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Credit cards offer many advantages. There is the convenience of being able to buy needed items now and the security of not having to carry cash. You also receive fraud protection and in some cases rewards for making purchases.
With these advantages also come responsibilities. You need to manage credit cards wisely by understanding all of the card's terms and conditions; stay on top of payments; and realize the true cost of purchases made with credit. Using a credit card is like taking out a loan. If you don't pay your card balance in full each month, you'll pay interest on that loan.
The best way to maximize the benefits of credit cards is to understand your financial lifestyle - your money needs and wants. Once you determine how you'll use a credit card, it's important to understand all of the card's features including:
Some credit card issuers offer free, personalized and automatic alert messages to your phone and email to help you keep track of:
Understand Your Rights
Credit cardholders are entitled to protections:
Follow the 20-10 Rule -This general "rule of thumb" helps you understand how much credit you can afford. Credit cards are loans, so avoid borrowing more than 20 percent of your annual net income Credit Card Terminology
Understanding the language of credit cards will help you make informed decisions when choosing one. Below is a list of some of the most commonly used credit card terms.
The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees. The annual fee is part of the total cost of credit.
Annual Percentage Rate (APR)
The yearly interest rate charged on outstanding credit card balances.
An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to an amount of money owed.
A reporting agency that collects information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union.
The maximum dollar amount that can be charged on a specific credit card account.
A financial institution's evaluation of an individual's ability to manage debt. It is necessary to have a good credit rating if you intend to borrow money or have credit cards.
The time a borrower is allowed after a payment is due to make that payment without adding to the interest owed.
Credit card companies may offer low introductory annual percentage rates as special promotions. Be sure to fully understand how long the introductory rate will last and what the standard rate will be.
The lowest amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.
on all of your loans (not including a mortgage). And payments on those loans shouldn't exceed 10 percent of your monthly net income.
Credit Pros and Cons
As with anything there are advantages and disadvantages to using credit cards. Your informed use of credit cards begins with understanding these.
Immediate Access: Need a new set of tires? Credit can help with an expensive, unexpected emergency and give you the flexibility to pay it over time.
Security: Lose cash, and it's gone. Lose a credit card, and it can be cancelled. Also, if you report a lost or stolen card promptly, you're protected against its unauthorized use.
Record Keeping: Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
Convenience: Credit cards are accepted at more places than checks, and they're generally faster to use.
Bill Consolidation: Bills can be paid automatically via credit card, consolidating several payments into a single lump sum.
Rewards: Using a credit card with a rewards program may earn you benefits like free travel.
The main disadvantage to credit card usage is its cost to you in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of The True Cost of Credit Card Purchases
If you don't pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.
See how much extra you might pay on a $1,000 credit card purchase with varying interest rates:
Limit your spending to ensure that you can repay your credit card bill in full when it comes due each month.
To get a glimpse of your financial future, many businesses look at your financial past. This history is contained in your credit report. Your credit report determines everything from qualifying for a loan, the rate you'll pay on that loan, getting a new job, renting an apartment and obtaining car insurance.
What Is a Credit History?
Your credit history is a financial profile. It lets lenders, landlords and employers know how you have managed money in the past and helps them decide whether or not to do business with you. This history is contained in a credit report that is kept on file by the three independent credit bureaus listed below. It may include such information as:
Who Can See Your Credit Report?
Your credit report can and most likely will be reviewed by anyone planning to give you a loan or credit, such as banks and credit unions, credit card issuers, auto financing companies, and insurance companies. Your report also may be checked by landlords and potential employers. Some lenders may also use the details in your report to determine how much credit they are willing to offer you and at what rate. Anyone with a legitimate business need can access your credit report, though an employer (or prospective employer) typically requires your written consent to do so.
Beware of "Fast Fixes" For Accurate Credit Problems
If you’ve had any late payments, foreclosures, or repossessions, this information stays in your credit report for up to seven years. If you’ve filed for bankruptcy, this information can stay in your report for up to 10 years.
Some companies claim they can "fix" such problems for a fee. However, it is legally impossible to alter an accurate credit history. If you find yourself in financial trouble, contact a member agency of the National Foundation for Credit Counseling (NFCC), the nation's largest national nonprofit credit counseling network, by calling 1-800-388-2227 or visiting www.nfcc.org.
Credit Bureau Contact Information
Once a year, it’s a good idea to check your credit report for accuracy, and you can do so for free through the three major credit bureaus. Get your reports at www.annualcreditreport.com or by contacting the bureaus directly: