Credit Cards: Everything You Need To Know Before Applying [INFOGRAPHIC]

Credit Cards: Everything You Need To Know Before Applying [INFOGRAPHIC]
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I won’t be wrong in saying that in our day to day lives, credit card is considered one of the decisive products amongst all the available fiscal products. It’s not just a vague statement, you can easily see people around you making payments, for most of their expenses, using credit cards and I am sure you also do the same.

credit-cards

Credit Card Defined

Well, it can be defined as a tool. Whether it proves beneficial or harmful will depend on your proficiencies and the knowledge about the credit cards should be used. Modern credit cards are a rectangular piece of plastic, metallic alloy, and graphic that identifies a financial account. The front side of the credit card contains RFID (Radio Frequency Identification) chip, you have your account number beneath that chip, followed by the expiration date, and your name. When you flip the card, you get to see a magnetic stripe (often called magstripe) that will contain your signature and Security Code (CVV/CVC).

Credit Card Functioning

 A credit card is a pact between you and the bank or any other fiscal entity. Your first step would be apply for a credit card and if the credit history meet the bank’s standards you will get an approval. Entirely depending upon your bank or the card’s issue, the card might come with an annual fee. You will receive a bill, on a monthly basis, along with a credit card statement for which you will be asked to make a minimum payment on your balance.

Let us assume, you have decided to make the minimum payment, but this can lead to accumulate more debt because of the interest rate of the credit card. Well, you can save yourself from paying interest on your card, all you need to do is to clear off your balance before the month ends

Your Credit Score

Your credit score is a three-digit number that is based on the information in your credit report. It is one of the factors that lenders use to determine your creditworthiness when you apply for a new credit account. There are few things which negatively affects your credit score. A credit score is supposed to be about how you handle credit, so it seems counter-intuitive that non-loan actions can bring your credit score down.  Unfortunately, the reality is that even if you aren’t borrowing money, you could still be hurting your credit score. Here are 5 actions that can bring down your score .

credit-score

Credit Card Pros and Cons

Credit cards have its share of advantages and disadvantages. Let us share them in detail –

PROS

●        Credit history – One of the key benefits of having a credit card is that if you use it wisely, it can have a positive effect on your credit score. When you use your credit card on a regular basis and make timely payments, you can help in building a healthy credit history that sends a message to the potential lenders that they can trust you.

●        Help in saving money – Like we discussed above timely bill payments can improve your credit history, this can also help you in qualifying for low-interest on mortgages and cars, helping you to save significant amount of money.

●        Security – Probably, one of the key benefits of having a credit card is ‘safety’. When you carry heavy cash in your wallet, you always have a fear of losing it somewhere or it might get stolen. With a credit card, you don’t need to have those cash in your wallet.

●        Convenience – Nowadays, credit cards are accepted everywhere and it has taken the place of checks. In addition they are much faster.

●        Immediate access – If you like anything or in dire straits, you can use your credit card then and there.

●        Balance Transfer – Some credit card companies offer low interest rates. With the help of these offers, you can even move your balances to the lower-rate credit cards.

Related Read: Credit Card Debt Consolidation: 5 Smart Tips For Consolidating Debt

Now that we have discussed the pros, let us take a look at the cons as well.

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CONS

●        Overuse – If you want to revolve your credit, it makes it easier to spend beyond your means.

●        Teaser rates – There is no doubt that low introductory rates can be luring, but they don’t last for long. But, the moment these rate expires, the interest rate on your balance rise up significantly.

●        Documentation – When you have a credit card, you have to save all your receipts and ensure that you check them against your statement on a monthly basis. Moreover, before you actually receive a credit card, your bank will ask for various documents and paperwork that can be overwhelming at times.

●        Debt trap – When you have a credit card, you should know that it is just a form of borrowing. Credit cards are basically buy now and pay later, but there are risks attached to it. If you have forgotten paying off your balance in full each month, you will end up racking up the interest. Your credit card debt can therefore go out of hand, mainly if you are making minimum payment.

●        Hidden costs – It’s not just the interest rate that you need to take care of. If you are making late payment or have missed payments repeatedly, you will charged a fee. If you have exceeded your credit limit then also you need pay a penalty. So, it is imperative that you have tracked your spending and ensure that you have paid all your bills on time.

