things to know before applying for a credit card
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4/23/2020 9:56:56 AM
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Credit
1. THERE’S A BIG DIFFERENCE BETWEEN DEBIT AND CREDIT CARDS
If this is your first foray into the world of credit cards, you may think they’re much like debit cards. Debit and credit cards do work in fairly similar ways; they both have the logo of a major credit card company (Visa or MasterCard), they can be swiped for payments (instead of cash) and usually require a pin for successful transactions. But there’s one very big difference: debit card payments come off a current account while credit card payments are made using credit which you have to repay with interest later.
2. CREDIT LIMITS
‘Credit limit’ refers to the total amount of money that you can spend on your credit card. Your credit limit is determined by several factors including your credit score and income. People who earn more and have higher credit scores are often given higher credit limits.
Once you’ve had a credit card for a while, the issuing lender or bank might offer to raise your credit limit, but think twice before accepting it. It’s safer to keep your credit limit to an amount that you can pay off easily, and a higher credit limit might tempt you to over-reach.
3. MINIMUM PAYMENTS
A ‘minimum payment’ refers to the smallest amount due every month on your card based on a percentage (usually 3% to 5%) of the capital. The minimum payment tends to include interest for the month, potential charges for a defaulted payment and if there is an annual fee, part of it might also be included.
The minimum payment terms change from bank to bank so be sure to familiarise yourself with the specific terms of the credit card you’re interested in. Because minimum payment is based on a percentage, the smaller your debt, the less you are required to pay.
4. CREDIT CARD INTEREST
Credit card issuers charge interest only if you carry a balance over from one month to the next. If you pay your balance in full every month, your interest rate is irrelevant, because you don’t get charged interest at all. Obviously, it’s important to know the exact payment due date so that you can pay your balance in full and avoid accruing any interest (the sensible thing to do).
If you don’t pay off your credit card in full every month, you will be charged interest on the balance. Usually the annual percentage rate is between 15 and 20 percent, but credit card interest is actually calculated on a daily basis and then compounded every month. What that means is that you will be charged interest on interest if you allow it to roll over from month to the next. Again, you should always aim to pay off your credit card in full every month.
5. HOW CREDIT CARDS AFFECT YOUR CREDIT SCORE
There are a number of ways to establish a credit score, but by far one of the most popular options is to get a credit card. However, a credit card itself will not help you build a good credit score; your spending and repayment habits will. If you spend responsibly on your credit card (spending no more than your 75% of limit) and repay in full every month, you’ll likely see a positive trend in your credit score.
However, if you max out your card every month and make only minimum repayments, you could damage your credit score. A downward turn in your credit score would be even more likely if you did this with multiple credit cards, a sure sign of irresponsible financial habits.