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Credit Cards

What is a Credit Card?

This seems like a pretty simple question, but a lot of people don’t fully understand what it really means to have and use a credit card. A credit card isn’t free money. It’s a system that allows you to easily and quickly borrow money from a bank, which you then have to pay back. (See how the bold text let’s you know I’m serious?)

Credit Card Scenerio

Your car breaks down. You need it to get around but you don’t have the money to pay for it to get fixed. You use your credit card and instead, your bank pays for the repair. You now owe the bank for that charge.

Credit Card Interest and Fees

What is interest and interest rates?

Interest is how banks make money by lending you money. When you are approved for a credit card, they will tell you what your interest rate is. This APR(Annual Percentage Rate) is how they determine how much to charge you for borrowing money.

Credit Card Interest Example

You paid your car repair bill for $100 using your credit card, which has a 15% interest rate. Now you owe $100 plus the 15% APR, added monthly, for however long it takes to pay it off. Every month, the interest amount is added to your balance.

Month Interest (15% APR) Total
January $100
February $1.24 $101.24
March $1.17 $102.41
April $1.31 $103.72
May $1.29 $105.01

* This is an overly-simplified example just to show how interest can add up, not including any payments or other fees. APR is not simply 15% of $100. 

For more information on Interest Rates, see How Do Interest Rates Work?

Do credit cards charge any other fees?

Yes. There are always fees. Don’t confuse “No ATM Fees” or “No Annual Fees” with “No Fees”. Most common fees are finance charges, late payments, over limit, returned payment, etc. Make sure you understand possible fees before you get or use a credit card.

Secured Credit Cards

For regular credit cards, you are making an agreement to borrow from a bank. Secured cards work exactly the same except you pay the bank a deposit beforehand. Usually the amount of your deposit will be your credit limit. If you pay off your card and close it, you can get your deposit back.

Secured Credit Card Example

You apply for a secured credit card and pay a $300 deposit. Your new credit card now has a limit of $300.  If you miss a payment or stop paying all together, the bank will take your $300 deposit.

Why Would I Get A Secured Credit Card?

Secured credit cards are mostly used for people with bad credit or no credit history at all. Because you have to pay that initial deposit, these cards are easier to get since it means less risk for the bank if you somehow don’t pay them back. When you miss a payment, they simply take it from your deposit and of course, also charge you a late fee. In a lot of cases they may even take the full deposit to pay your balance. If they take the money from your deposit, you won’t get it back.

Should I Get a Credit Card?

I’ll give you two answers for this, one is idealistic and one is realistic. Of course this doesn’t apply to everyone. It depends on your spending habits and financial situation.

Ideally:  Yes! Of course you should have a credit card! Credit cards help build good credit and are life savers in emergency situations.

Realistically… don’t. 90% of the people I know who often find themselves struggling with money, even just occasionally, will use credit cards as a crutch. It’s easy to forget that you’re spending money you don’t have and even if you fully intent to be good and make payments on time, you probably won’t.

A reasonable solution? If you are serious about wanting to build your credit, I say get a credit card. Then when it comes, cut it up and throw it away. You’re account will stay open, and you won’t be able to use it to destroy your credit.

 

Ernesto Jaboneta

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