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Credit Cards

Credit cards is an option in which you can apply for to obtain money. We emphasize that  it is not a cash substitute, rather a loan made to the bank. How a credit card works can be complicated because it simply is not given to you for free. When you apply for a credit card, you make a credit agreement with the issuer of the card. This agreement will usually contain how and when you should pay back the amount of money you used in the credit card, what the interest rate is, etc. If you do not follow these agreements, termination, bad credit scores and/or other consequences will occur.

If you are planning on having a credit card, here are some facts and keywords you need to know:

Credit Limit:  There is a credit limit that a credit card company gives in which you cannot exceed. Depending on your ability to pay your debt, your credit limit may increase. Once you pay back your balance, you will be able to use your card again until it reaches your credit limit. 

Grace Period:  This period is usually about 28 days. The grace period allows you to pay your bill without any penalities. If you pay all of your balance within the grace period, you will not have to pay interest.

Interest Rates:  Because you are borrowing money, the credit card company must issue an interest rate. When you purchase an item, it is actually the issuer who pays the store. On average, the interest rates for credit cards are 18% to 24%. Your interest rate will depend on your credit history. If you do not have a credit history, look for low interest rates.

Late Fees:  If you do not pay your balance within the grace period, you will have to pay a late fee. Late fees can go as high as $35.

Types of credit cards:

  • Bank cards (Visa and Mastercard)
  • They are issued by banks. They are accepted generally anywhere from restaurants to the purchase of clothing.
  • American Express or Diners Club:
  • Secured credit cards can be found in selected banks. These are usually given to those who have bad credit history or are building their credit history.  This credit card is secured through a money balance such as a savings account. You will not be able to take out money in this account and if so, your credit card will be terminated. Your bank can withdraw from your account if you charge over your limit.

Credit cards can lead you to be financially independent. Helping you to build your credit history or in making travel plans are some examples of credit card use. But, before you obtain a credit card, make sure that you can manage your credit wisely. Plan your credit use. Set limits and rules for yourself when you receive your credit card. Setting rules will help you to practice your spending. You should also be aware of what you can and cannot afford. Budget wisely. Think of it this way; every dollar that you spend on paying your credit charge is every dollar less on your future expenses/purchases.

Having a credit card may be convenient at the time of use, but total cost of charges will eventually add up. If anything, apply for installment loans when you need money to make purchases. You can also use that to pay back your credit charge, but keep in mind that it is still a loan. Credit unions and banks offer installment loans. Installment loans in most cases have lower finance charges then credit card loans.

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