The Basics of Using Credit Cards

Good players know the rules of the game. But, when the rules are buried in fine print, use language that’s hard to understand, and change periodically, it’s easy to get confused. Add enticements of “no payments for 6 months” and the credit card game becomes the playing field for serious financial injuries.

In today’s financial world, credit cards are a necessary convenience and one of many financial tools. As with any tool, used correctly and maintained properly, credit can be very helpful. Unfortunately, it can also be a complicated tool that comes with no instructions. However, getting a grasp of the basics can help you take good care of your credit and be in a better position to score well in the game.

Dig out your contract– the “agreement” that became a legal and binding contract the first time you used the card. Review the rules of the games you’re in. Recognize that each card has its own terms related to specific information. If you can’t find your contract, much of the information will be in the details on your last statement. Or, call the 800 customer service number on the back of your card and request a copy of the terms and conditions of your contract.

If you have more than one card, compare the terms of each so you know the best way to play each game. You’ll find some useful worksheets by clicking on the resources at the end of this article. Look for your specifics related to the following general information:

The Annual Percentage Rate (APR) is the interest rate charged on any balance not paid by the due date. If you always pay your bill in full by the due date, the APR doesn’t really matter. If you don’t, the lower the APR, the less you’ll pay.

Be aware that your APR may suddenly increase because of a universal default clause in your contract. Look for a term similar to “default rate” which indicates a higher interest rate if you pay late on that or another credit card, or do something else the credit card issuer deems as too risky. That’s why people have been surprised when their APR suddenly goes up even though they’ve been making those particular payments on time.

Watch out for low “teaser” rates on new cards as they typically only last for six months to a year. Also, cards generally have different rates for different balances – such as new purchases vs. balance transfers vs. cash advances vs. those tempting “convenience checks” that often accompany statements.

Paying by the due date is important! Your contract will spell out when a payment is considered “late” – often noting a specific time on a specific date. Having your payment postmarked or even on your creditor’s desk by the due date is not “on time.” You’re on time if your payment is actually applied to your account by the due date. Mail early or pay online so you know when the payment is applied.

The grace period, if any , is the number of days you have to pay your balance before incurring a finance charge. Note that if you carry any balance forward from one month to the next, the grace period for new purchases may disappear, depending on how your balance is calculated. That means if you didn’t pay your last bill in full, the interest clock probably starts ticking on new purchases the instant you swipe that card to pay for them.

If you typically carry a balance on your card, know the balance calculation method – how they come up with the amount you owe finance charges on. It can make a big difference in the size of that charge!

Of the four common calculation methods, adjusted balance is the least expensive. It would be hard to find a new card today that used that method. The most common method is the average daily balance. Essentially, this is the sum of each day’s balance divided by the number of days in the billing cycle. The two-cycle average daily balance triggers the biggest charges for those who carry a balance from month to month. That’s because it adds together the average daily balances of two billing cycles to compute the charges. The previous balance simply uses the amount owed at the end of the previous billing period.

Cards will have varying fees. Some charge an annual fee just for the privilege of having the card. Often, cards with an annual fee have lower APRs and cards without an annual fee have higher APRs. So, the best card for you depends on whether you tend to carry a balance from month to month. Other costs to compare between issuers include late payment, cash advance, balance transfer, and over-the-limit fees.

The minimum payment is the smallest amount you can pay by the due date without triggering even more charges. Historically, this has been around 2% of the outstanding balance. Look for this to about double in the coming months as creditors address federal banking regulator concerns of debtors taking too long to pay off their card balance.

Your credit limit is the highest balance you can carry on the card during any billing cycle without incurring extra fees. It’s good not to be pushing your limit and not to have so many cards that your total limit is really beyond your means!

Use the rules of the credit game to make effective plays:

•  Limit charges to what you can pay in full each month. If you can’t pay in full, pay as much more than the minimum payment as you possibly can.

•  Pay on time! But if you can’t, call your creditor immediately to explain. They may waive late fees. Be ready to offer the “how much” and “when” of your next payment. Follow up in writing and do what you promise.

•  Ignore offers to “reduce” or “skip” payments because the finance charges keep accruing.

•  Know what you are paying for credit. For example, if you pay only the minimum payment on a $1000 computer, let’s say about $20 a month, your total cost at an APR of more than 18% can be close to $3000 and take nearly 19 years to pay off.

•  The FDIC recommends not more than two to four credit cards for most adults. More cards tend to trigger costly impulse buying. Also, each card you own – even ones you don’t use – represent what you could borrow. If you applied for new credit, you may only qualify for a smaller or costlier loan.

Click below for credit worksheets and more in-depth information.

“Know What You Owe” will help you summarize your secured and unsecured debt. Click on Worksheet 2-A at http://ohioline.osu.edu/mym/mym2d.html

To compare the terms of various cards, click on Worksheet 4-D at http://ohioline.osu.edu/mym/mym4e.html

The bulletin “In Over Your Head: Lifesaving Strategies for Financial Crisis” provides information and outlines financial actions to address overwhelming debt. http://ohioline.osu.edu/b891/index.html

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