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Credit Cards and How To Use Them

teens buying with a credit card

So you and your friends are out shopping and you realize you don't have enough cash to buy that large iced mocha latte that you want. What to do? Sure, you could always borrow the cash from one of your friends or you could pay for it with a credit card. Just because you're not paying for the coffee today, doesn't mean you won't be paying for it down the road. So, what is a credit card and how does it work?

A credit card allows you to purchase products or services without cash and to pay for them at a later date.

How to qualify for a credit card

To qualify for this type of credit, you must open an account with a financial institution or company which sponsors the card - for example a clothing store, electronics store, or even a gas station. After applying and being approved, you then receive a line of credit with a specified dollar amount. The amount of credit you are approved for is determined by your credit history, the amount of debt that you have, and the ability or means to pay (which is generally based on your income).

You can use the card to make purchases from participating merchants until you reach this credit limit. Every month the company that you received the card from provides a bill, which tallies the card activity during the previous 30 days. Depending on the terms of the card, you may pay interest charges on the amount that you do not pay for on a monthly basis. Besides interest charges, there could be other fees associated with having a card including an annual and over-the-limit fees.

Before applying for any card, be sure to read the fine print. Know your card's credit limit, annual percentage rate, grace period on purchases (how many days before you're charged interest), and fees.

Advantages of having a credit card

  • Convenience:
    It's often easier and safer to have a credit card rather than carry around a large amount of cash. And it's much more convenient to use a credit card for travel expenses and buying items on the Internet.
  • Protection:
    Buying items with a credit card can make it easier to get a refund if there's a problem with an item you purchased. Also, some cards offer buyer protection - a type of insurance for items you buy with a credit card in the event you find them damaged after purchase.
  • Emergencies:
    With a credit card, you always have a way to pay for emergency expenses. If your car breaks down on a Sunday morning, you're going to get back on the road much faster if you charge the repairs than if you try to find a nearby ATM from which to get money.
  • Opportunity to Build Credit:
    Using a credit card responsibly is simply the best way to build your credit history. It makes it easier to get more credit when you need it later.
  • Special Offers:
    Sometimes you can take advantage of special offers, such as a reduced interest rate for a limited time, or even deals to buy now and make no payments until next year. These offers decrease the short-term costs of using a credit card. (But always know when and what happens when the deals expire.)
  • Bonuses:
    Some types of credit cards also offer bonus points such as frequent-flyer miles or cash rebates for every dollar you spend. But credit card holders often pay for these perks through higher interest rates or annual fees. Savvy credit users carefully read the card's terms and weigh the value of the bonus features against potentially higher costs.

Potential risks

While there are many advantages to having a credit card and building a credit history, there are potential risks that need to be addressed:

  • Interest:
    This is the amount you pay for using credit card. This automatically makes the item more expensive than if you had just paid for it with cash.
  • Overspending:
    Some people often use credit to live beyond their means buying items they simply can't afford. As time goes on and the amount they owe grows, it gets harder and harder to pay down the balance.
  • Debt:
    The amounts you borrow add up to what is called your debt, or the entire amount of money you owe to lenders. These lenders have legal claims against your future income should you not be able to repay a debt. And if you take on too much debt, it can completely derail your financial plan and your future.
  • Identity Theft:
    Identity theft occurs when someone uses your personal information without your permission to commit fraud or other crimes. Each time you give out your credit card or Social Security number, you're at risk for someone stealing that information to run up debts in your name.

Secured credit cards

In addition to the credit cards described above, some financial institutions offer "secured" credit cards. a "secured" credit card is a credit card used to build a good credit record for people with little or no credit history or people who have a damaged or poor credit score. This is a credit card that a cardholder must secure with a savings deposit so that the card issuer is guaranteed payment. The amount the cardholder can charge is limited by the amount he or she deposits in the savings account.

A tip about making monthly payments

Here's a tip about making monthly payments on your credit card. Think about paying off the full balance on your credit card each month which will help reduce the cost of using credit. Even paying a little more than the minimum amount can speed the repayment process and decrease overall interest charges. And of course, it's important to pay bills on time to avoid more charges and to build a strong credit history.

Remember . . .

A credit card is more than just a piece of plastic you carry in your wallet or purse to make purchases without having to pay for something up front. Using a credit card wisely can help you establish a good credit history and help you when it's time to get a car loan, rent an apartment, or in some cases even get a job.