Managing Credit Cards Effectively
Credit cards are almost a necessity in today’s society. It has become harder and harder to get through life without plastic. If you want to make purchases over the Internet, guarantee a hotel room, or perform a wide variety of other financial transactions, a credit card is essential. And, the truth is, credit cards can be a valuable financial tool, provided you manage them effectively. All credit cards are definitely not created equally and the first step to effective credit card management is shopping around for the right card in the first place. The factors to take into consideration are interest rates, annual fees, other fees, grace periods and aspects like cash back or other rewards for using the card.
Interest Rates One of the incentives credit card companies use to try to get customers to choose their card over all the others floating around is to offer a special introductory interest rate. An introductory rate sounds good, but can be a trap for the unwary. Generally, the customer opts for the low introductory rate, runs up the charges on the card, and is not able to pay the card off by the end of the introductory period. That’s when the ‘after-introductory’ rate kicks in, and you find yourself paying from 12-20% on your credit card debt. When you are interest rate shopping, you also need to make sure that the interest rate won’t take a substantial jump if you are late with a payment.
Some companies bump the interest rate if your payment is even a day late, and the change is permanent. You don’t ever go back to the lower rate. Fees Be sure to read the fine print. Credit card issuers have gotten fairly ingenious about hiding a variety of fees that the casual consumer, who doesn’t bother to read all of the credit card details, may end up paying and not even be aware. Annual fees are fairly straightforward. There are cards that charge annual fees just for the privilege of carrying the card, and there are others that don’t charge annual fees at all. An annual fee is not necessarily bad, depending on the perks that go along with it. If there are none, don’t bother with cards that charge an annual fee. On the other hand, if you have no credit history or a bad credit history, you may have to get a card with an annual fee, and use it until you can qualify for a different one. In most cases the annual fee can be rolled into the monthly payments and doesn’t have to be paid up front, although that is not always the case.
Watch out for hidden fees like closure fees. Some companies actually charge you for closing your account. The only way to avoid closure fees are to carefully read all of the credit card’s terms and conditions before accepting it and make sure that no such fee is attached. Late fees can be charged when your payment is late, sometimes even as little as one day late. These fees can vary, but again are disclosed in the credit card terms, so at least you are aware and can avoid them by keeping your payments current. If you travel, beware of overseas transaction fees. Some card issuers have begun to charge a 1-2% fee off the top for using the credit card overseas. Grace Periods If you plan on paying off your balance in full each month to avoid incurring any interest fees, make sure your card has a grace period that allows you to do so. Some cards begin charging interest at the time of purchase. In that case, even if you pay off your balance every month, you will still end up paying interest to the credit card company.
Make sure there is a grace period on your card – that’s the amount of time you have before you start incurring interest charges and it’s usually something like 25-30 days. Be sure to read the card disclosures carefully so you will know if there is a grace period during which you pay no interest, or not. If you don’t pay off the balance of your account each month, grace periods really don’t make too much difference because you will be paying interest anyway. Other Benefits Some credit cards offer additional benefits for using their card – things like airline miles or a percentage of cash back on all your purchases. If you travel a great deal or routinely use your credit card for all purchases and then pay them off before the end of the month, these can be valuable additions. However, be sure to read all of the fine print and make sure the perks aren’t costing you more in fees and interest than they are worth. If you can’t get by without a credit card, and very few of us can in this day and age, at least be aware of all the different types of offers that exist and choose the one that will benefit you most in the long run.
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