Are you considering applying for your first credit card in order to start developing your credit history, but you are hesitant because you have heard how risky credit card debt can be and you are unsure of how they operate?
Don't worry; we'll explain all the fundamental ideas you need to be aware of in this post to prevent paying interest, along with other advice so you may take use of credit cards' benefits without getting in over your head.
What is a credit card and how does it work?
We'll start by stating that credit cards are a type of financing provided by financial institutions; that is, they allow borrowers to borrow money in exchange for paying a monthly interest rate. It is frequently described as combining revolving credit with a payment method (which can be used repeatedly).
Since the financial institutions are the ones who pay the businesses the amount of their purchases, these cards allow users to make purchases without using cash. This is where they become a double-edged sword since occasionally people forget that it is a loan and that it is not extra money.
The majority of credit cards contain an annual fee for use, which is a payment for utilizing a credit line for a full year, though this varies depending on the perks provided by each institution.
Your credit line is used each time you use your card to make a purchase, and when you make payments, the initial amount you borrowed is returned to you. If you pay your bills on time, your bank might even reward you by raising the loan's line of credit limit or its total value.
Additionally, good credit card management allows you to accrue points toward your credit history, which acts as a letter of introduction to lenders in the event that you wish to apply for a bigger loan like a mortgage or auto loan. The following are the essential ideas for comprehending how a credit card operates:
Credit limit refers to the maximum amount the financial institution is willing to lend you, and is determined by your income and ability to pay.
Cut-off date this is the first important date to remember, since it is when your institution makes a cut-off to calculate the debt of your purchases of the last 30 days, and thus define the minimum payment and the amount of interest you will have to pay.
Payment deadline is the second date that you should always keep in mind, since this is when you will have to make the payment to avoid falling into arrears. Normally it is 20 calendar days from the cut-off date.
Minimum payment is the minimum amount required by your institution, which you must cover before the payment deadline so that your account remains current and you are not reported to the Credit Bureau for delinquency. Be careful! It is not recommended that you pay only this amount, because if you do, it will take you a long time to pay off your debt, since only a portion of that amount goes to the payment of principal (1.5% minimum) and the rest is for interest payments.
Interest: there are two types of interest, the first is ordinary interest, which refers to the percentage that the institution charges you for not paying your balance in full at the cut-off date; and the second is late payment interest, which arises from the delay in the payment date of your loan and when you do not make the minimum payment.
Balance at cutoff is the amount you owe at the cutoff date (when the statement is issued), which includes balances from the previous period, fees, interest and payments you have made.
Commissions and surcharges are charges made by the financial institution for the provision of various services or penalties for their use, such as cash withdrawals, plastic refills, inactivity, etc.
Non-interest bearing payment is the amount of the consumption that you made during the period and that you must pay in full in order not to pay interest. It includes the total sum of previous balances, interest, commissions and interest-free month promotions.
TAC: This is the abbreviation for Total Annual Cost, and to calculate it, credit institutions use the interest rate, annuity and commission for the use of credit.
How to pay 0% interest?
Did you know that you may finance purchases on your credit card for up to 50 days without incurring interest? This is one of the biggest advantages provided by your plastic; all you have to do is structure your purchases and payments. Pay off all of your purchases before to the payment deadline if you want to avoid paying interest on your credit card balance. This will give you 50 days to make your purchases before they expire.