How do Credit Cards Work?
When you pay for something with a credit card, you are borrowing money from the issuer (bank, credit union, or other financial institution), with the promise that you will either repay it all or make the minimum payment requested when the bill comes. If you don’t pay it in full, the remaining sum will “revolve” – move onto the next month’s bill. Interest will be added to the balance, and will continue to accumulate until the debt is paid.
Example: You are charged $500 for school books and materials, but can only pay $25 a month. If the interest rate on your credit card is ten percent, it will take you one year and ten months to repay – plus $49 in interest. However, if the interest rate is 22 percent, it will take two years and two months to repay, plus $129 in interest.
How you use credit matters! If you want to finance a car, get a cell phone contract, rent an apartment, obtain a job, qualify for low insurance rates, and (one day) buy a home, you will need to treat credit right – not just now, but over the long term.
Credit Card Features
When shopping for any credit card, look for the following:
- A low-rate (APR) Visa. The lower the APR (the interest you are charged on balances), the less you’ll pay to hold on to debt.
- Long grace period. A grace period is the number of days (typically 15 to 30) you have to pay your bill in full before interest is added. The grace period usually applies only to new purchases, but in some cases (check the application!) is completely eliminated if you carry over a balance from a prior month.
- Low cash advance fees. Though you may be able to take cash out from your credit card, it is best if avoided. Average service fees are between two to three percent of the advance, and interest begins immediately.
- No annual fee. If you are new to credit you may have to pay an annual fee, but after a year or so of good use, ask for it to be reduced or eliminated.
- Low penalty fees. You will be charged hefty fees if you pay after the due date or go over your credit limit. Though you should manage your account so you do neither, look for low penalty fees anyway. Just in case.
How to use Credit Cards
Once you have a credit card, use it wisely:
Stay out of debt. It doesn’t take long for a few purchases to add up to hundreds, even thousands, of dollars. Never charge more than you can afford to repay by the time the bill comes in. To avoid overspending, keep a record of all credit card purchases you make during the month, with a running total of what you’ve spent. When you reach the amount you can afford to pay off, stop using the card until the next month rolls around.
Pay more than the minimum payment due. If you absolutely can’t pay the entire balance, at least pay more than the requested minimum payment. Because the minimum due is often very low (usually between two to four percent of the balance), you’ll drag the debt out for many, many years if that’s all you pay.
- Pay on time. Miss a payment cycle and your credit history will take a quick and hard hit. And if you fail to pay by the due date you will have to pay that late payment fee – typically $25 to $40.
- Limit the number of cards you have. Only apply for the plastic that you absolutely need. The more open credit lines you have, the more you’ll be tempted to spend beyond your means. Also, too many applications can hurt a credit score.
Idaho Central Credit Union has many options for a Visa Credit Card, even Credit Builder Visa Cards. At Idaho Central you can enjoy hassle-free Visa options that include low rates, no annual fees, and no fees for balance transfers.