●        Make a right choice – Ensure that you have made a right choice for a credit card, or else you might end up paying more than what you need. If you have plans to spend extravagantly, make sure that you look for a 0% purchase card.

Related Read: Top 5 Credit Card Scams In 2016    |      Credit Card Hardship Program

Why use credit cards?

With the advanced technology and communication happening behind the scenes to help you make the payments using your credit card, a thought must have crossed your mind that what makes the businesses to use credit cards. First, when the merchants offers you convenience and more spending power, they can flourish their business. The banks or the fiscal entity charge interest from you when you carry a balance that piles on from month to month, which is profitable for them. Every time you make a transaction, the card issue gets a fee from the acquiring bank and the bank get to earn a fee paid by the merchant. Certainly, you are benefited too, you get to enjoy a simple way of paying for the varied things. In addition to all the convenience and flexibility, you also get to build your credit on using your credit card responsibly.

Using a credit card responsibly

– If you have a credit card, it is imperative that you have used your card responsibly. In order to do that, the first thing you have to ensure is to make timely payments.

If somehow you have failed to make the payments, you will have to face the following consequences –

●        Even if you have gone one day ahead of your due date, you will have to pay a late/missed fee and it usually ranges from $15 to $35. If you are continuously missing your payments, it will have a negative impact on your credit history and you will face difficulty when you try to secure a loan.

●        If you make late payments, the creditor has the authority of increasing your interest rate. This increase in interest rate also increases your finance charges that make it difficult to carry a balance and extending the time that it takes to pay off the balance.

●        If you think that the interest rate is too high, you can have a word with your lender. If you have maintained good history with the company, you can also have lower interest rate and in some cases, your annual fee can also be exempted.

●        Your credit history is being used by the creditor in deciding whether you are worthy enough for a loan or a credit card. Ensure that you have the access to your credit report and it is you who has the authority of making improvements in your credit score.

Related ReadSecured Debts vs Unsecured Debts   |   Credit Card Debt Relief Programs   |   Unsecured Credit Cards For Bad Credit

Are credit cards for everybody

– For this question, straightway there is an NO. Let us take the example of tools, if they are given to a novice, it can prove hazardous. Let us say if you have personality traits like lacking self-control, not ready for the personal responsibility, in a process of repairing your finances, then make sure you avoid using credit cards till the time you have made yourself both emotionally and mentally prepared.

Credit card glossary

– This section will cover all the important terms that are related to credit cards and it is important that you are familiar with them –

●        Adverse credit – This is related to the people having a low credit score that is the result of the poor management of the debt.

●        Affinity Cards – These cards are offered via an alliance between the leading banks and NGOs (non-profit organizations). Whenever you buy something, using this card, your bank will donate some percentage to the nonprofit partner.

●        APR (annual percentage rate) – It is a numeric representation of your interest rate. While choosing credit cards, APR comes handy in comparing how expensive a transaction will be on each one.

●        ATM cash withdrawal – If you are using your credit card to withdraw cash from an ATM, it can prove costly to you. The interest rates on the cash withdrawals are quite high as compared to what is being charged for the balance transfer and purchases.

●        Credit card issuer – It can be your bank or a financial entity from whom you are getting your credit card. Some of the leading names are – Citibank, Bank of America, and Wells Fargo.

●        CCA – Also known as Consumer Credit Act. It got updated in 2006 and is legislation that is framed for the protection of the consumers while they are borrowing the money.

●        CCA: Otherwise known as the Consumer Credit Act 1974. It was updated in 2006 and is legislation designed to protect consumers when they are

●        Credit limit – When it comes to the credit card, it is one of the things that matters the most. The credit limit on your credit card is the highest amount that you can borrow on your credit card without facing any penalty. It also affects how much you can spend on your credit card.

●        Credit Rating – When you borrow money, the lenders will first have a look at your credit ratings in order to determine your suitability.

Related Read: Credit Card Debt Consolidation For Bad Credit

Credit Rating

●        Interest – It is applied by the banks when they lend money. The interest rate is calculated as a percentage of your balance.

