What You Should Know About Using A Credit Card

A credit card is a safe and convenient way to pay for everyday purchases and bills when used responsibly. They can also make it easier to afford big-ticket items. However, it can backfire if you only pay the minimum monthly payment or rack up a mountain of debt. Learn more about credit cards and if they’re the right fit for you.

How Do Credit Cards Work?

When you use a credit card, you are using money borrowed from a lender. Generally, lenders issue a line of credit, which is the amount of money you can spend up to a certain point. This credit limit can vary depending on your creditworthiness, or how likely the lender feels you will repay the borrowed funds.

If you repay the entire amount you borrowed every month, you won’t have any interest payments. However, this doesn’t apply to cash withdrawals, which typically accumulates interest — sometimes as high as 4% — from the day you withdraw it to when you pay it back. For this reason, you should not use credit cards to withdraw cash if you can help it. 

How Do I Know If I Should Get A Credit Card?

A credit card is a big responsibility. Before applying for one, make sure you consider these factors:

 

  • You must pay the minimum monthly payment, regardless if you have an interest-free grace period. You can enroll in automatic bill pay to cover a certain amount or the entire bill. Autopay ensures you don’t forget a payment, incur interest, or negatively impact your credit. 
  • When you apply for a credit card, the lender will perform a credit check. A positive credit score increases the likelihood that the lender will approve your application and gives you more options for low-interest cards or cards with generous sign-up rewards.
  • You must be 18 or older to apply for a credit card.

 

What Charges And Fees Should I Expect?

Again, if you are considering getting a credit card, you should use it responsibly. You can get hit with penalties in many ways, some of which you may not have expected. Here are a few of the standard charges you should expect when you use a credit card:

Interest Rates

If you aren’t in a grace period that waives interest and you don’t repay your balance in full when you receive your statement, you will have to pay interest for the next month’s bill plus the amount leftover from the prior month.

When you sign up for a new card, you may be eligible for an introductory rate. Just make sure you know if this rate applies to regular transactions, balance transfers, or both. Additionally, keep in mind that you will always pay interest on cash withdrawals.

You should also find out what interest rate you will have to pay when the grace period ends. You want to pay off your balance before then so you don’t get stuck with interest payments! 

You will also have to pay a fee — usually 3% — when you transfer the balance from one credit card to another. Some people move their balances to get a better interest rate, but you should determine if a lower interest rate will offset the transfer fee’s cost. 

Late Payments

When you get a credit card, you should do whatever you can to pay your monthly bill on time, even if you just make the minimum payment. Not only will the lender issue a late payment penalty, but you may lose your introductory rate, and the lender will report the late payment to the three major credit bureaus. This can hurt your credit and prevent you from getting approved for other lines of credit — from mortgages to other credit cards — in the future.

Minimum Payments

Each month, you will receive a statement telling you how much you owe and the minimum amount you must pay. You can choose to make the minimum payment or pay it in full, depending on your finances that month. However, it would be best if you always tried to pay as much as possible. 

When you let your credit card balance carry over month to month, you will accumulate more interest, making the original payment more challenging to pay back and result in you paying more than the amount you borrowed.

Cash Withdrawals

While you don’t have to pay a fee to withdraw money from an ATM when you use a debit card (in most cases), you do when you use a credit card. Many lenders do not warn you about this added fee, and the ATM won’t notify you, either. 

Not only will you pay as much as $5 each time you take money from an ATM, but you also have to pay interest — even if you repay it before the due date. These charges also apply when you buy foreign currency, gift cards, use your card for gambling purchases, and other miscellaneous “cash” transactions. 

 

Source
  • “A Simple Guide to Credit Cards.” Money Advice Service, www.moneyadviceservice.org.uk/en/articles/credit-cards.
Ian Schindler