Credit cards can be a good way to establish and build your credit, as well as offer you some pretty great discounts and rewards on items that you buy the most. And while these are good things, there are some serious downsides if you don't understand how credit cards work.
1. Credit limits
When you are issued a credit card, you'll be given a credit limit. This is a set amount that the creditor has approved you for. Simply put, it's how much credit they are willing to extend to you. As time goes by, the credit card company may choose to increase your line of credit if you have a good payment history and don't go over your allotted limit. And while paying on time can really help boost your credit score, you don't want to be using a large percentage of the credit they extended to you. By not maxing out your limit shows lenders that you have the restraint to manage your spending by watching your budget.
When your bill comes, you'll have the option of paying the balance in full, making a partial payment, or the minimum payment. At the very least, you must make your minimum payment because that is what the credit card company is requiring of you. If you don't make the minimum payment, many companies will raise your interest rate (this is often noted in the fine print of your agreement). Make sure you know the company's policy on late payments and its effect on rate increases before applying for the card.
3. Interest rates
If you don't pay your balance in full each month, the credit card company is going to charge you interest - that's how they make their money. The only exception to this would be in the case of balance transfers (balance transfers may offer zero percent interest for a specified period of time) and special introductory rates. Make sure that you fully understand your agreement and know:
- What your interest rate is (also known as your APR)
- How long this rate is in effect (in the case of special offers)
- And in the case of a balance transfer, know what the interest rate will jump up to once the offer has expired