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Personal Finance 101: Credit Cards Basics – Friends or Foes

credit cards Credit Cards. You see the offers all the time. You see the commercials on TV and you see the offers come in the mail. Are they really a big deal?

Depends on who you ask.

First, let’s talk about what credit cards are. A credit card is a piece of plastic that carries identifying information about a credit account you have opened at a bank or other institution. The line of credit is pre-approved, which means you will not have to forfeit any assets (or things you own) to the bank in the event you don’t pay back what you owe.

An advantage to having a credit card is using the card to make transactions over the internet or over the phone. It is fast and convenient compared to using a check or money order by mail.

Another advantage to using a credit card compared to using a check is that store owners and merchants are able to easily recognize and authenticate a credit card. When a customer uses a check, the merchant has to worry about whether the customer has sufficient funds to cover the transaction…especially if the check is from out of town. When a customer uses a credit card, the merchant does not have to worry about if the transaction will be paid for.

A disadvantage of having and using a credit card is the massive debt that can come with that usage. If the customer loses a job all of a sudden, it might become very difficult to pay back the balance on the credit card or cards that have been used.

 

If you already have hefty credit card bills, transferring the balance will usually substantially cut your interest costs. What this means is that your new provider pays off the debts on your current credit or store cards for you.

You then owe the money at a (hopefully) lower interest rate for a fixed – or sometimes indefinite – period of time. The key to making this work is by not using this card for spending. What this can mean is that credit card providers will then revert the interest rate for the WHOLE of the balance up to a higher rate.

If you pay off your balance in full each month then the interest rate is irrelevant. The key to this is the reward scheme offered. Many credit cards offer points schemes or even cash-back. There’s a huge array of different schemes, but by picking the right one you can benefit substantially. It’s often simpler just to go for a Cashback card, where the benefits are more apparent, but sometimes reward schemes offer great inducements – particularly when they offer double points to new customers, and so on.

Store cards should be avoided under almost all circumstances. They charge the highest rates of interest, and by being offered at a department store counter are an easy lure into a mine of consumer debt. You should never use them to borrow money on, and if they offer any perks and benefits make sure they work for you.

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1 Comment

  1. […] you apply for any loan that you need, you must realise the part of the FICO credit rating system, which is the standard for that credit score used by most lenders within figuring out […]

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