Credit Card Basics - Page 2

Balance:

This is the amount of money that's been charged on your credit card, waiting to be paid off. The balance includes purchases, finance charges, and fees—all of which count against your limit. So if you have a $5,000 limit on your card and you've made $2,000 worth of purchases, you probably have less than $3,000 to spend after deducting finance charges. It's important to keep track of your remaining credit through your statements, and not just by tallying up your purchases.

Credit card fees:

 Just about every credit card carries at least some fees, the most common of which is the APR. Others may include application fees, annual fees, late fees, over-the-limit fees, charges for cash advances and balance transfers, and foreign transaction fees.

Credit limit:

 This number dictates how much you can charge to your card. Remember, your credit limit is affected by fees, not just purchases—so keep an eye on those statements, to prevent accumulating an over-the-limit fee on top of your balance.

Finance charge:

 Many people use “finance charge” and “APR” interchangeably, but they're actually different numbers. The APR is a rate, expressed by a percentage, while the finance charge is calculated using the APR and your balance. Credit card companies use various methods to determine finance charges, so it's important to read the terms carefully. The most beneficial (and least expensive) are finance charges that are calculated on an average daily balance, excluding new purchases.

The balancing act: Making payments on your credit card

While the ability to charge your purchases can come in handy, it can also create the illusion that you have access to more money than you actually do. While that's technically the truth, this line of thinking can lead to serious financial trouble.

Making only the minimum payment on your card every month is problematic. Because finance charges are assessed each month on your total balance, you'll end up paying interest on your finance charges—and your actual rates will be far higher than your APR.

Always clear the balance on your card as soon as possible. Resist the urge to charge more than you can comfortably pay off in a few months. If necessary, you can ask the card issuer to lower your credit limit, to help you avoid charging too much.

On the flip side, if you use your card responsibly and pay on time every month, you could be eligible for an increase in your credit limit.

Choosing the right card for you

There are countless credit card options out there. If you have no credit record or a bumpy credit history, your options may be limited to secured cards until your score improves.

However, if you have good to excellent credit, you'll probably find that credit card companies are eager to work with you—and many are willing to pony up incentives to get you to choose them.

When deciding on a credit card, look for not only the best possible deal, but also a card that complements your spending habits. If you're not big on traveling, a card that rewards you with frequent flyer miles or travel discounts probably isn't a good choice. If you have no immediate plans for big purchases, you may be better off with a lower-limit card that carries better terms.

In general, look for a low APR and annual fees, and make sure to read the fine print thoroughly so you can spot any hidden fees or charges. Use your card responsibly and make your payments on time, and you'll be well on your way to enjoying the many benefits of credit spending.

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