Things one must know before getting a credit card

For some people, acredit card may be just like a tool which helps to buy, but one can use itwisely to get much more of it. A credit card can help you build a good credithistory when used responsibly. Good credit scores can enable you to enjoy loansat lower rates, cheap insurance and more.

On the other side credit cards can help to earn rewards onpurchases and get discounts & other offers. Moreover, it can also protectyour purchases in case of damage or theft.

If you use it in the right way, a credit card can be muchmore useful than your debit card. Let’s start over and go through the ways youcan get benefit from a credit card.

What is a credit card?

Credit card and debit card have similar look. However,instead of directly withdrawing funds from checking account when you make apurchase, you will basically get a short-term loan. You may or may not becharged interest on this loan, dependingon when you pay it.

Moreover, in a given billing cycle for purchases (typically30 days) — you will get a grace period before your payment become due. By thatdate, if you pay the full balance, no interest will be charged. However, on theother side, if don’t pay by the due date,you pay less than the due balance an interest will accrue on daily balance.

Why you need a credit card?

Credit cards have many benefits. First and most importantly,a credit card that you use wisely helps you build your credit. On the otherside credit card can help you get an apartment approval or a mobile phone plan,avoid utility deposits and get lower insurance premiums.

Many cards give youcash back or travel benefits, usually equal to 1% to 2% of the amount youspend. Some rewards cards offer registration bonuses worth hundreds of dollars,as well as shopping and travel benefits that can save you money. Many cardshave a promotional interest of 0%. Read the benefit details for your card from thestatement when you receive a card bypost.

Secured vs. unsecured credit card

A secured credit card is supported with a cash deposit. That deposit is originally your cash money submitted at the time of account opening. Deposit is generally equal to your credit limit, that’s why you will get $500 credit limit when you deposit $500.

More importantly, deposit reduces the risk to the issuer ofthe credit card: If your bill is not paid, the issuer can use the deposit moneyto pay that. These cards are therefore available to people with poor credit orno credit history.

Secured cards don’t correspond to prepaid cards. Yourdeposit does not run out as you spend with a secured card, as it does with aprepaid card. You will pay with an unsecured card the same way as you would,and you will pay interest if you do not fully pay your balance at the end ofbilling cycle. Once you switch to an unsecured card you can simply cancel yoursecured card and get your deposit back after paying the balance.

Unlikely, an unsecured credit card is one that does not require a deposit. That is why it poses a higher risk to the issuer or bank. Furthermore, credit card companies usually demand an average credit score for issuing the card and good or excellent scores for the best options.

For this reason, people without credit history usually haveto start with a secured card or obtain an unsecured card with a co-signer.

What is a grace period & how it works?

One of the many advantages of using a credit card is thatyou mainly receive a loan without interest and a grace period of 21 to 25 days.This is how grace period works;

Let’s suppose you’ve got a credit card billing period from 15September to 14 October. While the payment due date is 10 November. Then anypurchases made within the billing period will be free of interest charge butonly until the due date of payment.

How they calculate interest on payment?

Some people believe that the interest on credit cards iscalculated on the balance of the card after the due date. However, if you donot fully pay your balance, they will charge interest on your daily averagebalance during the month.

You must pay the new balance on your credit card statementevery month to avoid accruing interest. The minimum payment is sufficient tokeep you safe from extra penalties.

Remember, that you may have to bear a higher rate of interest if you take a cash advance from yourcredit card and you can’t get benefit from a grace period. If you pay a latepayment or spend more than your credit limit, you may have to pay a penaltyinterest rate. One can find details of such interest rate situation at theofficial website of the issuer.

How to determine minimum payment

The smallest amount of money which you have to pay eachmonth to avoid damage to your payment history and other penalties is known as aMinimum Payment. There are a couple of different ways to calculate minimumpayments, but the prominent are:

Percentage Method:By using this option issuer calculate your minimum payment on the basis of yourbalance percentage. This percentage is normally between 1% and 3%. If you havea balance of $1,000 during a billing cycle. While the minimum payment is 2% ofyour balance, in that case, one must payat least $20 for safe play.

