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Credit Cards

Credit Card Basics

A credit card lets you buy things and pay for them over time. Using a credit card is a form of borrowing: you have to pay the money back. If you don’t know a thing about credit cards, but you want to get one, review some of the very basic terms below:

Fees: Many credit cards charge membership and/or participation fees. Issuers have a variety of names for these fees, including “annual,” “activation,” “acceptance,” “participation” and “monthly maintenance” fees. These fees may appear monthly, periodically, or as one-time charges. What’s more, they can have an immediate effect on your available credit. For example, a card with a $250 credit limit and $150 in fees leaves you with $100 in available credit.

Transaction Fees and Other Charges

Annual Percentage Rate (APR): The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements.

The card issuer also must disclose the “periodic rate.” That’s the rate the issuer applies to your outstanding balance to determine the finance charge for each billing period.

Some credit card plans let the issuer change the APR when interest rates or other economic indicators change. Because the rate change is linked to the index’s performance and varies, these plans are called “variable rate” programs. Rate changes also can raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must tell you that the rate may change and how the rate is determined.

Before your account is activated, you also must be given information about any limits on how much your rate may change — and how often.

Grace Period: A grace period, also called a “free period,” lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month. Without a grace period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.

Balance Transfer Offers: Many credit card companies offer incentives for balance transfers — moving your debt from one credit card (Card Issuer A) to another (Card Issuer B). All offers are not the same, and their terms can be complicated.

Other Costs and Features

Credit terms vary among issuers. When considering a credit card, think about how you plan to use it: If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, and whether there is a grace period for purchases. If you use the cash advance feature, many cards do not permit a grace period for the amounts due — even if they have a grace period for purchases. That makes considering the APR and balance computation method a good idea. But if you plan to pay for purchases over time, the APR and the balance computation method definitely are major considerations.

You’ll also want to consider if the credit limit is high enough, how widely the card is accepted, and the plan’s services and features. For example, you may be interested in “affinity cards” — all-purpose credit cards sponsored by professional organizations, alumni associations, and some members of the travel industry. An affinity card issuer often donates a portion of the annual fees or charges to the sponsoring organization, or qualifies you for free travel or other bonuses.

Why Do I need a Credit Card?

It’s a buyer’s world out there. Never before have we seen so many ways to purchase so many different things. You can use the internet to purchase whatever your heart desires from here to the end of the world and maybe beyond. Anything can be bought and sold—check out the strange and exotic world of Ebay auctions—and it can be bought and sold by anyone with a mouse and a vision—and a credit card. With so many things to buy and so many ways to pay, it can be like navigating a confusing maze to determine which payment methods are the most convenient while still protecting you, the shopper.

Credit cards happen to be one of the safer ways to conduct business in today’s commercial kingdom. Not only do they work almost anywhere and for almost anything, but they are becoming one of the standard methods of payment worldwide. You can rest easy knowing you should have options no matter where you make your next purchase. Most credit cards also provide a decent measure of fraud protection and anti-identity theft measures. Debit cards and other forms of payment can’t always say the same.

Credit cards are typically large enough to provide a service that alerts you if it appears your card is being used in a strange place or in an atypical manner. Both of these services can be invaluable considering the significant increase of identity theft in recent years. Moreover, credit cards—unlike debit and check cards—are not tied directly to your personal deposit accounts.

By using a credit card, you are accessing available credit and not reducing your cash on hand. Not only does this provide flexibility for your personal finances but it also insures no one else will have direct access to your deposit accounts in the event your credit card falls into the wrong hands.

You can see that credit cards can be very useful; now, how to find the right one. The credit card business is very competitive, so look around, starting with any bank or credit card company you deal with now.

Now that credit cards have passed the viability, safety, and availability tests, it’s time to put one other stigma to rest: credit cards are not really evil or bad for you. In reality, anything can be unhealthy if used unwisely. Moderation is a good rule to live by, and the concept holds true when discussing the merits of credit cards.

Credit cards are a useful and almost indispensible tool in today’s world. Using them the right way can make your life easier. Using them too much, without a way to pay them back, or without considering the consequences, can have a damaging effect on your life. Be smart with credit and use the power of credit cards without letting them get the best of your finances.

Resources
Money Decision Problems: Credit Card Example

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