Whether it’s your first or your twentieth, you may breathe a sigh of relief when a new credit card arrives. You no longer have to worry about covering everyday expenses because you have a financial backup. Perhaps you’ve had your eye on an expensive item for months and you can now afford to splurge. The problem is that credit cards only bring relief and luxury if you manage them properly. Safe and efficient usage starts with understanding credit cards, and that includes learning five basic facts about how they work.
1. No two cards are the same.
Getting an approval for a new card is exciting, but you must look at the terms of service before you determine that the card will serve your financial needs. Here is a short list of terms that you must consider:
- Secured or Unsecured. A secured credit card requires you to place a deposit that is used as collateral in case you default, but an unsecured card is issued without any upfront financial investment. The higher your credit score, the more likely you are to receive unsecured cards.
- Interest Rates. Credit cards for people with bad credit often come with high interest rates that go well over 20 percent while cards that require a higher credit score should come with rates as low as 0 percent. You’ll see this rate referred to as the APR when reviewing the details of an offer.
- Annual & Monthly Fees. An annual fee is charged to your card automatically once a year, and monthly fees are automatically charged every month. Your new credit card will arrive with the first fee already charged to your account, and you will pay interest on the fee if you don’t pay it off quickly. The best cards have no annual or monthly fees.
- Miscellaneous Fees. Cards targeted to consumers with poor credit often come with added fees that you may not notice until it’s too late. For instance, some cards may charge a fee to add an authorized user or to accept a credit line increase.
- Private Label: This is a store credit card that you can only use when shopping with a specific retailer. For instance, a Best Buy store card is only valid when you buy from Best Buy. Some stores offer Visa or MasterCard options, but it’s easier to get approved for the basic store card first.
If you’re building your credit or rebuilding after past financial mistakes, you may have to accept secured cards, high interest rates and/or annual fees. The trick is to only charge as much as you can afford to repay at the end of each month so that the interest rate doesn’t matter. Once your credit score improves, you can replace those high-interest cards with better options.
Takeaway Tip: Many banks offer multiple credit cards, and the terms can vary depending on the consumer accepting the offer. Never assume that the terms are the same if you’re offered a second card from a bank backing a card that you already have in your wallet.
2. Interest rates aren’t always fixed.
When reviewing the APR for a new card, determine whether it’s fixed or variable. A fixed rate always remains the same while a variable rate fluctuates according to the prime lending rate or other factors. If you accept a variable rate, you will have to monitor the rate over time to avoid paying excessive interest when you carry a balance on the card.
3. Your grace period will determine when you pay interest when carrying a balance.
Completely understanding credit cards requires mastery of this often-overlooked concept. You may think of a grace period as a period of time past your payment due date that you can make a payment without penalty, but that isn’t what it means in terms of a credit card. A card’s grace period reflects the number of days that you have to pay your balance before interest is charged.
Don’t assume that you’ll have a full 30 days from the moment you scan your card. Some grace periods are as brief as 20 days.
There’s one more thing that you should understand about credit card ownership before accepting the next offer that comes your way: credit card help is always available. If you’re interested in accepting or applying for a new card, do some research online to compare the card’s terms to competitors. This will allow you to select wisely so that each credit card carries the best terms for your current credit score and other financial factors.
Many cards also offer credit card help in the form of protection programs that will pay off your balance if you lose your job or otherwise run into financial struggles. You’ll pay a small monthly fee for these programs, but participation could save your credit record if you do run into unexpected problems.