Personal Finance 101: Credit Cards

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Credit Cards

As a 20-something, I’m learning the importance of building my credit history now, so in the future I’ll be in a position to make the financial moves I want when I’m ready, rather than letting my credit score have control over my major life decisions.

One way to show responsibility with credit is by using a credit card.

Naturally, it’s hard to do something right if you’ve never done it before. It’s even harder if you don’t quite understand the lingo. With this in mind, it’s important to know some credit card basics before you open your first account. This way you won’t be swayed by something that sounds like a great deal, but may end up creating bigger problems for your finances down the road.

Here’s a list of credit card terms you’ll need to know before you get started:

Cardholder agreement

You know that pamphlet that comes with almost every purchase you make; the one with all the product information, troubleshooting guidelines and other important details? No? That’s probably because these manuals usually get tossed to the side; I mean we all know exactly how to use a digital camera, laptop, car, etc., right?

When it comes to credit cards, the cardholder agreement is one document you’ll want to make time to read. It’s required by Federal Reserve regulations, and is a written statement that gives the terms and conditions of your credit card account. This includes the Annual Percentage Rate, minimum monthly payment, any fees associated with the card, and your consumer rights when filing billing disputes, just to mention a few.

It’s important to know exactly what is in your cardholder agreement because your bank can make changes to this agreement; however, they are required to give you a written advanced notice of these changes. Being prepared for a situation like this will give you the upper hand when deciding if you want to accept the changes, or if it would be better to close your account.

Minimum payment

Although it is a good idea when starting to build your credit history to only charge amounts you can pay in full, your credit card company will only require you to make the minimum payment towards your balance. This is the amount of your current balance that you have to pay to keep your account from going into default.

Grace period

Remember the time between eating a handful of cookies after school and sitting down at the dinner table where you got scolded for not being hungry? Well your credit card has a built in grace period too (and the good news is it’s longer than a few hours).

If you don’t carry a balance from month to month, all of your purchases can be made, interest-free, during the grace period between the date of a transaction and the billing date. The standard for grace periods is usually between 21 and 30 days. However, if you do carry a balance on your credit card, finance charges will accrue the moment you make a purchase with the card because no “get-out-of-interest” period is in place.

Finance charge

Have you ever wondered why you run into credit card offers everywhere you look? Why are banks willing to let you borrow their money? Isn’t having a credit card just like having a free supply of money that you don’t have to pay back until later without any consequences? Think again.

Credit cards often come with a list of extra fees outside of the amount you are charging on the card. Any additional charge you incur for simply using a credit card (which is typically made up of interest costs and other fees) is known as a finance charge. If you are responsible with credit, and make sure to only charge items you can actually afford, you will limit these additional costs.

Pre-approved offer

Congratulations! You’ve been pre-approved for a credit card. But you didn’t do anything; how can this be right? A credit card offer that contains the “pre-approved” word, only means that you’ve passed a preliminary credit-information screening that was run by a credit card company that’s interested in acquiring new customers.

Receiving one of these offers does not guarantee that you will actually qualify for the card in the long run. It is simply a way for banks to target a group of people that currently match a certain set of requirements. It isn’t until you respond to one of these offers and actually submit an application that you will find out if your request has been approved or rejected.

Secured credit card

If you are truly starting to build your credit from scratch, a secured credit card may be one of your only options to obtain a line of credit. A secured credit card is just like a “regular,” or unsecured credit card, only you are required to put down a security deposit when you open the account, as a form of assurance to the creditor that you will repay your debt.

Your purchases are not deducted from this security deposit. Instead, secured cardholders are billed each month for the charges they make, just like an unsecured cardholder.

This is just a chip off the ol’ block of credit card terminology; however, in order to become a responsible, in-good-standing money manager you have to know the basics. Take math for example. Before you can learn the complexities of calculus, you have to master simple addition and subtraction.

For more tips and info to help you manage your home, money and credit through your 20s and beyond–where you’ll find out your potential for credit improvement and get the most affordable credit monitoring on the web – visit Quizzle.com.

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