A credit card is a financial tool, and just like any tool, its effectiveness depends on how well you use it. For it to be useful, credit card users need to understand their basic principles.
Who is eligible to acquire a credit card? What are the credit card’s features? How do you become a responsible credit card user? How do interest and late fees work? These are all important questions everyone should understand.
If you can answer the above questions, then you are likely ready for your credit card journey. But if you are not sure, then this article is for you. Continue reading to learn more about how to be a great credit card user.
1. Fees and Penalties
Interest, fees, and penalties are the means your bank uses to make money. Charges from fees and penalties can accumulate quickly and can easily land the cardholder in debt.
For example, when you exceed the due date depicted in your monthly credit card statement, then you are charged a late fee. Also, when you postpone your credit card balance to the following month, the bank charges you interest.
Other fees and charges that can come with credit cards include annual fees, foreign transaction fees, balance transfer fees, cash advance fees, over-limit fees, and more.
Pay your statement balance in full each month to keep interest charges at bay. Make sure to pay on time to avoid late payment charges.
Make sure to always review your card’s terms and conditions to understand all the fees and charges that could be charged to your account.
2. Credit Card Type
There are a wide range of different card types on the market, and an issuer may offer one or all of them. Sometimes an issuer can offer different versions of the same credit card.
For example, a basic card offer provides no extra perks but offers low-interest rates. A rewards credit card gives rewards for each purchase made.
Premium credit cards are loaded with benefits and perks, but they often charge a higher annual fee. Lastly, a balance transfer credit card accepts an introductory balance transfer interest rate that is typically lower than other cards.
3. Credit Limit
This is the maximum amount of credit that a bank or any other financial institution/lender extends to a client. The lending institution establishes a limit on a line of credit or a credit card.
A lender determines the credit limit based on the information the client provided in the application form. It includes personal income, credit rating, and loan repayment history, and other factors.
Knowing and respecting your credit limit will allow you to make better spending choices. Only charging what you can afford to pay back and keeping your credit utilization rate low will make sure you avoid debt and maintain a good credit score.
4. Perks and Rewards
Rewards programs award rewards based on the money you spend using your rewards credit card. For instance, the rewards may be one point per dollar.
Rewards keep accumulating and can be redeemed for cash, gift cards, and even travel. Alternatively, they can be redeemed for merchandise in the reward program’s online shopping mall. The exact details depend on the card issuer.
Perks include additional tools and features that benefit the credit card user. These tools can help keep a record of your spending and allow you to download your transaction history. They also provide credit card benefits like free car rental insurance and free warranty extensions.
5. Grace Period
The grace period is a set time after the due date during which payment can be made without penalty. Usually, financial institutions provide a grace period of 15 days. This duration will be mentioned in the fine print of your card.
A grace period allows a client or borrower to delay payment for a limited time beyond the due date. During the grace period, no penalties or late fees are levied onto the client. Also, payment during this period does not cause a black mark on the borrower’s credit report.
Bottom Line
When you understand the above credit card features, you can effectively use a credit card. Also, when you appreciate that ultimately, credit cards are out there to make money for banks, you will minimize your spending.
When you pay your bills on time, avoid carrying forward a balance, and avoid being an impulsive buyer, your credit card journey will be pleasant. Credit cards are not to help you acquire what you can’t afford to pay for. They are to time-shift money for you so you can purchase the necessities of life.