10 Important Facts You Need to Know About Credit Cards

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1. Credit card use

Around 180 million Americans, nearly three-quarters of the adult population, have at least one credit card. The average credit card holder has 3.5 credit card accounts. Credit cards have become an important part of life in the U.S., and are often required for everyday activities like cashing checks, renting cars, opening utility accounts and so forth.

2. Credit cards are a privilege, not a right

Although credit cards are available today for people of all income levels, even those with poor credit, having a credit card is not a basic right like freedom of speech or religion. A credit card is a type of personal loan offered by a financial institution, and the institutions will only issue unsecured credit cards to individuals they deem creditworthy.

3. Poor credit means a higher interest rate on your credit card balance

Poor credit means you are considered a higher risk of default, so your interest rate will be higher on any kind of a loan, including a credit card. Most banks offer a number of different credit cards with varying interest rates and benefits to fit the incomes, backgrounds and interests of a wide range of consumers.

4. Interest rates on credit cards can change

Obviously credit cards with variable interest rates change over time. But credit card holders should be aware that even a “fixed” interest rate on your credit card can go up, and this can happen even if you always made your payments on time. Other factors like overall debt load or late payments to other creditors can lower your credit score and trigger a higher interest rate on your credit card. Credit card companies are required to give you at least 30 days notice of an interest rate increase or other changes to the terms of your account. The consumer protection law passed in 2009 also requires that credit card companies re-evaluate any rate increase every six months to see if the higher rate still applies.

5. Credit cards impact your credit score

Credit cards do have an impact on your credit. Not making your monthly payment on your credit card is just like not paying your auto loan or any other loan. Just being a couple of days late on a payment is generally not a big deal, but missing more than one month’s payment will usually be reported to the credit bureaus, and will typically lead to a reduction in your credit score.

6. Credit limits

The amount of your credit limit that you are using (i.e., your current balance) also impacts your credit score. Maintaining a balance close to your limit on several credit cards will very likely have a negative impact on your credit score. Most financial experts suggest maintaining a balance of less than half of your credit limit if possible.

7. Using your credit cards

It is important to at least occasionally use your credit cards. Use of your credit cards – accumulating a balance and regularly paying it off – builds your credit, so some sources suggest making it a habit to pay for certain regular purchases with your credit card. Just make sure to pay off as much of the charges as you can afford every month. Inactivity fees for credit cards were banned by the consumer protection laws that went into effect in 2010.

8. Prepaid cards

Prepaid cards are a new, convenient alternative where consumers can put funds on the card and use it like a credit card, but a prepaid card is really more like a debit card in the sense that no credit is being extended and using it does not impact your credit score. While prepaid cards are great for individuals on a budget or who want to avoid the temptation of spending on a credit limit, consumers should keep in mind that prepaid cards are often not accepted in situations where you are required to put down a deposit using a credit card, such as renting a car or reserving a hotel room.

9. Shop around for credit cards

Credit card plans, interest rates and terms vary dramatically – soSHOPAROUND! If you have good credit, you can pretty much pick and choose the features you want and still be assured of a good interest rate, but if you are considering a subprime or lower tier credit card it is extremely important to read all of the fine print and make sure you understand how the interest rate is calculated, and all of the monthly, annual and/or penalty fees that apply to your account.

10. Consumers can make complaints against credit card companies

The current consumer protection laws do provide consumers recourse to file complaints against credit card issuers. Always try to resolve the issue with the merchant or the credit card company first, but you can find out how to proceed with an official complaint against the issuing financial institution by contacting the appropriate federal agency. Many states also have laws through which consumers can lodge complaints against credit card companies.

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