Though credit cards have been getting a lot of bad press owing to the cost of credit debt one might potentially get into, they are an indispensable tool that helps us manage our finances smartly if used responsibly. They can also be used to build a good credit history and generate some returns in the form of cashback or rewards. Providing us a greater purchase power, they will also be able to bail us out during emergencies when it gets hard to arrange cash at short notice.
But to achieve this positive relationship with credit cards, one must learn how to use them properly. It’s also extremely important to understand some of the basic things about credit cards before we start to use them. This will not only help you keep out of credit debt but also enable you to take full advantage of the promised features. After all, if you are going to be using the credit card and paying off what you owe regularly, won’t it be a good idea to get benefitted for your financial discipline?
So, let’s dive right in and find out what are some of the basic things you need to know about credit cards. Once you internalize this information, you will be well on your way to become a power user of credit cards.
This is the first thing you need to know about your credit card. Also called the Annual Percentage Rate (APR), this is the cost you will pay the company for borrowing if you do not clear your entire outstanding every month. The interest on your card outstanding is obtained by dividing the APR by 365 which yields the periodic interest rate. This interest rate is then multiplied with your average daily balance and divided by the number of days in that month to calculate the interest for the month. In short, the higher the APR, the more interest you will end up paying. So, always compare cards and go for ones with a lower APR if there are no other beneficial features.
Referred to as the grace period, this is the time the credit company gives you to pay off the outstanding without any interest. Essentially, this period denotes the length of time you can get an interest free loan in the form of credit purchases before you need to pay the amount you have spent, usually on or before your bill due date. Typically, the grace periods across most cards will be from 20 to 30 days and will depend on your card’s billing cycle.
At the end of every billing cycle, the credit company or bank will sum up all your purchases for the month and send you a credit card statement. This statement will tell you the total outstanding you owe the bank, the minimum amount you need to pay (usually 1 to 3% of your balance plus any interest accrued on previous balance plus late payment charges, if any), and the bill due date. It is always a good idea to clear all the balance, if you can, or at least the minimum payment amount well before or on the bill due date to avoid any late payment charges and interest.
Sometimes, credit cards may come with a very low APR but may have other charges like a high Annual Fee. This is the fee you will need to pay the credit company for using their card. Even if you have been very diligent in paying all your dues well on time every month, you will still need to pay this annual fee. Companies may also discount this fee for you for the first year or two after which you will need to start paying the fee. Always make it a point to specifically ask for the annual fee before you sign up for any new card and see if the card’s other benefits outweigh this fee. You might also be able to get the fee waived off if you avail of the credit card through your employer.
Other than the interest and annual fee, some of the other fees you need to be aware of are the late payment charges, cash advance fee (for withdrawing cash vis-à-vis spending at a merchant), over-limit fee, foreign transaction fee and returned cheque/payment fee. Understand these charges and see if it is possible to avoid them when you can.
This is the loyalty points the credit company may award you post every purchase. Some purchases at specific merchants may also earn you back a small percentage of what you spend as cashback. However, not all cards will offer these so check the features well before using a card.
Irrespective of whether you use a credit card for your expenses or debit/cash, it is always a good idea to track all your expenses on apps like NumReceipt to inculcate the necessary financial discipline. This will go a long way in ensuring you stay out of debt.
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