What Is A Credit Card?
A credit card is simply a line of credit that a company provides to you in exchange for interest. When you use a credit card, the company that granted the card charges an interest rate on all of your purchases. These interest rates will vary depending on a number of factors including the bank offering the credit, your personal credit score and the length of time that you have held the card. The type of credit card may also have an impact on the amount of interest that you pay. A credit card is basically a short term loan that is expected to be paid back over a period of time. You will make monthly payments on your balance and when your balance is paid in full before the billing cycle date, which is typically around 30 days from purchase, you may not be required to pay interest on the charges.
Benefits Of Having A Credit Card:
Aside from helping you to establish or build good credit, credit cards can have additional benefits. Many cards offer rewards in the form of cash back or travel benefits that can come in handy if you tend to travel quite a bit for business or pleasure. Some cards may offer additional benefits like an extended warranty, discounts on rental cars and rental car insurance and other features. Establishing good credit is probably the main reason that many consumers opt to apply for credit cards. Good credit offers benefits of its own such as the ability to obtain loans at more favorable rates and lower rates on cell phone plans and car insurance.
Unsecured Versus Secured Credit Cards:
When applying for a credit card, it is essential to understand the differences between a secured and an unsecured credit card. These are the two main types of credit cards. Secured cards are those that require a deposit that is equal to the credit limit established on the card. You can make a direct deposit to the credit card account and once that is done, the credit card will be active and ready to use. Secured cards are typically recommended for consumers who have yet to establish a suitable credit history and those who are attempting to rebuild bad credit. An unsecured credit card is one that does not require you to make a deposit prior to use. The bank granting the card sets up an approved credit limit which you can use to make purchases and that limit is typically based on your credit history as well as your current income level.
Understanding Credit Card Interest:
Interest is how credit card companies make their money. Interest on your credit card is calculated based on the balance of the account after your payment date. If your balance is not paid off before the payment due date, you will pay interest on the daily average balance during any given month. The actual amount of interest depends on the credit card that you have as well as your past credit history and a few other factors. Some credit card companies charge lower than 20 percent interest while others, particularly those that offer cards to consumers with bad credit, may charge closer to 30 percent interest on purchases.
Credit Cards And Your Credit Score:
A credit card can help you to establish credit but it is important that you understand how this line of credit affects your overall credit score. There are five different factors that go into determining your credit score. These include payment history, credit utilization, the length of your credit history, the types of accounts that you have in your name and any new credit that you have recently been granted. Credit card utilization is one of the most damaging aspects to credit but there are ways to avoid this. If you have a credit card, it is important that you keep the balance low. Loan companies prefer to see less than 10 percent utilization on average. So for instance, if you have a credit card with a $1,000 credit limit, you should attempt to never have more than $100 in credit utilized on that card at any given time. Your overall debt balance should never be more than 30 percent of your credit limit for all loans and credit cards combined.
Should You Apply For A Credit Card?
Credit cards can be very useful tools to have at your disposal, provided you use them properly. You should pay strict attention to your credit limit and always ensure that you are not over utilizing that limit. Remember that most credit cards have annual fees and all of them charge interest for use, which is something that you want to keep in mind before making a major purchase with your credit card. Before applying, financial experts recommend doing a bit of homework and comparing different cards and credit card companies to find the one that offers the lowest fees and interest. Make sure that you also understand the fee structure for things like over the limit and late fees. When used properly, a credit card can come in very handy in the event of a financial emergency but they should always be considered a last resort when it comes to using them simply for cash withdrawals and bill paying. Play it smart and do your research before applying and you will find that having a credit card offers a number of perks.