Credit Cards

Credit cards are an exciting financial instrument.  You can buy an item today and pay later. They eliminate the need to carry cash. Some cards even provide rewards like cash back or airline miles!

​However, you cannot simply look at a few positive attributes and start swiping away. Remember, with great power comes great responsibility and credit cards are a great power.

What is a Credit Card?

A credit card is issued by a bank or a financial institution and allows the card owner to make purchases on credit.  This gives you, the holder, the ability to buy now and pay later.

​Payments are usually made monthly.  If you don’t pay off the entire balance, you will be charged interest (this is the cost of credit) and this will result in you paying more for your purchases.

Selecting a Card

You just turned 18 and you can’t wait to get a credit card, right? Not so fast! There is more to selecting a card than just finding one that allows you to put a picture of your dog on the front.  Consider the following points:

  1. Annual Percentage Rate (APR): Fixed or variable rates?​
  2. Credit limit
  3. Rewards: cash back, airline miles, special access to events)
  4. Fees: Late, over limit and annual/membership fees

Fees

Not too many people get excited about fees. If you are one of these people then be sure to understand the below fees and do your best to avoid them.

  1. Annual Fee – This is a fee you pay annually just to have the credit card. Unless the card offers some very good perks that outweigh the fee, then avoid cards with an annual fee.
  2. Cash Advance Fee – This fee applies if you use your credit card to get cash. Usually these fees range from 2% – 5% of the amount you borrow. However, the fees may actually be higher once you factor in the cost of ATM fees.
  3. Foreign Transaction Fees – For those who like to tarvel be aware that you may incurr fees when using your card abroad. These fees can range from 1% to 3%. If you do travel, look into applying for a travel rewards credit card that doesn’t charge a foreign transaction fee.
  4. Late Payment Fee – This fee is easy to avoid. Simply pay your bills on time. If remembering due dates is difficult then schedule auto payments each month.
  5. Returned Payment Fee – This is a fee charged if your payment to the credit card company is returned to your bank. This would normally occur if you do not have enough funds in your bank account to pay the bill. These fees are usually around $35.

Staying Out of Trouble

Credit card companies usually offer a few services to help keep you out of trouble.  Take advantage of these (often free) services:

  1. Text alerts
  2. Auto Pay
  3. Email reminders
  4. Select your own due date
  5. Travel notices

In addition to the above, all credit cards come with fraud protection. If fraudulent charges are made you will not be held responsible.

Helpful Tips

Pay as much as you can by the due date. When you get your first credit card bill you will see a minimum due amount. If you only pay this amount each month, you will end up paying a great deal more in interest and it will take longer to pay off the debt. Try and pay the full balance each month, or as much of it as you can.

If you find yourself in trouble don’t ignore the problem. Contact your credit card company and explain the situation and ask them to work with you. They may have alternative solutions to help you pay back your debt.

Be conscious of your credit limit. Going over your limit may result in an increase in APR and/or extra fees. Remember, just because a transaction is approved doesn’t mean you are not over your limit. Check your balance on a regular, if not daily, basis.

CREDIT TERMINOLOGY

Annual Percentage Rate (APR): Annualized interest rate applied each month to balances carried on a credit card.

​Credit Line/Limit: Amount of money that can be charged to a credit card account.  How big your line is and how much is used will play a role in determining your credit score.

​Credit Score: A number indicating how well you handle your debt. Credit scores are used to judge how risky you are as a borrower, so a higher score is desirable.

​Finance Charge: The total cost of borrowing (interest + fees) expressed in dollar terms.

Grace Period: A time period where you can pay your credit card bill without a late fee.

​Minimum Payment: The minimum amount you are required to pay for a given month. Paying only the minimum amount will result in paying more interest and taking longer to payoff.

Secured Credit Card: Credit cards requiring collateral before being issued.  These usually come with high interest fees and are designed for those with poor credit.

​Unsecured Credit Card: The most popular type of credit card. These do not require collateral before being issued and limits are based on income and credit ratings.