If you're like most consumers, you may be dependent on credit cards. That's understandable because they offer convenience, enable you to take advantage of opportunities, and can get you through emergencies. Establishing credit is also a must if you plan to ever borrow money to buy a car or home. However, credit can also get you into trouble. At best, credit cards can make it difficult to stick to a budget. At worst, they can tempt you to overspend to the point of not being able to pay your bills. To enjoy the benefits of credit and avoid the potential pitfalls, you need to understand the basics of getting, using and managing a credit card.
Credit cards allow you to buy things and pay for them over time. But remember, buying with credit is a loan — you have to pay the money back. And some issuers charge an annual fee for their cards. Some credit card issuers also provide "courtesy" checks to their customers. You can use these checks in place of your card, but they’re not a gift — they're also a loan that you must pay back. And if you don't pay your bill on time or in full when it's due, you will owe a finance charge — the dollar amount you pay to use credit. The finance charge depends in part on your outstanding balance and the annual percentage rate (APR).
Do You Want a Credit Card or a Charge Card?
With a traditional "credit" card, you charge items on your account and receive a bill later, which you have the option to pay in full or in part (at least as much as the "minimum payment due"). If you don't pay the account in full, the remaining balance will carry over to the next month and you'll be charged interest on it. This is referred to as revolving credit.
The other type of card, often referred to as a "charge" card, doesn't allow you to carry a balance from month to month; you have to pay off the total balance when you get your bill. These cards offer the convenience of plastic without the danger of getting into debt or paying high interest charges. American Express is a good example of this type of card.
Both kinds of cards are offered under a variety of labels (gold, platinum, premier, and the like), each one offering different features and benefits. The gold and platinum types of cards are typically offered to consumers who have an excellent credit history.
The Fine Print
When applying for credit cards, it’s important to shop around. Fees, interest rates, finance charges, and benefits can vary greatly. And, in some cases, credit cards might seem like great deals until you read the fine print and disclosures. When you’re trying to find the credit card that's right for you, look at the:
Annual percentage rate (APR) — The APR is a measure of the cost of credit, expressed as a yearly interest 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" — the rate applied to your outstanding balance to figure the finance charge for each billing period.
Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators — called indexes — change. Because the rate change is linked to the index's performance, these plans are called "variable rate" programs. Rate changes raise or lower the finance charge on your account. If you're considering a variable rate card, the issuer also must tell you that the rate may change and how the rate is determined.
Before you become obligated on the account, you also must receive information about any limits on how much and how often your rate may change.
Grace period —
The grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have 25 days from the statement date, provided you paid your previous balance in full by the due date. The statement date is on the bill.
The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away. If your card includes a grace period, the issuer must mail your bill at least 14 days before the due date so you’ll have enough time to pay.
Annual fees —
Many issuers charge annual membership or participation fees. Some card issuers assess the fee in monthly installments.
Transaction fees and other charges —
Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee if you use the card — or if you don't.
Customer service —
Customer service is something most people don’t consider, or appreciate, until there’s a problem. Look for a 24-hour toll-free telephone number.
Unauthorized charges —
If your card is used without your permission, you can be held responsible for up to $50 per card. If you report the loss before the card is used, you can’t be held responsible for any unauthorized charges. To minimize your liability, report the loss as soon as possible. Some issuers have 24-hour toll-free telephone numbers to accept emergency information. It’s a good idea to follow-up with a letter to the issuer — include your account number, the date you noticed your card missing, and the date you reported the loss. Keep a record — in a safe place separate from your cards — of your account numbers, expiration dates, and the telephone numbers of each card issuer so you can report a loss quickly. (Information courtesy of the FTC)