These days, cash is used less and less, and, instead, credit cards are a financial tool used by millions of people every day to manage their money. However, despite this fact, we’re not usually taught some of the basics of using these cards.
Here are a handful of things that every credit card owner should know:
1.) How does a credit card work?
Credit cards are basically a short-term loan from your bank. The cards provide you with a revolving line of credit, meaning the bank gives you a monetary limit that represents the amount of money you can borrow each month. Then, you use as much of that credit as you need and pay it back at the end of the month. If you pay the bill in full, you won’t pay any interest on the purchases you charged. However, if you only pay part of your bill, the remaining amount will accumulate interest that you owe the bank for borrowing its money.
The amount of interest that accrues will depend on the size of the balance you carry and your card’s interest rate, or annual APR. If you carry a $1,000 balance and your annual APR is 15%, you will accumulate $150 (15% x $1,000) in annual interest, or $12.50 each month.
2.) Benefits of using credit cards:
They can provide you with protection. Credit cards typically offer a variety of benefits, ranging from help with lost luggage to insurance on rental cars to extended warranties on certain products. Plus, if your credit card is stolen and someone uses it to make purchases, most cards won’t hold you responsible for purchases made with the stolen card, a benefit that cash does not offer. Contact your credit card company to find out the exact benefits of your specific card.
They have rewards programs. Most credit cards these days have rewards programs that allow you to earn points, airline miles, or hotel stays through purchases made on your card. Also, remember that if you are paying interest on your card, the money you are spending on that will negate any benefit you get from rewards points.
3.) Risks of using credit cards:
Credit cards are high-interest debt. Credit cards typically charge annual interest rates of anywhere from 10%-30% (depending on your credit score and the exact offer on your card). These are considered high rates, relative to a mortgage or a typical car loan. Therefore, if you fall behind on your credit card bills, it is easy for your debt to start to accumulate quite quickly, as your interest owed accumulates more interest at a high rate.
You might spend more than you would with cash. Doesn’t it always seem easier to swipe a credit card than it does to part with cash? That said, while a credit card can actually make it pretty easy to track your spending in an organized way, it also makes it easy to rack up purchases and lose track of how much you’ve spent until your bill comes at the end of the month. If you’re not careful, this can lead you down a rocky financial path.
4.) What about those sign-up bonuses?
You may have noticed that a lot of banks and credit card companies offer lucrative bonuses for signing up for their card. The bonus could range from cash to free flights or hotel nights, and may be tempting.
Applying for a credit card can have a temporary, slightly negative impact on your credit score, so you shouldn’t do so without giving it careful thought. However, if you are looking for a new card anyway, and the bonus being offered is worthwhile to you, you can consider whether it makes sense to take advantage of it. Just make sure to carefully monitor your credit score whenever you apply for a new card to make sure that your score isn’t too negatively impacted. You also should be especially careful about applying for a new card if you are about to apply for a large loan, such as an auto loan or mortgage.
Photo credit: thinkstock
More from Manilla.com: