In today’s money-happy society, getting a credit card has almost become a rite of passage. However, before you commit to that plastic gold mine, memorize a 16-digit number and buy a new laptop with all the trimmings courtesy of Visa, there are a few things to keep in mind that will help you turn credit to your advantage and save you some unwanted surprises.
Why Do I Need a Credit Card?
Emergencies. Credit cards are a necessity for dealing with the unexpected. Blow a tire on a road trip through Nebraska? Have a family emergency and need airfare money? Credit cards can get you out of a tight spot when you don’t have the cash you need.
ECommerce. Perhaps, you want to buy books, CDs, or even groceries online. Pretty hard to do without plastic.
Credit rating. In the long term, good credit is a necessity. Years from now, as hard as it may be to imagine, you might want to buy a home. For that, you’re going to need at least three forms of credit, usually two credit cards and an auto loan in good standing. Charging responsibly now, and incurring and paying off balances will help build your credit history.
Be careful building your history: Credit reporting companies rate your credit record on a scale of 300 (very bad) to 800 (very good). Anytime you are late on a loan or credit payment, you lose points. In the short term, even one late payment could cause banks to deny you a loan.
What makes one credit card better than another?
- Not all credit cards are created equal. It’s important to check the fine print to see how some credit card offers differ from others. There are many options out there, so before you apply for a card, shop around. Three main things to consider are: the rate of interest (or APR), the annual fee, and the length of the grace period for payment.
- APR. The Annual Percentage Rate (APR) is the rate at which interest is accrued on the unpaid balance of your card. For example, if the APR is 18.0%, and you carry a $1000 balance for a year, you’ll rack up $180 (18 percent of $1000) of extra debt. Obviously, low APR’s are better than high APR’s.
- Fees. Most companies charge a flat fee every year on your card. Some charge less than others do, so make sure you ask.
- Grace period. The grace period is the amount of time a credit card company gives you to pay your bill before being charged interest. You’ll want to make sure the card you get gives you enough time to pay your bill.
Some cards offer incentives for charging on their cards. Frequent Flyer miles, store discounts and money back on purchases are just a few incentives that some cards offer. If you can find a card with extra perks, that’s great. But don’t let the incentives make the decision for you. Again, the most important things to look at are the APR, fees and grace period. There are several websites that publish this information to help you compare various cards.
Where Can I Get the Best Deal on a Credit Card?
One great place to look is close to home – your local bank. Most of those glitzy mail offers come from a handful of large, national banks. Typically, while the offers appear good at first, the interest you will actually pay over time is higher because introductory rates don’t last. A local bank will usually offer a good card with a fair rate that will not change.
Warning! Read the fine print. It may surprise you.
While a card may say your monthly minimum payment is $20, the details will usually mention something like “or 3% of the bill, whichever is greater.” You can wind up with a much higher monthly bill than you expected. In addition, you may find finance charges on your statement; some companies issue cards that begin charging interest shortly after a purchase, rather than giving a 25-day grace period to pay.
What are the Best Strategies for Paying a Bill?
There’s really only one good strategy. Pay in full, within the grace period. If you can’t afford that, pay as much over the minimum as you can. A debt consolidator estimates that, depending on the size of your bill, about $13 of your $20 will go to interest, leaving only $7 to pay back the original amount.
Suppose, though, that you pay $20 of a $200 bill two weeks before deadline. You earn extra money the next week and pay $20 more, still before deadline. Do you still have to pay the next month? Yes. And if you don’t, you lose points on your credit rating and incur penalties.
In short, if you use your credit card knowing how and when you can pay it back, you can make it work for you.