, a low balance transfer fee, and NO minimum finance charges.
Why Use a Credit Card?
So why are credit cards important? Wouldn’t it be better to just pay with cash? Credit cards can be a convenience but I make it a habit to think of them more as a tool, and a dangerous one at that.
To understand why credit cards are important, you have to remember that the world practically runs on credit. If cash is King then credit is the Queen, and we all know who is in charge in that relationship. Credit (and your credit score) is a reflection of your ability to borrow and to repay money. So when you purchase something with your credit card and then pay off the balance on time this is reported to credit scoring agencies, who then update your credit report and score on a monthly basis. The higher your credit score the easier it will be for you to qualify for loans of all types.
VISA cards offer a zero liability policy, which with a few exceptions basically protects you from all forms of credit card theft and fraud. If someone were to get a hold of your card number somehow and make a purchase with it all that needs to be done is to report it to VISA and you will not be held responsible under most circumstances. MasterCard, American Express and Discover likewise offer fraud protection. This is another reason why I prefer credit cards over cash; the security is far superior.
Credit Card Benefits
Did you know that by using your credit card to pay for a car rental that you are automatically protected with rental insurance? There are many benefits that credit cards offer to their cardholders, some of which can save you money.
Take this knowledge and use it. I don’t want to hear about any of my readers applying for bad credit cards. On that note if you have any credit card horror stories or any further questions please contact me; I try to respond to all messages!