Credit cards offer convenience and safety: You're able to buy what you need now, and you don't have to carry cash. You also receive fraud protection, and with some cards you get rewards for making purchases.
But credit cards also carry risks that can affect your finances today and far into the future. Before you use your credit card, know how it works. Here are a few tips that will help you manage your credit wisely.
Learn to "speak" credit.
Before you apply for a credit card, make sure you understand these basic terms:
- Annual Fee: What you'll be charged each year for using the card. Many cards have no annual fee, so shop around
- Annual Percentage Rate (APR): The interest rate you'll be charged if you don't pay your balance in full each month. Credit cards often have different APRs for Purchases, Cash Advances, and Balance Transfers, so make sure a low APR in one category isn't offset by high APRs in others
- Introductory APR: A low rate that goes up after a certain time. If your card offers a "low introductory rate," note how long you have until the rate rises, and what that rate will be
- Balance Transfer Fee: Sometimes charged to transfer balances from one credit card to another
- Cash Advance Fee: Cash Advances refer to getting cash from or taking out a loan on your line of credit. They can bail you out of emergencies, but can become expensive loans if you don't pay them off quickly
- Late Payment Fee: Charged if payment is received after the due date
- Minimum Interest Charge: Imposed whenever you carry forward a balance
Understand your credit score.
Your credit score is a number that helps financial institutions determine how likely you are to repay your debt. Every time you apply for, use, make, or miss a payment on a loan or credit card, you build another entry that raises or lowers that number on your credit report. To establish a good credit score:
- Limit the number of cards you take out
- Be sure to pay your monthly balance on time
- Don't run up the balance on your card
- Keep well within the credit limit on your account
- Pay off card balances instead of moving debt to other cards
- Check your credit report at least once each year to make sure it's error-free
A free credit report is available once a year from each of the three major credit reporting agencies. Visit annualcreditreport.com to get yours.
Make use of tools that can help you stay out of credit trouble.
Some cards offer free, automatic email alerts as well as online access that help you keep track of:
- Available credit
- Payment due dates
- Payment history
- Purchase activity
You can also stay out of credit trouble by remembering these important points:
- Charges to your credit card are loans from your bank that must be repaid
- If you don't pay back the entire amount owed each month, you'll pay interest on the outstanding amount
- Follow the 20-10 Rule: Avoid borrowing more than 20% of your annual net income and payments on those loans should not exceed 10% of your monthly net income