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Study How Do Credit score Playing cards Work?

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A friend has probably told you about the fantastic rewards they get on their credit card to pay for their trip to Mexico. There are other stories that you heard too. How credit card debt is taking over people’s finances.

These negative effects made you hesitant to get a credit card. Knowing how credit cards work and how to use them responsibly can help you avoid pitfalls like credit card debt accumulation. Then you can take advantage of the benefits and rewards of a credit card.

How do credit cards work?

A credit card is basically a type of loan. The bank, known as the “Issuer”, sets a credit limit, which is the maximum amount you can spend.

Your billing cycle is approximately one month and you must repay the remaining amount within the grace period to avoid paying interest. Your grace period is usually around three weeks. The bank statement close date is the last day of your billing cycle. You will receive a statement either by email or by post, listing all fees for this billing cycle.

For example, on the tenth day of your billing cycle, you charge your credit card with purchases of $ 250. Your total credit limit is $ 1000. So you have $ 750 of available balance that you can still borrow. When you make a payment, you have more credit available.

Since your billing cycle is 30 days, you have 20 days plus an additional 21 days from your grace period to repay the $ 250. That’s a total of 41 days to repay these purchases with no interest charges.

Because of this flexibility, credit cards are a popular choice with consumers. However, if you spend more than you can afford, you will quickly find yourself in a very bad financial position.

What interest and fees do credit cards charge?

The interest charge on a credit card is known as the annual percentage (APR). This is the annual cost of borrowing money on your credit card. You pay this interest rate on the balance that you have not paid during the grace period.

Let’s take the following scenario: You have a credit card with an annual interest rate of 15%, which is roughly the average interest rate on a credit card. If you have a balance of $ 1,000, you will be charged interest on that balance on a daily basis. This is calculated by dividing the APR by 365 and multiplying the amount owed. You owe an additional $ 150 if you hypothetically maintain that balance for a year.

Credit cards require you to make a minimum payment each month to avoid fees and to keep your account in good condition. This minimum amount is usually around 2 to 3 percent of the balance.

Other than interest, fees may vary depending on the credit card. Your credit card agreement lists all of the charges associated with your account. Here is a list of some of the common fees:

  • Annual fees – This fee is common with travel credit cards, which generally offer more perks and benefits. The fee is charged annually for holding the credit card. The most typical amount that is charged is $ 100.
  • Remaining transfer fees – If you move credit card debt from one card to another, it is the amount that the issuer charges. Some credit cards waive this fee as an introductory offer to encourage you to open an account. The transfer fees are usually between 3 and 5 percent of the balance.
  • prepayment – If you use your credit card to withdraw cash like a debit card, you will be charged this fee. The fee is usually the higher of a percentage of the transaction or a lump sum.
  • Foreign transaction fees – Travel credit cards usually waive this fee in order to receive the card. This fee is charged when you make purchases in foreign currency with your credit card. The fee is usually a percentage of each purchase you make, so it can add up quickly.
  • Reminder fee – If you fail to make at least your minimum payment by the due date, you will be charged a late payment fee. The fee is usually $ 39, which is an expensive mistake!

What types of credit cards are there?

There are many types of credit cards. They can serve different purposes; Therefore, certain types of cards are better suited to certain people. Here is an overview of the most common types of credit cards available:

  • Rewards credit cards. This type of credit card offers some type of rewards to its cardholders. Cash back, bank statement credits, and points that can be used on flights, hotels, etc. are examples. According to a TSYS study, 79 percent of consumers named rewards as the most attractive feature of their credit card.

    Reward credit cards are the most popular type of credit card. When you get your first credit card, you may not qualify for the cards with the best rewards program. If you use your credit card responsibly, you may qualify for credit cards with better rewards in the future.

  • Secured credit cards. Secured credit cards require prepayment to open an account. This deposit usually also serves as a credit limit. Other types of credit cards are “unsecured” and there is no deposit requirement.

    Secured credit cards are ideal for those who are new to credit or who are trying to rebuild credit. As with unsecured credit cards, payments made with a secured credit card are reported to the credit reporting agencies. This will help you build up credit and qualify for other types of credit cards with more benefits.

Why should I get a credit card?

Credit cards offer many great benefits as long as you use them properly. These benefits include:

  • Help build your credit
  • Earn rewards
  • May have additional shopping and travel benefits
  • Are safer than a debit card; Better protection when shopping online
  • Have access to interest free short term loans

To get a credit card, you should find one that suits your current situation. If you are new to credit, a starter credit card, student ID, or secured card is likely the solution. For many issuers, you can check their website to see if you are pre-qualified for a credit card offer. Use this feature to see what you might be able to get before finalizing an application.

How do I build up a balance with a credit card?

Credit cards are arguably the best tool to build your credit score. For example, with a good score, you can be approved for lower interest mortgage loans. Landlords, employers, cellular operators, utilities, and insurers also use your creditworthiness to determine whether they will have a relationship with you. Here are some things you can do to start building credit with a credit card:

  • Pay your bill on time – 35 percent of your FICO credit score depends on paying your credit card bill on time. It is the most important and easiest thing you can do to build good credit. Use features like automatic payment on your account so you never miss a payment.
  • Don’t use too much of your balance – Ideally, you want to keep your balance below 30 percent in order to build up credit. Charging more than that is a red flag for creditors and it can indicate that you are borrowing more than you can afford.
  • Don’t close your accounts – Even if you haven’t used your first credit card months ago, don’t close it. Otherwise you will lose this credit rating. It also reduces the average age of the account, so it is better for your credit score to keep it open.
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