It's hard to imagine doing business today without credit cards. If you are 1 of the few who do not own a credit card, you probably have difficulty renting a car or reserving a hotel room. On the other hand, if you have a fistful of maxed out credit cards and want a new one, you have a whole new adventure ahead of you, too.
Let's start with the basics.
What Is A Credit Card?
The dictionary defines a credit card as: "A card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company, which in due course is reimbursed by the credit card holder, who will be charged interest at the end of the credit period if
money is still owing."
In other words, whatever you charge to your credit card has to be paid back within the credit cycle, or an interest amount will be applied to the remaining balance. Sometimes, lots and lots of interest.
Pros and Cons of Credit Cards
The obvious advantage to using a credit card is that it allows you to purchase goods or services that you might not be able to pay for immediately. The credit cycle of most cards is usually about 30 days, and if the money is paid back in that amount of time, there is no interest owed. This sounds good in theory, just like an interest-free loan. But the bottom line is that most folks don't pay off their balances on a monthly basis. This is where the disadvantages come into play.
Any amount that isn't paid off within the monthly cycle will be subjected to an interest charge. Depending upon your balance and the rate charged by the specific card issuer, that amount of interest could be huge. On top of that, many people will continue to charge things to their card, and the balance and interest keeps growing until they have no hope of ever paying off the card by only make the minimum payment. This is a very common scenario, and most of us know someone who has been in this situation.
The Rewards of Good Credit
Chances are that every few days you get a pre-approved credit card application in the mail. Sounds easy, doesn't it? Well, before you accept this generous offer, read the fine print. You'll see that many of these promotions come with hidden penalties in the guise of high interest rates and annual fees.
If you want to get the best possible interest rate with no additional fees, you’ll need to give the credit companies what they’re looking for in your credit history. They will check to see that you are responsible with your credit and that you have paid your bills in a timely manner.
These signs of stability and credit responsibility will encourage the card company to reduce the amount of interest they will charge you. Outstanding loans with late payments and too much available credit will work against you.
Although credit cards can be great for emergencies, they can easily get out of hand. Before you apply for one, decide in advance what you plan to use it for. If used with discretion, credit cards can give you added economic flexibility and buying power.
