Credit Card Information You Need to Know
Here are some typical credit card questions and answers. It's information you need to know when using credit.
Q: What happens when I use my credit card?
- When you "charge" something you are actually taking out a loan from the bank that issues the credit card. The amount of the loan is the amount you charged.
- The bank then pays the merchant the amount of your loan minus a transaction fee. The fee is often about 3% of the purchase price. The bank keeps this fee as the price the merchant pays for the privilege of have the charge card account.
- Every month you receive a "statement" from the bank asking you to pay money on your loan. This is your credit card statement.
- If you make full payment the bank does not charge you for the loan.
- If you do name make full payment, the bank gets to charge you a high interest rate, often 17% to 19% or more.
Q: What is a grace period?
- For a credit card, a "grace period" is the number of days from the time your purchase is posted to the credit issuer to the date you can pay for the purchase without interest charges. Most cards have a grace period of 20 to 25 days.
- If you fail to pay your complete balance in any month, there is usually no grace period for purchases until you again pay off your balance in full. When you owe a balance, interest is charged as soon as the purchase is posted to the credit issuer.
Q: Should I get a credit card with an low introductory interest rate?
- Many people move their balances from existing credit cards to a new card just to get a lower interest rate for the introductory period. This is often 6 to 12 months. This does reduce your interest payments on your debt for that introductory period.
- You should determine the ongoing interest rate of the new card after the introductory period is over. The ongoing interest rate may be higher than the interest rate on your other cards. Once the introductory period is over, you have several choices:
- You can move your balance to yet another card as the introductory period comes to an end.
- You can call the bank to see if your low introductory rate can be extended for a period of time.
- You can leave your balance where it is and pay the higher interest rate.
Q: How can I use my credit card with no interest charges?
- Interest is usually charged on purchases if you do not pay the entire balance in any month. To avoid interest charges, pay the balance in full each month. (Watch out--there are some cards without grace periods that always charge interest.)
- Interest is always charged on cash advances. These are considered loans and interest will be charged regardless of whether you pay your balance in full. To avoid interest, do not obtain cash advances from your credit cards.
Q: When does interest on my purchases start?
- Most credit issuers begin charging interest on the day your purchase is posted to you account. However, some will charge interest from the date of your purchase--even before they pay the store.
Q: What is a "secured" credit card?
- Most credit cards have a credit limit. The credit limit is often based on your credit rating and the faith credit insurers have in your ability to finally pay off your debt.
- Those who have a poor credit rating will often be required to provide a "security" deposit to "borrow money" on credit. The credit user maintains a bank account at the institution that issues credit. The credit limit on a "secured" credit card is limited to the amount in the bank account. The bank account "secures" the credit card debt in the same way that a home "secures" a mortgage.
Q: Is there a transaction fee associated with cash advances?
- Most credit issuers charge both interest (finance charges) as well as a transaction fee on cash advances. The transaction fee can often be up to 2.5% of the cash advance amount.
Q: I've got a card with a low monthly minimum payment requirement. Is this good?
- Some cards require you to pay only 2% or 3% of your balance each month. At an annual interest rate of 18%, if you pay only 2% of your balance, 3/4 of your payment is interest. Only 1/4 of your money goes toward paying for your purchase.
- Your $100 purchase could wind up costing you $400. That's $300 to the bank and $100 to the store.
- Yes, low monthly minimum payment credit cards are very good--for the bankers and other credit insurers. But, not so good for you.
What Credit Cards do I Qualify For?
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- Why moving credit card balances to low interest credit cards can save you money (page 52)
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- The three ways to pay down your credit card balances and which is best for you (page 69)
- How you can make "interest" work for you (page 17)
- How advertising influences you to spend more money and what you can do about it (page 10)
- Why the rich get richer and the poor get poorer and how you can move to the rich side (page 17)
- How the "Can I afford the payments?" culture has changed the way you think about credit and debt (page 22)
- Why banks are not necessarily your friend (page 23)
- Why written goals will save you money and how you can start writing your own goals (page 30)
- The only type of plastic cards you should carry (page 35)
- How to live like a millionaire for less than you think (page 24)
- The importance of budgeting and making targeted spending goals with easy to follow examples (page 36)
- How to create a personal budget (page 61)
- How to contact your creditors to reduce your interest rates (page 74)
- What to watch out for with credit counselors (page 77)
- How you can earn more money than you do now (page 82)
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