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It’s time to talk about important credit card facts and whether having a credit card is right for you. The average person in America has 2.6 credit cards, including those having none. If you only count those who have one or more cards, then the average number of credit cards per American jumps up to 3.7.
Let’s begin with what a credit card is, and then go into what types of cards are available on the market. After that, we’ll discuss common fees.
Table of Contents
1. What is a Credit Card?
A credit card is a small plastic card that you can use to make purchases around the world. When using a credit card, you borrow money from a bank that you must pay back within the grace period of your next statement; otherwise, you are charged interest.
Credit cards are used all the time, whether you’re buying gas or booking a vacation. Responsible credit card usage has many perks, but irresponsible usage can lead to credit card debt, which is never good.
Related Post: 9 Ways How To Get Out And Stay Out Of Debt
2. Different Types of Credit Cards
There are many types of credit cards out there. Below are some of the more popular ones.
Cash Back Credit Card
Some issuers offer cashback credit cards, which pay you a percentage of all purchases you make with them. It essentially gives you a discount, usually a few percent, on everything you buy, in the form of credit. You choose when to cash in your rewards, and the amount is either applied to the balance of your next statement, directly deposited into your checking account, sent to you as a check, or sent to you as a gift card.
Balance Transfer Credit Card
A balance transfer credit card generally has a 0% introductory APR for a certain amount of months, allowing you to transfer high balances from other sources into this card.
If you pay it off before the introductory period ends, generally 18 months, you pay zero interest. Most balance transfer credit cards have a one-time fee or charge the full amount of interest should you not pay off the balance before the 0% APR period ends.
The best time to use a balance transfer credit card is when you know you can pay off your credit card debt, ideally in a year or less, and want to stop paying interest on your current credit card. You pay the one-time balance transfer fee, transfer your high interest credit card balance to the 0% APR card, and pay off the balance before the 0% APR period ends.
Student Credit Card
Student credit cards are marketed towards students; however, they have lower credit limits and are more likely to be approved. The average APR on student credit cards is also higher than other credit cards. Students should be cautious about credit cards in general. Many credit card companies will attempt to get college students to sign up for cards without warning them how dangerous it is to be in credit card debt.
Airline Credit Card
An airline credit card offers travel rewards earned in the form of points when you use the card. The points can then be redeemed for travel-related expenses, including covering airfare and baggage-checking fees.
Airline cards also offer perks to booking during blackout dates, and some offer a “plus one” ticket for free or at a discount for a companion traveling with you.
Rewards Credit Card
Cardholders of a rewards credit card often have a variety of incentives to use the card. When you purchase something with your rewards card, you earn points depending on your rewards rate.
These points can be traded in for various items, including gift cards, discounts, cashback, travel rewards, and more. Rewards programs are an excellent way to have your credit card pay you to use them.
How Interest and Fees Work
Credit card companies charge interest if you don’t pay your balance in full at the end of each statement period.
If you don’t pay the minimum payment or more, by your statement’s due date, credit card companies will often charge you fees and increase your APR to a penalty amount for a period of time. Let’s discuss what APR is and some common monthly fees.
3. What is APR?
APR stands for annual percentage rate. In the world of credit cards, if you carry a non-zero balance from month to month, you will be charged interest based on your APR.
First, the credit card company calculates the periodic interest rate, which is APR divided by 12. So, if your credit card APR is 18%, your periodic interest rate would be 1.5%. After that, 1.5% is multiplied by your average daily balance.
For example, if your average daily balance was $1000, an APR of 18% would have you pay $15 in interest at the end of the month ($1000 * 18% = $180. $180 / 12 months = $15)
4. What Are Credit Card Annual Fees?
Some credit cards have annual fees. While it may seem outrageous to pay an annual fee to use a credit card, many credit cards with annual fees have rewards that, if you take advantage of them, pay back far more than your annual fee.
While most credit cards don’t have high annual fees, and many have no annual fee at all, you may find a card with fees that have rewards you enjoy that far surpass the fees you’re paying.
5. What Are Credit Card Transaction Fees?
You may have to pay a foreign transaction fee if you make purchases outside of the US. These fees can be 2% and 3% of the transaction. If you travel outside the country a lot, use a credit card that doesn’t have foreign transaction fees.
6. What Are Cash Advance Fees?
Some credit cards will allow you to take a cash advance from them. This can be risky as while it’s money you can get immediately, there are often high fees and a separate, higher interest rate that you have to deal with as you pay off the advance.
Cash advances also don’t have a grace period, meaning you’ll be paying interest from day one. Unless it’s an absolute emergency, you should NEVER use a credit card’s cash advance feature. Instead, always buff up your emergency fund whenever you can.
7. What Are Credit Card Late Payment Fees?
If you are late paying your credit card, you will be charged a late fee. Currently, the law is you may only be charged a maximum of $28 or $39 late fee, depending on the situation. The best way to avoid late fees is to pay at least the minimum balance before the due date.
A common way to do this is to set up automatic payments to draft the minimum payment from your checking account. If you have additional money, then you can manually pay more of the balance as well.
8. What Are Returned Payment Fees?
If you make a payment with insufficient funds, such as making a $200 payment when you only have $100 available in your checking account, the credit card company may charge you a returned payment fee.
The fee can only be a maximum of $28 or $39, depending on whether there have been previously returned payments in the past six months. Make sure that you can cover your payments before you schedule them.
9. What Are Over-the-limit Fees?
If you go over your credit limit, you can be charged an over-the-limit fee. That said, you can only go over your limit if you “opt-in” to your credit card company to allow you to.
If you’re frequently reaching your limit, consider reeling in your spending habits, or if your credit card simply has a very low limit, consider asking for a small increase from your credit card company.
Note: If you get a credit limit increase, do not use this as an excuse to spend more money. Raising your credit limit can be a double-edged sword. Raising your credit limits can help your credit score if you raise your credit limit without raising how much you’re spending.
10. What Are Balance Transfer Fees?
Oftentimes, credit card companies will offer a balance transfer from another credit card. They will usually offer a 0% APR for a specified period. This can be an excellent way to pay down a balance if you can pay it down in the 0% (or similar reduced) APR period.
However, there can be a balance transfer fee, which is often 3% to 5% of the balance being transferred. You might think that that is a lot of money to pay for a fee; however, if you can pay down the balance during the introductory period, you can save a ton on interest by paying that initial balance transfer fee.
Wrapping It Up
Credit cards can be both an excellent tool for building credit and receiving many rewards but also be a risky way to get into debt if used irresponsibly. Apply for a credit card only if you trust yourself in using one. Otherwise, stick to using your debit card. Ending up in a situation where you have too much debt and no money to cover it can be daunting.
If you’re one that spends without thinking, consider shying away from credit cards unless you can pay your balances each month. Otherwise, a credit card is something I would recommend to most people, as long as you pay your balances each month.
What were things you wish you had learned about credit cards before you started using them?