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It’s a milestone, a rite of passage that marks the journey into adulthood: holding your very first credit card with your name in shiny, raised letters.
There’s a sense of freedom in the moment – you can go buy things, no matter what your bank balance shows. But before you peel that “Activate your card now” sticker off and head out to your favorite stores, make sure that you have a handle on what’s about to happen.
Choosing a Card
Card issuers offer a variety of incentives to attract new users. These offers can include waiving the annual fee, zero interest fees for the first year or bonus points that can be put towards future purchases. While the incentives may be appealing, it is important to remember that they are typically temporary. Check out what happens when the initial ‘new card’ phase is over before applying for a card.
Know the Basics
Before using your card, it’s important to have a clear understanding of the card’s key criteria.
Annual Percentage Rate
Annual Percentage Rate (APR) is the yearly rate of interest on your credit card. Determined by using an index (such as the U.S. Prime Rate) and adding the bank’s margin, the APR is a method of assessing fees on credit card usage.
The APR for a card can change over time. For example, the card might have an introductory rate or a promotional rate (applicable to balance transfers).
Higher APRs are assigned to individuals with lower credit scores. As both your credit reputation and score improve, see if you can get a lower rate.
Start by talking to your bank and requesting a lower rate. “It’s a simple phone call, and the worst they can say is no,” says Patricia Hasson, executive director of Consumer Credit Counseling Service.
Interest Fees
By calculating the Daily Periodic Rate (the APR divided by 365), credit cards assess fees based on the amount charged on your card. These fees can vary, based on card polices and variable APR rates. Some cards offer an initial grace period for interest fees or offer one year of low interest as an incentive to use their card.
Minimum Payment
The lowest amount of money a cardholder is required to pay each month is known as the minimum payment. Each card has its own formula for determining the minimum payment due, specified in the card agreement.
Card Smarts
Unchecked spending can lead to financial disaster. Before you start swiping the card, make a plan of action.
Use Your Power Wisely
The secret of successful credit card usage is understanding that just because you CAN charge something doesn’t mean that you SHOULD. Credit card use should be filtered through a need vs. want criteria. Taking your credit card out of your wallet when the purchase is a legitimate need will help prevent excessive credit card debt and abuse.
Cash Advances Can Really be a Set-Back
Sometimes, you really ‘need’ some cash. That cash advance option on your card is tempting, but what are the long-term effects of hitting the ATM? Interest rates on cash advances are calculated differently than on purchases, resulting in higher fees and a reduction in your available credit.
Rich Bialek, a credit card industry expert, said, “A cash advance typically would involve a higher APR than a retail purchase because the card company doesn’t earn a merchant fee on a cash advance.”
Keeping an Eye On the Bottom-Line
Most cards come with a credit limit, a maximum amount that can be charged. Spending over that amount can result in additional fees and fines, which can quickly add up. Keep control of your card usage by paying attention to your credit limit and staying under it.
Know Your Chargeback Responsibilities
Chargebacks are a consumer protection mechanism. If you experience fraud, either from a business owner or a criminal, you have the right to a refund. A chargeback is a forced credit card refund, facilitated by the bank that issued your card.
However, chargebacks should only be used in extreme circumstances as a last resort. You should always try to get a refund from the merchant directly before contacting the bank. If you dispute a transaction with the bank instead of dealing with the merchant, you’re engaging in something called friendly fraud. Merchants consider this illegitimate use of the chargeback process to be cyber shoplifting.
There are major consequences for businesses when chargebacks are filed. A credit card expert, Monica Eaton-Cardone, said:
I don’t think the majority of consumers who file friendly fraud chargebacks are doing it to create a consequence. I think… they are ignorant to what really happens behind the scenes. They think that it is just their bank giving them the money back.
Don’t be ignorant of your credit card responsibilities and liabilities.
Paying Off Debt
Using your credit card is easy, but paying it off just doesn’t have the same ‘fun factor.’ However, it’s a necessary part of the credit card system.
Save the date
Many credit card companies allow you to choose your own due date – a feature that can come in handy for planning purposes. Choose a date that is just after payday to ensure that you have funds available to make your credit card payment. Making your payment on time is an important factor in building your credit and preventing additional fees for late payments.
More Than the Minimum
Your credit card statement will tell you the ‘minimum payment’ that you must make to be in compliance with your cardholder agreement. As long as you pay the minimum amount due each month, your account will stay in good standing.
The reality, however, is that by making the minimum payment you may end up paying for items years after your initial purchase. Your interest is calculated on the amount of credit used on the card, increasing the amount you’re actually paying back by sometimes hundreds of dollars. To maximize your credit, make more than the minimum payment each month. Ideally, you should pay the entire balance off every month.
Anisha Sekar, a contributor to Nerd Wallet, also points out that paying the minimum can hurt your credit score:
Thirty percent of your credit score is determined by how much debt you carry… This means that accruing charges on your card and failing to pay them off is like putting a dent in your credit score every month; over time, this adds up to a lot of damage.
Check Your Status
Using credit cards is both good and bad. Used wisely, credit cards can be helpful in an emergency or for making large purchases. Used improperly, however, these cards can have a negative effect on your credit – a result that can haunt you financially for years.
Monitoring your credit is important. Credit bureaus offer consumers free credit reports annually and many credit card companies offer credit reporting as part of their services. Checking your credit report not only lets you see what your financial habits look like, it allows you to keep an eye on any fraudulent activity on your accounts.
Think Long Term
Incorporating basic financial principles into your college education will help establish a reputable credit history that will benefit you for years to come.