Using credit cards has become second nature for most people. Whether it is paying for a tank of gas or buying your morning cup of coffee, credit cards are the go-to method of payment. Credit cards are an excellent way to build your credit history, and even earn rewards depending on the type of card you have. On the opposite side, however, if you spend more on your credit cards than your budget allows for, you may find yourself in debt from compounding interest and fees. Before you make another charge on your card, it is important to understand these 7 credit card terms.
1. APR: The APR on your credit card is the annual percentage rate. This term refers to the amount of interest you are charged per year on the balance of each of your cards. APR can vary from 0% (most likely an introductory rate for new cardholders) to well over 20%. APR only applies if you carry a balance on your card, so by paying the full balance by your due date you will avoid paying hefty interest charges.
2. Annual Fee: An annual fee is a charge to your card on yearly basis, simply for owning the company’s card. Many credit card companies don’t charge annual fees, but one’s with decent rewards programs or other benefits may charge an annual fee from as low as $15 to as much as a few hundred dollars. Before applying for any new credit cards it is important to see if the card carries an annual fee.
3. Credit Limit: Credit limit, sometimes referred to as a credit line, is the total amount of money you are able to charge to your card. If your credit limit is $2,500, that means you can only spend that amount on your card before it is maxed out. Having a high credit limit can help your credit score, so long as you keep the balance low on your card. Your credit utilization rate, or the amount you owe versus your credit limit, is crucial when deciding your credit score. So although you may have a high credit limit it is important to keep your revolving balance under 30% of your credit line.
4. Finance Charges: This term refers to the amount of money you will have to pay your credit card company for carrying a balance on your accounts. This includes APR and other fees associated with borrowing money from your lender. Finance charges can be a flat-fee or a percentage of the amount you have borrowed. They can be based on the daily balance you carry on your card, or on the amount of your balance at the end of your billing cycle. Understanding how your credit card calculates your finance charges will help you save the most money in the long run.
5. Balance Transfer: Many credit cards offer you the opportunity to transfer the amount you owe to one card to a new card. This service can be very helpful if you want to pay off your debt quickly and avoid interest charges. Some credit cards offer low introductory APR rates for 6 to 12 month periods of time. If you wish to consolidate your debt this is a great option, but remember to pay off the amount you owe before the introductory period is over and a new APR kicks in. It is also important to note that balance transfers may incur an additional fee.
6. Unsecured Credit Card: These types of cards are the most common kind of credit card. Unsecured credit cards are not backed by any kind of collateral. This means you qualify for them based solely on your credit history and salary.
7. Secured Credit Card: A secured credit card on the other hand, is a special type of credit card where you put up a deposit in order to be issued a credit line, for generally the same amount. This is a great option for people with a limited credit history, no history at all, or poor credit. You can use this kind of card just like any other, but if you do not make your payments the lender will simply keep your deposit. Just like any other credit card it is important to understand the amount of interest you will pay and any other fees that you may incur for using the card.
Credit cards are an excellent resource for building a solid credit history and managing a budget, but it is important to understand all the different terms associated with them. For questions on building a good credit history, contact us today!