On 18-May-2017 In Lifestyle
A credit card is much more than just a plastic tool that allows you to make purchases when you don’t have cash on hand. When used sensibly, it (a credit card) can open various other doors for you in light of helping you build up a good credit score/rating and history, and building up a better reputation at/with your bank in general. Having a good reputation (at your bank) can lead to bigger loan amounts being approved and better interest rates being given; amongst numerous other fabulous perks.However, there is still a lot you should know before joining the millions of Visa and MasterCard users worldwide.So before running out and applying for your first card, read onwards where I shall be listing some things to be aware of (as well as think about) before taking the “credit card plunge”.(Please note that images used throughout this story are for illustration purposes only)
So, just what is a credit card exactly? A credit card is a plastic card that looks just like a debit card. But the difference is that instead of having the funds removed directly from your checking or savings account when you make a purchase, it is removed from an account that works on the premise of a short term loan. Being a loan, the amount used/debited may or may not accrue interest; in most cases depending on when you pay it off that is. Be sure to ask your bank how their interest calculations work before applying for a credit card or deciding on the type of card you want.
The benefits of having a credit card are numerous. As said above in opening, the most important benefit being the fact that having a credit card helps to build your credit score/rating. A good credit record equals better future loans and way better interest rates. It can even aid your approval when it comes to obtaining a home loan or even a cell phone contract. Some of the other perks to having a credit card are things like cash-back rewards, travel rewards, shopping rewards et cetera.
There are also numerous downsides to having a credit card such as being in debt, having the temptation of overspending and of course, having to pay interest. Be 100% sure that you are prepared to deal with the bad/downsides of having a credit card, before you even consider applying for one.
Not much more can be said on this than what the heading has already said; make sure you can afford the payments on your credit card before making debt. If you don’t you could be facing some serious heat.
Minimum payments are the smallest amounts you are allowed to pay per month on your credit card debt, without damaging your payment history and incurring fines and penalties for late or non-payments. There are numerous ways that minimum payment amounts are calculated but the following two, as per nerdwallet.com are the most common:“Percentage method: Your issuer may calculate your minimum payment based on a percentage of your balance. This is generally between 1% and 3%. So if you have a balance of $2,000 and the minimum payment is 2% of your balance, you’ll have to pay a minimum of $40 to stay in good standing.Percentage + interest + fees method: Your issuer may also take a percentage of what you owe plus any applicable interest and fees. Let’s say you have a $1,000 balance and an interest rate of 18%, and you pay late. Your issuer might charge you a minimum payment of the sum of 1% on your balance ($10), your interest accrued ($14.79) and a late payment fee ($35). Your minimum payment in this case would be $59.79.If your balance is relatively low, you may be required to pay a flat minimum payment, which typically ranges from $25 to $35 a month. But we always recommend that you pay your balance in full by the due date.”
There are two primary types of credit cards; namely secured and unsecured credit cards. Secured credit cards are cards that are backed by a cash deposit, which in general are equal to the card’s limit. This is done in order to act as collateral and removes all risks related to non-payment for the card issuer. These types of cards are excellent for people who are scared of having a credit card and/or those how don’t have a solid credit history as of yet. For more on these types of cards, visit your local bank or lender.
Unsecured credit cards are those types of cards that aren’t backed by a cash deposit or any other means/forms of collateral. These cards have a credit limit that is based on your income level and credit history amongst other factors. Once again, if you would like more information on these types of cards, visit your local bank or lender.
According to nerdwallet.com, “One of the many benefits of using a credit card is that you essentially get an interest-free loan and a grace period of between 21 and 25 days. Here’s how it works: Say you have a credit card period of Jan. 5 through Feb. 4, with a due date of March 1. Any purchases made within the period can be made interest-free until the payment due date. If you don’t pay your balance in full on or before March 1, you’ll owe interest on your average daily balance.”
This varies from bank to bank and lender to lender, however, once again nerdwallet.com has a nice explanation, which reads as follows: “Many people think that credit card interest is assessed on the card balance remaining after the payment due date. However, if you don’t pay your balance in full, you’ll accrue interest on your average daily balance during the month. Say you have a card balance of $1,000. On day 11 of accruing interest, you pay off $200. Then on day 21 of accruing interest, you pay off another $350. Your average daily balance would be $750.If the card’s annual percentage rate (APR) is 20%, the periodic interest rate is 0.0548%. Your periodic interest rate is calculated by dividing your APR by 365. Multiply your average daily balance by the periodic interest rate and the number of days in the month to get the interest accrued for the month. In our case, this is $12.33.To avoid accruing interest, you need to pay the new balance on your credit card statement each month. The minimum payment is enough to keep you in good standing, but paying interest is unnecessary if you spend within your means. Keep in mind, if you take a cash advance, you may have to pay a higher interest rate and you won’t have the benefit of a grace period. You may also have to pay an increased penalty interest rate if you make a late payment or spend more than your credit limit. You’ll be able to find these alternative rates on your card issuer’s website".
Credit cards can affect your credit score in two primary ways; positively and negatively.
If you make your payments on time, you will positively affect the most important credit score factor which is ‘payment history’.
Late payments will have the opposite effect in that they will hurt your score very badly. For more on credit score factors and how these are positively and negatively affected, speak to your local lender/bank.
As per nerdwallet.com, here are the most common fees associated with credit cards:
"Annual fee: Charged on most secured and certain unsecured credit cards. For unsecured cards, annual fees are often charged on high-value rewards cards. You can avoid them by getting a card without an annual fee, but if your spending is high enough, a fee card may net you higher rewards.
Balance transfer fee: Charged when you move a balance from one card to another, typically 3% to 4%. Balance transfers are usually made by people with credit card debt who have found a balance transfer offer with an introductory APR of 0%. You should only pay a transfer fee if the interest you would pay on your current card is greater than the balance transfer fee you’ll pay. And if you qualify, there are credit cards without balance transfer fees.
Foreign transaction fee: Charged whenever you make a purchase overseas, typically between 3% and 4% of your purchase. To avoid this fee, you can get a credit card without foreign transaction fees. If you ever travel overseas, you should absolutely have a card without these fees and preferably with an EMV chip.
Late payment fee: Charged if you don’t pay at least the minimum payment by the due date on your credit card statement, typically around $35. Avoid this by always making your payments on time.
Over-the-limit fee: Charged if your balance exceeds your credit limit. You have to opt in to this fee, per the Credit CARD Act of 2009. Keep in mind that if you choose not to opt into this fee, your purchases may be rejected at the register if you go over your limit".
As stated in point 3, one of the downsides of having a credit card is the temptation of overspending. Be 100% sure that you understand all of the risks involved with regards to having a credit card and that you are responsible enough not to let those ‘risk factors’ turn into ‘reality’.Debbie NelSubscribe(Source of information: Various written resources and nerdwallet)