Cashless payment forms, such as debit cards, credit cards, and payment apps, are becoming more popular, and, while rare, some vendors no longer accept cash.
Having some form of cashless payment is a must. But with credit cards, in particular, you can build your credit history while making everyday purchases. If you want to know more about credit card payments, these tips from Investopedia can help.
What Is A Credit Card Balance?
A credit card balance is the sum of the purchase charged to your card on top of the amount you already owe, including any outstanding interest, penalties, and other charges. These fees can be anything from the card’s year fee, foreign transaction fees, late payments, and more.
Each month, your credit card issuer will inform you of:
- Your remaining balance
- Minimum monthly payment
- The due date
If you pay the minimum payment on or before the due date, you won’t have any problems. Your issuer will carry over the balance to the next month, and it will begin to accumulate interest. It’s best to pay above the minimum. Even better is repaying your total balance every month to prevent yourself from falling behind on interest payments.
Minimum payments and allowing your credit card balance to carry over doesn’t hurt your credit. The problem arises when your balance becomes too large with respect to your line of credit. Lenders examine your credit utilization ratio to determine how high a risk you pose when seeking a credit line.
Additionally, your credit utilization ratio plays a significant part in your credit score. Generally, lenders look for applicants with ratios no more than 30%. In other words, if you have a $5,000 spending limit, you should try to keep your credit card balance under $1,500.
How Do Interest Rates Work?
Interest rates are determined as an annual percentage rate (APR). Instead of applying the APR in a lump sum once a year, lenders divvy the percentage and add it to your balance every month. For instance, if you have a credit card with 20% APR, you pay 1.66% interest on your unpaid balance every month.
Keep in mind that this would only work for a credit card that lets you carry over your balance each month. On the other hand, charge cards work similarly to a standard revolving credit card, but you can’t carry your balance from month to month.
Depending on the card, you may more than one APR, like one for purchases or one when you get a cash advance. When you open a credit line, make sure you read the fine print and fully understand the conditions to know what to expect.
While convenient, credit cards can come with many different charges and penalties that can add up fast if you don’t take the proper measure to prevent them.
What You Should Know About Credit Card Fees
If you have never had a credit card before, you might be surprised at just how many miscellaneous fees and charges can accumulate, even if it’s unintentional. The most critical ones to be aware of include:
- Late fees, which occur when you don’t make your minimum payment by the due date. The amount varies, but it could be as much as $27 for your first time and $40 any time after that. Lenders will report missed or late payments to the three major credit agencies, causing your credit score to take a hit.
- Over-limit fees, which happen when you spend more than your credit limit. Like late fees, over-limit charges can differ between $25 to $35. Generally, the amount depends if it’s your first time going over your limit or if you are a repeat offender. It’s important to remember that some credit card providers may just reject any purchases that surpass your credit limit.
- Annual fees, which is a flat fee you pay just to have an account. Although you can find a number of credit cards without an annual fee, those that have them often offer many perks and rewards that other cards don’t.
- Cash advance fees are determined as a ratio of the sum you withdraw using a credit card. These fees can be expensive, so it’s important to be mindful of them.
- Returned payment fees, which happens if your credit card issuer declines a transaction and it bounces.
Credit cards can be a great strategy to improve your credit and develop a positive credit history when used responsibly. However, if you don’t completely understand the terms or are unaware of potential charges, you could end up spending more than you intended. But by staying on top of your credit card’s monthly balance, you can avoid high interest payments while still enjoying all the benefits it has to offer.
- D’Angelo, Matt. “How Do Credit Card Payments Work?” Investopedia, Investopedia, 27 Sept. 2020, www.investopedia.com/how-do-credit-card-payments-work-5069924.