A credit card offers great convenience: You don't have to constantly dig out an ID (or so it seems), you don't have to carry large amounts of cash, you can consolidate payments, and you have a record of purchases. A credit card is needed to complete some transaction—try buying an airline ticket, renting a car or shipping an overnight package with cash. (You could use a bank debit card, but the dangers and hassles.
But think of a credit card as a loan from the bank that allows you to buy goods and services now and pay later. If you're smart, pay the balance in full each payment cycle, and use the bank's money interest free for about a month. Those who don't pay the bill in full each month and make additional purchases soon find themselves choked by interest payments on a ballooning balance. This is hurtful to your financial health and can leave its mark on your credit rating.
Although banks have done a terrific job marketing these pieces of plastic as status symbols and tickets to freedom, don't buy into the hype--think of credit as a commodity and shop for the best deal.
Credit Card Usage Tips
Late Credit Card Payment?
- Before you sign anything, read the fine print—check the terms and conditions that will determine your overall cost. You don’t want pay an annual fee for the privilege of carrying a credit card—if a bank wants to pick your pocket before issuing a card, simply deal with another bank. Most creditors want your business and won't charge an annual fee for the card. Also, ask about transaction fees. Banks often charge a fee if you use the card to get a cash advance, make a late payment or exceed the credit limit.
- Check the annual percentage rate, or APR. This is the standard cost of the credit shown as a yearly rate. Every creditor must disclose this figure to you. Remember that many banks offer a low introductory rate that climbs steeply in a few months. Beware—and remember, read the fine print.
- Some creditors offer variable rates tied to interest rates or other gauges of the economy. This isn't a problem as long as you're paying attention. But who tracks this stuff along with the clatter and chatter of daily living? This can be an invitation to a beheading—yours.
- Keep monthly charges low. Some recommend no more than 30% to 50% of the credit limit.
- Pay your debt obligations on time, every time (at least 2-3 days before the due date to ensure that your payment arrives on time). This saves you money and really helps your credit report. A solid credit report is the key to securing a mortgage or a car loan, often at a lower rate. If you don’t pay on time and let a balance build up, the "periodic rate" will be a charge applied to your outstanding balance to calculate the monthly finance charge for each collection cycle. This can be a killer if you let the unpaid balance build. The smart user of credit pays the bill in full each month, saving big bucks and driving the banks crazy.
- Limit yourself to one major card with a credit limit you can handle. Some people flash a wallet full of credit cards as if it's proof that creditors love them. Hint: The bank wants your money--make them jump for it.
- Always keep your credit-card account number and the phone number of the creditor's service line at home. If your card is lost or stolen, contact the bank immediately to cancel the account. Your liability is limited by law to $50 and in most cases, you won't be asked to pay a cent if you report the theft promptly.
- Review your credit report. It is vital in maintaining a solid credit rating and guarding against identity theft. Typically, a credit report contains personal identifying information, a credit summary, account history, inquiries, collections and public records. The three major credit-reporting agencies, Equifax, TransUnion and Experian, collect similar information to help banks answer a basic question: Is the credit applicant a good risk? (Click here for information on what do to with a credit report.)
About to be late on a credit card payment? Communication is key—your creditor isn’t unapproachable like you may think. If you are going to be late with your payment, give them a call immediately. Explain your situation. Many creditors will gladly accept credit card payments over the phone. If paying by credit card is not an option, notify the creditor that you will be sending payment today. Most creditors will make notation to your account to avoid late fees.
If you don't have enough money to make payment for the month, suggest to your creditor that you can pay perhaps half the payment now and the rest next month. If unemployment, divorce, sickness, etc., puts you in a situation where you need to suspend payments, discuss your situation with the creditor. Many creditors have deferment plans for financial hardships. The key point is contacting and working with your creditor. Never assume that your creditors are going to "walk away" from your debt obligations. You want to avoid having your account sent to collections. Creditors will be happy to work with you if you make a honest attempt to resolve your situation.
Credit Card Debt Collection
If you receive a notice from a collections agency, contact your creditor immediately. Find out why your account was sent to collections if a repayment agreement was reached. Request that they remove your account from collections and renegotiate your repayment plan. Read our guide to dealing with debt collectors
- Never ignore collections notices or payment due notices. Get them resolve as quickly as possible.
- Understand your rights under the Fair Debt Collection Practices Act. Click here to view rights