Knowing the ABCs of credit cards will help you make informed decisions before opening a credit account – from choosing an issuer to picking the right credit card. There is a lot to consider and analyze before committing to a credit card. Get to understand the legal implications, interest rates and types of credit cards to choose the card that is most suitable for you.
What is a Credit Card?
A credit card is plastic money that lets you borrow funds to pay for goods or services. A credit card comes in handy when you need instant cash to offset payment or purchase items or mitigate any type of financial emergency.
How Credit Cards Work
Credit cards have a money limit on the amount the cardholder can access; your expenditure is charged against the card’s credit limit. The bank pays the merchant (on behalf of the cardholder) and charges the bill to the cardholder.
There is a set of financial qualifications required by issuers for potential credit cardholders. While some of these requirements are common across the board, others differ based on certain standards set by the issuers.
Common Requirements for Eligibility
According to the Card Act of 2009, individuals seeking credit cards must be 21 and older. There is an exemption provided for persons aged 18 to 20 years who have proof of an independent source of income and those above the age of 18 with a qualified co-signer.
If a person is underage and seeks to build credit history, they can join a care giver’s account. The account must have a good credit history.
Aside from age, credit card applicants must have a verifiable source of income. Income does not mean employment alone; it also represents investment or any other sources of income.
You also need a home or business physical address when applying for a credit card not the P.O. Box addresses. According to the U.S PATRIOT Act, only army post office boxes used by military personnel and Fleet Post Office (FPO) boxes can be used for credit card purposes. Nevertheless, you do not need to receive mail on the stated physical address to list it in your card application.
You will need your social security number to apply for a credit card. Your social security number is important for bank verification and to ensure the correct credit report is forwarded to you.
Your credit history and credit score determine the amount of credit risk you pose to credit card issuers. Different credit cards have different figures for eligible cardholders in regard to credit score.
Types of Credit Cards
There is an array of credit cards from issuers ranging from standard to private with varying rewards.
a) The Standard Credit Card
A standard credit card has no benefits or frills. The card operates on what is known as a revolving balance; your credit is used up when you use it and made available once you pay. The amount spent must be paid by the specified date or penalties will be imposed on you.
b) Balance Transfer Credit Card
Not all credit cards permit the transfer of funds from one credit card to another to settle balances. The balance transfer credit card or cards that offer this feature help in moving credit balance between different credit cards. As a result, you can conveniently pay a debt, from high-interest cards or one with an expiring grace period, to avoid costly penalties.
c) Rewards Credit Cards
Reward credit cards are those that repay cardholders for purchases made through the credit card. Common rewards include cash backs, points and travel benefits such as miles for money spent using the card.
d) Student Credit Cards
Student credit cards are suitable for cardholders with little to no credit history. The interest rates and fees are usually low to accommodate the cardholder’s financial strength. One must be e enrolled in an accredited institution of higher learning.
e) Charge Cards
Charge cards have no credit limit. Payment for money spent must be cleared at the end of every month. The card has no finance charge or minimum payment because balances must be paid at the end of the month. Penalties imposed on the cardholder in case of payment delays include additional fees, charge restrictions and cancellation. You need a good credit history to qualify for this type of credit card.
f) Secured Credit Cards
A secured credit card is a feasible option for people with a poor credit score or no credit history. The cardholder is required to deposit refundable security in exchange for a line of credit. The deposit is used as security in case the cardholder is unable to pay the balance. The credit limit is equal to the amount deposited.
g) Subprime Credit Cards
Subprime credit cards are ideal for people with bad credit history. As such, high interest and fees are applied to the card. Additionally, the terms and conditions are never straight forward and despite stipulations by the federal government, issuers still look for loopholes to manipulate cardholders.
h) Prepaid Cards
Prepaid credit cards are technically debit cards because you use money deposited before use and not the bank’s money. Furthermore, there are no fees or minimum payments required for this card. However, you do require a checking account.
i) Limited Purpose Cards
Limited purpose cards have restrictions depending on the purpose of the card. They can be used at specific places, locations, stores or to purchase specific items. Just like credit cards, limited purpose cards have charges and minimum payments. Examples of this type of cards include store credit cards and gas credit cards.
j) Business Credit Cards
Like the name suggests, business credit cards are used for business. The card is essential for business owners seeking to separate business transactions from personal transactions. The business owner’s personal credit history is considered before card issuance.
Credit Card Fees
Credit card issuers make their profit from the fees charged to credit cardholders. Most of these fees can be avoided by using credit cards wisely or carefully analyzing what credit card issuers charge. You can find out all the fees the issuer will collect in the Schumer Box – the issuers’ terms and conditions on credit card fees and rates.
i) Interest Charge
The main financial charge imposed on your card is the interest charge. Interests increase when you let your monthly bills spill on to the next month.
The interest charge is applied to the amount of cash that remains beyond the date required to pay the amount borrowed fully. The period before the date of payment and the issuance of the card is known as the grace period. If the debt is paid before the date of payment, no interest charge is collected by the credit card issuer.
Interest charges vary depending on a credit card’s annual percentage rate (ARP) and the balance remaining post-grace period. The APR (applied monthly) is the percentage interest that is charged on outstanding balances at the end of every month. You can avoid this charge by paying the balance in full before the grace period is over.
Interest rates can add up quickly and submerge the holder in credit card debt. It is always wise to pay your monthly statement balance in full.
ii) Annual Fees
An annual fee is an additional charge added by some credit card issuers in exchange for some top-notch perks. The fee can be as low as $30 for a basic card and as high as $700 for extra special privileges. The benefits range from security for online shopping, cash back, reward programs, luxury travel packages such as access to airport lounges and so forth. However, not all cards add an annual fee for rewards. Some cards give free benefits or offer none at all.
Before settling for a credit card, calculate the benefits and determine if the offers are beneficial for you in the long run.
iii) Foreign Transaction Charges
Foreign transaction costs are incurred by making purchases using foreign currency. Not all credit cards charge this fee.
iv) Cash Advance Fees
Some credit cash issuers give a cash credit line at a fee. The advance cash is acquired along with the credit card. The advanced cash can be withdrawn via the ATM or through a bank teller. A small fee is charged for the loaned sum of money in the form of interest which is applied from the time the cash advance was taken. Therefore, no grace period is given for cash advance fees.
v) Balance Transfer Fees
When offsetting a credit card balance using another credit card a fee is charged by the issuer for this type of transfer. Some issuers waive the fee if the transfer occurs within a specified timeframe. Nevertheless, it is better to compare the cost of interest rates for an unpaid balance to the cost of the balance transfer before conducting a transaction.
vi) Late Payment Fees
Banks will charge the cardholder late payment fees when the minimum required balance payment has not been paid. Fees for additional late payments are always more than the initial late payment.
vii) Over-the-Limit Fees
Over-the-limit-fees are the charges incurred when the cardholder exceeds the limit of the credit card. The fee (legally) should not surpass the debt surplus. It is worth noting that maxing out your credit card or exceeding the credit limit negatively affects your credit score and move you to a high revolving credit utilization ratio.
viii) Returned Payment Fees
When you make a payment below the scoop of your balance in your bank account, your credit card issuer will charge a fee for ‘returning’ the payment back to the bank. You may also be subjected to a high penalty APR.
Understanding credit cards is not difficult. When you have determined the type of card you want, you must analyze the rates and fees to find out which card and issuer is most suitable for you.