Credit Cards
Credit cards offer many advantages. There is the convenience of being able to buy needed items now and the security of not having to carry cash. You also receive fraud protection and in some cases rewards for making purchases.
With these advantages also come responsibilities. You need to manage credit cards wisely by understanding the card's terms and conditions, staying on top of payments, and knowing the true cost of purchases made with credit. Using a credit card is like taking out a loan. If you don't pay your card balance in full each month, you'll pay interest on that loan.
Credit Card Basics
The best way to maximize the benefits of credit cards is to understand your financial lifestyle - your money needs and wants. Consider the following when shopping for credit cards:
- Comparison shop and have a concrete plan on whether you plan to carry a balance or pay if off monthly.
- Only apply for credit you need; applying for too many credit cards over a short period of time can lower your credit scores.
- Be aware of and know terms like Annual Percentage Rates (APRs), credit limits, fees and penalties.
Consumer Financial Protection Bureau - How to find the best credit card for you
Some credit card
issuers offer free, personalized and automatic alert messages to your phone and
email to help you keep track of:
- Balances
- Payment due dates
- Payment histories
- Purchase activity
- Understand Your Rights
If your information ends up in a data breach, keep a close eye on your account activity and report suspicious transactions immediately.
Consumer Protection Services Bureau - Watch Accounts Closely When Card Data is Hacked
Report lost or stolen credit cards
- If you report a lost or stolen credit cards before it is used, the card company cannot hold you responsible for any unauthorized charges.
Resolving credit card billing error disputes
- The card issuer must send you a letter stating that it has received your billing dispute within 30 days of receiving it and complete its investigation within two complete billing cycles which generally means it cannot take longer than 90 days.
When can credit card companies increase interest rates?
- Credit card companies can usually increase your interest rate if they give you 45 days of advanced notice, but there may be steps you can take to lower your credit card interest rate.
- A credit card company is generally not permitted to increase your interest rate on new transactions during the first year of your credit card account.
- If your credit card company increased your interest rate after giving you a 45-day advanced notice, it generally must review and re-evaluate the interest rate for your account at least every six months.
See how much extra you might pay on a $1,000 credit card purchase with varying interest rates:
| Total Purchase Amount This is the balance due on your credit card. | $1,000 | $1,000 | $1,000 |
| Credit Card APR This is the annual interest rate on your credit card. | 10% | 15% | 25% |
| Monthly Payment This includes paying just the minimum monthly payment, calculated in this example as $40. | $40 | $40 | $40 |
| Number of Months to Pay Off Purchase Amount* This is how long it will take you to pay off the entire balance. | 29 | 31 | 36 |
| Total Finance Charge This is the total amount of money you will pay just in interest. | $126 | $207 | $427 |
| Total Cost This is the final amount you will pay for your purchase. | $1,126 | $1,207 | $1,427 |
Cost
If you don't pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.
Credit Card Terminology
The APR, or annual percentage rate, is the standard way to compare how much loans cost. It lets you compare the cost of loan products on an “apples-to-apples” basis. Your credit card company must disclose the APR before you agree to the use the card.
To calculate the APR, the interest rate and fees are compared to the amount you borrow and calculated over a one-year period. This allows you to compare the costs of a credit card to a six-month installment loan. It is also why APRs are often different from simple interest rates.
A balance transfer lets you move an outstanding balance from one credit card to another, sometimes for a fee. The fee is usually a certain percentage of the amount you transfer or a fixed amount, whichever is more. Many credit card companies offer zero-percent or low-interest balance transfers to invite you to consolidate your debt on one credit card. The promotional interest rate for most balance transfers lasts for a limited time. After that, the interest rate on your new credit card may rise, increasing your payment amount.
If you’re more than 60 days late on a payment, the credit card company can increase your interest rate on all balances, including the transferred balance.
A credit balance on your billing statement is an amount that the card issuer owes you.
Credits are added to your account each time you make a payment. It may also be added when you return something you bought with a credit card or because of rewards you have earned or a mistake in a prior bill. If the total of the credits exceeds the amount you owe, your statement shows a credit balance.
What is a credit balance? - Consumer Financial Protection BureauA grace period is the period between the end of a billing cycle and the date your payment is due. During this time, you may not be charged interest as long as you pay your balance in full by the due date. Credit card companies are not required to give a grace period. However, most credit cards provide a grace period on purchases.
What is a grace period for a credit card? - Consumer Financial Protection BureauA prescreened credit card offer is when credit card companies use information from credit reporting companies to make firm offers of credit to you if your credit history meets the criteria selected by the card company.
What is a prescreened credit card offer? - Consumer Financial Protection BureauGenerally, unauthorized use is the use of a credit card by a person who does not have the right to use the card. For example, if you lose your card and someone finds and uses it, that would be an unauthorized use.
What is an unauthorized use of a credit card? - Consumer Financial Protection Bureau