Types of credit cards

Credit cards are of various types, let us get to know more about these cards –

Standard credit cards –

Such cards can be seen anywhere and everyone has it in their wallets. These cards are offered by the banks and various other financial institutions. They are unsecured in nature, this means there is no need to surrender a security amount in order to prove that the money can be repaid. The method that is used to calculate the percentage rate for these cards can vary.

Reward Cards –

 

There are credit cards that offer reward programs influencing your daily spending. There are various perks such as discounts, cash, or points. On the negative side, these cards come with various limitations. This type of credit card is an ideal choice for all those people who pay off their balances every month.

●        Balance Transfer Credit Cards – These cards help you to transfer a credit card balance, with high interest, onto a credit card with a low-interest rate. Today, the market is flooded with balance transfer credit cards offering low annual percentage rate of 0%.

Balance-transfer-credit-cards

●        Reward credit cards – These cards offer you with an opportunity to receive incentives when you use a credit card of a particular company for buying. Most importantly, in order to receive approval, you need to have impressive credit. Travel reward cards are the favorite for the regular travelers as they get to earn free hotel stay, free flights, and various other perks.

●        Student Credit Cards – These cards are specially made for the college students seeing the fact that the students have either no or minimum credit history. A first-time credit card applicant will surely have a gala time after being approved for the student credit card as compared to other credit cards. These credit cards come with additional benefits such as low-interest rates on balance transfer, rewards but such features don’t have much relevance for all those students planning to have their first credit card.

Related Read: Credit Card Hardship Program: Little Known Debt Relief Alternative

best-college-student-credit-cards

●        Secured credit card – As per this type, the line of credit is secured by a set amount paid by you to the bank or lender. The amount to be deposited will vary mainly according to your credit history and the bank you are working with. So, let us say that if you are looking for a credit line of $2,000 then you need to put down a deposit of $2,000.

●        Unsecured credit cards – This type is quite common. These credit cards are not secured by any collateral. Issuers of these cards should use ways like garnishment or courts to collect the unpaid debts. You will qualify for these cards on the basis of your credit history, earning potential, and fiscal standing.

2016s-best-unsecured-credit-cards

●        Prepaid cards – These cards are similar to debit cards, however, they are not fixed with any checking account. For this type, you need to load some amount on the card in order to use it. The purchases are extracted from the card’s balance. Only when more money is added to the credit card that the spending limit gets renewed. You don’t have to pay any finance charges as the balance is extracted from the deposit.

Frequently Asked Questions –

What is a Grace Period?

A- It is the amount of time you have for making the payment for your balance in full prior to the addition of the finance charge. Most of the owners prefer longer grace period as it offers more time for the payment of the purchases before being facing any interest.

What are the chances of getting approval for a credit card?

A – If you have been responsible with the credit in the past, there are high chances of getting the approval. In case you have a bad credit qualifying for a credit card can be difficult. It is not that you won’t get a card but the fees and the APR will be on a higher side, moreover, the credit limit will also be quite low.

How many credit cards do I need?

A – It varies from person to person, but it is advisable to avoid having more than one credit card. There are people who like to keep multiple cards as they like to have a high credit limit, want to have better terms, and better rewards. Make sure that you know that if you have too much credit, it makes it difficult to have credit in the future.

Does it hurt my credit if I apply for more than one credit card?

A – Whenever you apply for a credit, a credit inquiry will be there on your credit report. Receiving increased number of inquiries is considered risky and it may lead to lowering your score. These inquiries will have less impact on your credit score when you have more information about your credit report.

In case you have a short credit history, it can considerably lower your score by few points. Before applying for a credit card, make sure you have done research work to determine which credit card suit your financial situation

Is there any need to pay an annual fee?

There are some credit cards which charge an annual or membership fee for using their card. This fee is applicable whether you are using the card or not. The fee, charged by the companies, can vary from $25 to $100 a year. But, not every credit card charge an annual fee.

What if I don’t make timely payment for credit card bill?

If you are making a minimum payment, the remaining balance along with the interest gets added to your next bill and it will negatively affect your credit score as well. If you have failed to make a minimum payment by the due date, you will have to pay a late fee and in the worst case, the company might increase your interest rate as well.

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