One quarter of all Americans have never used credit, but are about to become the next targets of the banks and credit card issuers who see an untapped source of business. There has never been a more timely moment to explain how credit cards work for those who don’t understand the way they work, the possible downfalls or the gains to be made from using them wisely.
Credit cards are offered randomly via postal offers or applied for. They come with or without fees, with annual interest rates (APR’s) varying from 0% to numbers out of the phone book, and allow you to spend money you don’t have or money which you have and can cunningly leave in a high deposit account for the grace period extended by the card issuer. This is the number of days allowable between spending on your credit card and needing to repay the card issuer.
Those who use credit wisely always pay off the full balance each month, and thus never incur interest charges. The bank of course don’t want you to do this, so they give you the option of making a minimum monthly payment of a small amount, which then means they can charge you interest on the remaining part of your balance. If you only make the monthly payment then the real cost of the item you purchased has now cost you the actual cost of your purchase plus the interest charges.
If you fail to make your card payment on time then penalty fees will apply, typically around $15 to $39. These are legal charges which you must pay. All late or missed payments will be reported to the relevant credit bureau and thus have a detrimental effect on your credit score, something you do not want to see.
Also late payments or other breaches of the terms and conditions of the credit card usually then involve you transitioning to a penalty APR, which can be up to 35%, and you will then stay on this interest rate indefinitely or up to 6 months, depending on the card issuer. As you can see if you are not terribly organised with your bill paying, credit cards can be an extremely expensive way of spending.
Used wisely a credit card will give you an interest free period of spending and if you pay the full balance off on time monthly you need never pay a cent to the bank for using it. Always shy away from cards which necessitate any kind of application fee, annual fee or processing fee. Only those who have bad credit need to be paying any kind of fee as a means of improving their credit score.
When your credit score is very high you are able to take advantage of the best cash back credit cards on the market which will reward you with a rebate for each dollar you spend. This is your opportunity to make a small profit from credit card use, and the time to put as much of your monthly spending on your card as possible, so you are in effect being paid back for using it.
Credit cards are one path to quick debt, but they need not be. If you have never used credit before don’t take it and see it as an opportunity to buy things you cannot afford, as the costs can end up being exorbitant, and just not worth it when the debt collectors begin to hassle you on the phone. However if you handle credit well it is a wonderful tool for allowing you to make a small profit at the banks expense.