Understanding Credit Cards

Why is understanding credit cards important? Credit cards can be easy to get, use and abuse. The more you know about credit cards, the more you can use them to achieve your goals.

Credit cards: What they are and aren’t

• Credits cards are issued by banks, stores and other businesses to allow people to buy things on borrowed money. Credit cards allow you to pay all or only a tiny portion of what you borrowed each month. Naturally, this privilege comes at a cost – typically double-digit interest rates.
• Charge cards, on the other hand, are NOT credit cards. Charge cards must be paid in full each month. Debit cards, which look exactly like credit cards, are just a way of paying from your own checking account without writing a check. You’re not borrowing at all, so it’s not a credit card.

Credit card advantages

These days, many people prefer to pay for their purchases using credit cards. Here are 4 reasons why using credit cards can be a good practice:

• Credit cards help you build a payment history and credit history. If you’re thinking of financing a car or a house, it helps to have an established credit history.
• Credit cards are safer to carry than cash. If you promptly report a lost or stolen credit card, you’re usually protected.
• Credit card companies tend to be good record keepers. Many people use their credit card statements to analyze spending habits or keep track of tax deductible expenses.
• Credit cards are convenient. Most people carry their credit cards 24/7, which are faster and more convenient to use than checks.

Credit card drawbacks

Credit cards are tempting, if not downright addictive to some consumers. Here are 3 things to watch out for as a credit card customer.

• Credit cards are usually the most expensive way to borrow. Try not to carry a balance. Watch your rate every month and pay on time to avoid late charges.
• Credit card rates are subject to dramatic change. Late payments —even on other types of credit – can result in rate increases.
• Credit cards encourage debt. Minimum payments are designed to keep you paying for years, which can easily double the true cost of the item you put on the credit card. Whenever possible, pay off your entire balance every month or as much above the minimum payment as possible.