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 1.
Types of Credit Card Accounts
Credit grantors generally issue three types of accounts. The basic
terms of these account agreements are:
- Revolving Agreement (Typical Credit Card Account)
You may pay in full each month or choose to make a partial payment based
on the outstanding balance. If you make a partial payment, you will
be charged interest (a "finance charge") on the portion of
the balance you do not pay. Department stores, gas and oil companies,
and banks typically issue credit cards based on a revolving credit plan.
- Charge Agreement
You promise to pay the full balance each month, so you do not
have to pay interest charges. Charge cards and charge accounts with
local businesses often require repayment on this basis.
- Installment Agreement
You sign a contract to repay a fixed amount of credit in equal payments
over a specific period of time. Automobiles, furniture, and major appliances
often are financed this way. Personal loans usually are paid back in
installments, too.
2. Compare Credit Cards
Credit card issuers offer a wide variety of terms. When you see credit
card offers, consider and compare credit cards terms, including the
following, before you select a credit card:
- Annual Percentage Rate (APR)
The cost of credit as a yearly interest rate. Low interest credit cards
are a good choice for those who plan to maintain a balance on their
account (not pay the full amount each month).
- Free or Grace Period
Allows you to avoid any finance (interest) charge by paying your credit
card balance in full before the due date. If there is no free period,
you will pay a finance charge from the date of the transaction, even
if you pay your entire balance when you receive your credit card bill.
- Fees and Charges
Many credit card issuers charge an annual fee for granting credit to
you ($15 to $55 for most cards, and from $75 on up for premium gold
and platinum cards); many also charge a fee for a cash advance or if
you fail to make a payment on time or if you go over your credit limit.
Some charge a flat monthly fee whether or not you use the credit card.
If you pay credit card bills in full each month, the size of the annual
fee or other fees will be more important. If you carry a balance, the
APR and the method of computing your balance are key terms to consider
as you compare credit cards.
Obtain all credit card terms and fees in writing, including whether
a deposit is required.
Apply directly to credit card issuers. Do not give money to a company
that offers to get you a credit card for a fee - you may not get a card
or your money back.
Beware of "credit cards" that only allow you to buy from their
own catalogs.
Beware of companies that promise instant credit, or that guarantee you
a credit card "even if you have no credit history." No one
can guarantee you credit in advance.
When shopping for a credit card, you probably will want to look at other
factors besides costs - such as whether the credit limit is high enough
to meet your needs, how widely the card is accepted, and what services
and features are available under the plan. You may be interested, for
example, in "affinity credit cards" - all-purpose credit cards
that are sponsored by professional organizations, college alumni associations,
and some members of the travel industry. Frequently, an affinity card
issuer donates a portion of the annual fees or transaction charges to
the sponsoring organization, or allows you to qualify for free travel
or other bonuses.
3. When To Use Credit Cards
Credit cards give you the possibility to buy things without carrying
large amounts of cash with you. That makes them very convenient for
everyday use.
Using a credit card for a short term, unsecured loan can be a good
way to take advantage of your financial opportunities. But credit cards
are often expensive as a source for long-term funding. Therefore it's
recommended that you always try to pay your credit card bills in full
each month to avoid interest expense.
- Use Credit Cards As a Free Loan
The shortest loan you can give yourself is from the time of purchase
to the payment date of the next credit card bill. That is if you chose
to pay of your credit card debt in full each month. This way you avoid
all interest expense and have basically given yourself a free loan.
- If You've Got Credit Card Debt, Make A Plan To Pay It Down
If you make an investment in a new dishwasher, car or computer, you
may not have the financial means to pay off the entire credit card bill
the same month. In those cases it's highly recommended that you make
a plan to pay down your credit card debt in three to six months. Write
down the plan to avoid the temptation of "forgetting" to pay
back.
- Use Your House To Lower Your Interest Payments
If you think it's going to take a longer time for you to pay of the
debt, maybe a year or more, you should consider alternative forms of
financing. If you need long-term credit and own a house, you should
consider increasing your mortgage or taking a home equity loan, which
will give you a significantly lower interest rate in return for you
putting up your house as collateral. There are different loan options
available, and you should consider using them instead of your credit
card for long-term credit.
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