Ok, brace yourself for what are probably painfully basic questions about credit cards that everyone else on the planet knows the answers to except me.
I’ve never had a credit card before, but I’ve been thinking about getting one, just to have in case of emergency. The problem is, I have no clue how they work. Do I have to pay fees just for having the card, even if I don’t use it? If I use it to buy, say, a $20 item, do I just have to pay off the $20 I spent, or are there charges that go along with each use of the card? And what in god’s name is an APR rate?
I tried searching for answers on the net, but found nothing basic enough. I blame my lack of knowledge on my parents, who went out of their way to instill a deep-seated fear of credit cards into me (I was taught that if I ever used 'em I would fall hopelessly into debt, become homeless and die in an alley, alone. Or something like that)
Some cards charge an annual fee, and others don’t. Read the fine print to make sure there’s no annual fee.
The best way to use a credit card is to pay off the full balance every month, so that you don’t accrue finance charges. If you really must keep a balance, keep it on the card with the lowest APR.
Don’t buy credit insurance (sometimes referred to as “account protection”)–this is a real ripoff for the consumer and an easy windfall for the credit card companies. If you really feel compelled to buy some sort of unemployment, disability, or life insurance, you’re much better off shopping around for the best deal.
As for how credit card companies make money–there are two aspects. Obviously, one way they make money is from the finance charges and fees on consumer accounts. Another way they make money is by charging merchants a certain percentage of each transaction–say perhaps 3% of each purchase. Merchants agree to pay these fees because by accepting a greater number of forms of payment, they can increase sales.
I didn’t read all the information in the link provided by astro, there’s a ton of information there. But to cover some basics, APR is annual percentage rate, or how much intrest the bank is going to charge you. The APR can range from around 8% to 22% or more, obviously lower is better. Sometimes lower intrest rates are available but the are usually temporary for promotional purposes.
There are plenty of cards out there that do not charge an annual fee. With most cards if you do not have a balance when you buy something you do not have to pay any interest on it if you pay the entire bill when it arrives. If you have an existing balance on your card you will have to start paying interest right away. If you pay your balance in full every month the APR doesn’t really matter and you basically get to use the card for free (assuming it’s a no fee card). However many people intend to pay the card off every month but end up with a balance, so be careful.
And as Philosophocles said - Do not buy credit insurance, it is a huge rip off.
By the way, it’s to your benefit to have a credit card (as long as you use it wisely). If you ever want to ask someone to loan you money, like maybe for a house, they really want to know that you’re the kind of person who pays his debts. A good way to demonstrate this is by having a credit card and paying it off in full every month.
I pay mine off every month (I haven’t paid CC interest ever, and I’ve used them for almost 20 years), I haven’t had a car payment since 1987. I pay all bills on time. When I bought a house last year, they basically led me to the vault and said “take whatever you need.”
One piece of advice is to read your statement every month. I have a no-fee card that I pay off every month (in fact, it is automatically deducted on the due date from my checking account and that has overdraft protection from a personal line of credit that I do use very occasionally). Despite that, my last statement contained an interest charge. My wife called immediately and they agreed that it had been paid on time and that we had an automatic payment agreement so there ought to be no interest charge. No, they couldn’t explain it and they agreed immediately to remove it, but if she hadn’t checked we would have been out 22c. But it could have been more. BTW, that was the interest on a bill of several thousand dollars, so it looks like I figure that that is about 20 minutes interest.
My experience is very similar to CurtC. You should get a credit card (ONE credit card, but you will be snowed under with offers for more - discard without reading), and it would be basically impossible for me to travel without one.
Eat beans for a month if you have to, but never, ever carry a balance on your credit card. If you cannot afford to pay off the balance every month, you have spent more than you can afford.
If you do pay off the balance every month, and you have a no-fee credit card, you are being given a short-term, interest-free loan every month.
acconav, make sure you don’t spend more than you are able to once you get a card. The interest rates are very high.
Some sad facts-
-Americans owe 1.65-TRILLION in credit card debt
-Almost half (49 percent) of the people who have credit cards carry a balance - 14 percent carry a balance of $5000 or more
I admit that the possibility of debt worries me, but not too much. I don’t plan to use the card very often, I just want it for emergencies (I don’t plan to use it at all, actually, but I can force myself to every once in a while, just to build a credit history).
I’m naturally paranoid about spending money, and I know a few people who’ve screwed themselves by misusing credit cards, so I think I’ll be able to charge sensibly.
I would further suggest you rip up all offers before discarding. I recently received a card for which I had not applied because someone had gotten hold of a pre-printed application and tried to use it for their own evil purposes. Fortunatly they were too stupid to intercept the card in the same way they got ahold of the application.