Credit Card 101: Facts About Credit Cards

There are many things that you should know about credit cards before applying for one. For example, not all credit cards are the same. Some credit cards are secured and some are not secured. In addition to this difference, there are usually "hidden" provisions in a credit card agreement that most people neglect to read. Such provisions include the differences between the interest rate for a purchase and a cash advance, and whether or not the credit card company from which you obtained a credit card engages in the practice of universal default.

A secured credit card is a credit card that is that is tied to a monetary fund of some kind (whether it is a deposit, bank account, or some other account). The monetary fund can be accessed and used by the credit card company in the event that the credit card holder defaults on a payment. These kinds of credit cards usually have an obscenely high interest rate and an inordinate amount of fees. Basically, they are terrible credit cards that target people with bad credit.

As an alternative to getting a secured credit card, you should look at non-major credit cards. These types of credit cards include credit cards from various retail stores, department stores, and even gasoline cards. These cards usually have a high interest rate, however, the usually have no fees attached to them as secured credit cards do. Additionally, these "non-major" credit cards are unsecured, therefore, you do not have to put up a big deposit or tie the credit card to a bank account. It is easy to qualify for non-major credit cards, and thus, they provide an attractive alternative to secured credit cards should your credit be bad.

In regard to the different interest rates for purchase and cash advances, if you look at your credit card statement, you will see a section that shows you your interest rate. There are usually two interest rates shown: (1) your purchases interest rate; and (2) your cash advance interest rate. I can almost guarantee that the cash advance interest rate will be several points higher than your purchases interest rate. For example, you regular purchases interest rate may be 12.95% while you cash advance interest rate may be 19.95%. Why the big difference? This difference exists because your monthly payments will not count towards your cash advance balance until you fully pay off your regular purchases balance. Therefore, the credit card company will be able to charge you a higher interest rate while you are paying off your primary debt.

Universal default is a credit practice where you will be in default on one card because you are in default on another unrelated credit account. For example, let us pretend you have two completely unrelated credit cards; Credit Card A and Credit Card B. Further, let us pretend that Credit Card B has a universal default provision in the credit card agreement. Now, pretend that you are late or default on a payment to Credit Card A. The credit card company that gave you Credit Card B can now put Credit Card B into default even if you have never missed nor been late on a payment to Credit Card B.

The effect of this is that it is possible for you to be charged a credit default fee for Credit Card B (even though you have never missed nor been late on a payment to Credit Card B) and that another negative impact will occur on your credit report.

These are just a couple of credit card facts of which you need to be aware before you obtain a credit card.

Actual and Potential Credit Card Usage Fees

Yes, credit cards can have costs. There are two main costs associated with credit cards: (1) interest rates; and (2) annual fees. Interest charges result only from the use of a credit card. Annual fees, on the other hand, are charged regardless of whether or not you actually use your credit card.

You should never have to pay to use credit cards. However, this is the exact effect of an annual fee. An annual fee is a payment by you to the credit card company for the privilege of using that credit card. There are far too many good credit cards out there that do not have an annual fee for you to obtain one with an annual fee. In essence, do not get a card with an annual fee, it is that simple.

In addition to annual fees, credit card companies charge other fees of which you may not be aware. If you are ever late on a payment, there is usually a fee. If you go over your credit limit, there is usually a fee. Know what these fees are and factor them into your decision as to whether to obtain that particular card. It is important to note that almost every credit card will have these fees. Therefore, do not refrain from obtaining a good credit card simply because these fees exist. Should you do so, you will not find a credit card.

Interest rates are another fee charged by credit card companies. First, you should notice that the interest rate is different for credit purchases and cash advances. Cash advances always carry a higher interest rate. Additionally, your monthly payment will not count towards your cash advance balance until your credit purchases balance is paid off. This is because cash advances carry a higher interest rate. Therefore, the longer that your balance remains unpaid, the more money the credit card company makes.
Also, make sure that the interest rate that is advertised is not an "introductory" rate or a "variable" rate. Introductory rates only last a couple of months (at most, one year). After that introductory period, your interest rate resets to the default rate. The default rate is usually a lot higher than the introductory rate. Therefore, be aware of what you are getting yourself into because you do not want to see your interest rate jump over twenty points at the end of your "introductory" period.

Variable rates change with economic conditions. Therefore, you could have a great rate one month and a terrible rate another month. Granted, the rate changes are not dramatic. Therefore, you will not go to bed one night with a 9% interest rate and wake up the next morning with a 20% interest rate. The changes are gradual. However, do not play a guessing game with your credit card interest rate. Get a low fixed rate, and you will be much happier.

Know the costs that are associated with a credit card. By doing this, you will be able to make the best decision possible based on your needs and wants.


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