Percentage + interest+ fee Method: By using this option issuer may take a percentage of what youowe plus any interest and fees applicable. If you have a balance of $1,000 andan interest rate of 18% and you’re paying late. Your issuer may charge you aminimum payment of 1% on your balance ($10), an accumulated interest ($14.79)and a late payment fee ($35).

How credit cards can affect the creditscore

In a number of ways, credit cards can affect your creditscore. Before we go into the details, look at the five factors in your FICO, itwill help to clearly understand the concept and credit calculation also.

Payment history 35%
Credit utilization 30%
Length of credit history 15%
Types of accounts in use 10%
New credit 10%

Using a credit card can have a positive or a negative impacton your credit score in several ways. You can have a positive impact on themost important credit score factor, the payment history, by paying the balance on time. A late credit card paymentwill probably not be reported in a few days’ time, but it can be reported tothe bureaus and as a result, your scoreis damaged.

The second most important FICO score factor is the use of thecredit limit at a given time. Try to keepyour Credit Utilization ratio below 30% of your credit limit, we will discusshow to calculate this ratio anytime later.

The age of your financial accounts and credit accountscollectively build-up your credit history. The longer the age is the better itis. Moreover, you can inflate this favorably by avoiding the cancellation of old accounts and keeping themopen and active. Finally, be patient, building a great credit score takes time.

Your score may get a little hit when you apply for a newcredit card. To deal with this, do not apply for multiple cards in a shorttime, specifically if you have not built your credit for a long time.

Calculating your credit utilization

FICO pays attention to two different utilization ratios,line item utilization, and aggregateutilization.

Line-itemutilization: It is the percentage of the credit limit of a specific cardyou use. Suppose, you have a $3,000 credit limit on your card and your currentbalance is $500, you have a 16.66% line-item utilization on that card.

Aggregateutilization: It is the total utilization of all your cards. Let’s suppose aperson has 2 cards

  • Card 1 with a creditlimit of $2,000 and a balance of $600
  • Card 2 with a creditlimit of $1,000 and a balance of $150

Your aggregate utilization will be 25% of your total creditlimit on all cards.

Remember that you have to keep your credit utilization below30%. Moreover, aggregate utilization and line item ratio are significant foryour FICO score.

How credit card offers the reward

There are many credit cards that offer cash or travelrewards for your purchases. These rewards either come from exchange fees or thefee paid to a customer bank by a merchant bank when you use your credit card tomake a purchase. The exchange fee varies, but is typically 2% or sometimes more, which is sufficient to coverthe reward you earn with a credit card.

Moreover, some cards offerup to 5% or 6% rewards for some types of purchases. They tend to be limited toa certain amount in a month or a quarter. If rewards from any card appear to bea little too good if compared to exchange fees. Kindly, read benefit statementfor further details on limits.

What’s an EMV chip and why it is there?

A small microchip embedded in credit card is known as an EMVchip. It basically helps authorities to prevent fraud (sometimes also detect fraud) by generating a unique code wheneveryou use the card. This can method helps a lot to secure the transaction dataeven if it is stolen.

On the other hand, traditional cards are only able to storestatic data on a magnetic strip. However, the EMV chip only plays the part if the consumer uses the card isphysically for purchases or any other thing. Moreover, the online or telephonepurchases do not involve the chip.

EMV chips use twoprime ways of verification — chip&Signature and chip&PIN.

Chip and signaturecards: This method is more popular in the United States, cardholders verifytheir identity with a signature

Chip and pin cards:with this method, cardholders enter afour to six- digit number along with chip verification. While traveling abroadmake sure that you have a chipped card because many foreign merchants don’taccept magstripe-only cards

If you have decided to apply for a credit card, you must consider some tips to increase your approval chances before your apply for that.

What fees you may be charged with?

Each credit card comes with its own set of fees and finesalso. However, some fees can be avoided by using credit card carefully andresponsibly. Some of the typical fees with a credit card are;

  • Annual fee
  • Balance transfer fee
  • Foreign transaction fee
  • Late payment fee
  • Over-limit fee