Credit cards are popular already and, they become more and more popular each and every year. There is however, an unfortunate downside to this. More and more American households are being overwhelmed by debt! Is this because credit cards are a trap? No! Credit cards are great financial tools. The only problem is that a very small percentage of their users understand how they work and how to use them properly. With that said, here are some vital factors you should know about credit cards and how to use them:
What Are Credit Cards And Where Did They Come From?
Credit cards are pretty handy pieces of plastic these days. They contain a small magnetic strip that allows your lender to track your purchases and allocate them to your account. Each number, letter and sign on your credit card is one that helps to determine who is responsible for the debts accumulated on these cards.
They were created as a test after high levels of supply in the lending industry forced the pie to be sliced to thin. McNarma of the Hamilton Credit Corporation came up with the idea at a lunch with a colleague. At this lunch, they discussed one of his clients who couldn’t pay his loan back because he was allowing his friends to use his charge card. The friends couldn’t pay back fast enough! Because charge cards could only carry a balance for 1 month, this man had to try and come up with the money too soon and was unable. By allowing consumers to carry a balance from month to month who make consistent monthly payments, McNarma could help to protect more of his clients!
How Lenders Make Money With Credit Cards
We all know that credit cards are not free! The truth is, they are a service provided by lenders. As with any service, they come with fees. Lenders make their money through 2 sources when it comes to lending through credit cards. The first and most important source of income for lenders is your interest rates. Credit cards come with 4 different types of interest rates in most cases. Here they are:
Promotional Interest Rates – Promotional interest rates are incredibly low, short term interest rates. These rates are designed as a tool to attract new clients or keep existing ones.
Standard/Purchase Interest Rates – The standard interest rate is the long term interest rate that you will most likely find yourself paying on the vast majority of your balance. This interest rate is charged to any balances acquired through standard purchases. A standard purchase is any transaction where products or services are exchanged for a swipe of your card.
Cash Advance Interest Rates – Cash advance interest rates will only be charged to balances accumulated through cash transactions. Cash transactions include ATM withdraws, cash back, wire money transfers and any other transaction where a credit card is used without the return of products or services.
Default Interest Rates – These are the rates that I hope you never have to pay. Default interest rate are the highest interest rates that you will ever pay on a credit card and for good reason. These interest rates are a punishment! If you default on the terms of the agreement you make with your lender you will be charged the default interest rates. Defaults include late or missed payments, spending more than your credit limit, sending in a check that can’t be cashed, ect.
Protecting Yourself From Credit Card Related Fraud And Scams
Although it may not have happened to you, credit card theft and fraud are very real things and it is important to protect yourself. To learn more about protecting yourself, read this article.
Keeping Your Accounts In Good Standings And Paying Less Interest
Step #1: Always Make Your Payments Early: I love getting my paycheck every Friday but, if my boss decided to surprise me and give me my check a few days early! This is the same with your lenders. If you pay early, you have a better chance of getting your interest rate reduced as your credit score improves, your lender will most likely be more willing to help you in times of financial hardship and, you can avoid last minute emergencies that can come up and cause you to be late. The truth is, only good things can come out of making your credit card payments early.
Step #2: Never Make Minimum Payments: Not only will this help you to keep your account in good standings, it will help you to avoid future interest by paying your principle balance down faster! The truth is, your minimum payment is the minimum amount of money that your lender is willing to accept as a payment on your credit card debt. It is by no means the maximum! It is a best practice to get in the habit of making at least double your minimum payments each month. If you do, you will not only save tons of money in interest, your credit score will show great improvements!
Step #3: Keep Your Balance Below 50% Of Your Credit Limit: It is great to have available credit for emergencies but, there is more than 1 reason for you to keep your balance below 50% of your credit limit. The other is to protect your credit and keep your interest rates low. The reality is, when consumers are facing financial hardships, they often spend more than 50% of their available credit in an effort to survive. If the hardship gets too bad, the consumers won’t be able to pay back their debts. Therefore, by spending more than 50% of your credit limit, you become more of a risk to lenders and may experience increases in your interest rates!
Step #4: Keep Your Balance Below 15% Of Your Annual Income: Sometimes, 50% of your credit limit may still be too much to spend. When you spend more than 15% of your annual income, you run a strong chance of forcing yourself into a future financial hardship. Therefore, even if 50% of your credit limit is more than 15% of your annual income, you should cap yourself at 15% of your annual income to protect your future financial stability.