by Kailey Hagen | Updated July 21, 2021 - First published on Nov. 6, 2020
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What you don't know can cost you dearly.
Credit cards aren't inherently bad, but they can be one of the worst things to ever happen to your finances if you don't know how to use them properly. You could wind up in debt, tank your credit score, or both. So before you swipe your card one more time, make sure you understand the following three things so you don't land yourself in a world of trouble.
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When you buy something with a credit card, you're not paying for it right away. Your credit card issuer pays for it and then sends you a bill for your month's purchases at the end of each billing cycle. Then, you pay back the credit card company by making monthly payments on that debt. You may only charge up to your credit limit, so you have to pay down your existing debt to make new purchases.
You get a grace period of at least 21 days starting at the end of each billing cycle. If you pay your credit card bill in full during this window, you won't have to worry about your card's APR at all. But if you don't pay your whole balance, the leftover amount will accrue interest. Credit card interest rates are known for being high and can reach over 30% for some borrowers. This causes your balance to grow quickly, making it difficult to pay off your debt, especially if you keep making new purchases with the card.
Your credit card statement lists the minimum payment you must make for that month. If you fail to pay at least this much by your due date, your credit issuer considers your payment late and it can charge you late fees and possibly a penalty APR. That can then cause your balance to grow even faster.
The card issuer may also report your late payment to the credit bureaus. This can drop your credit score dramatically and make it harder for you to get new loans or credit cards in the future. If you can get new credit, you'll probably pay a higher interest rate because your credit score indicates there's a greater risk that you'll fail to pay your bills.
You should always pay your credit card bill in full every month so you don't have to deal with costly interest. Keep an eye on how much you're spending and don't charge more than you can afford to pay back if you can help it.
Those who already have credit card debt should make a plan to pay back what they owe as soon as possible, though this may take a few months or even a few years. First, make a list of all the cards you're carrying a balance on, noting their interest rates, balances, and minimum payments. Put them in order, starting with the card with the highest interest rate. Make the minimum payment on all of your cards and then put any leftover money on the card with the highest interest rate until it's paid off. Then move onto the card with the next-highest interest rate, and so on.
Or you could use a balance transfer card. These have 0% introductory APRs for anywhere from six to 21 months. During this time, your balance won't accrue interest, so every payment you make goes toward reducing what you owe.
A personal loan is another option if you'd prefer to exchange your credit card debt for a predictable monthly payment. These loans don't require collateral, so their interest rates are higher than many other loans'. But they can still be more affordable than credit card debt, especially to those with good credit.
Credit cards are a popular target for identity thieves, who can use stolen card info to quickly make a bunch of purchases without your knowledge. Most credit card companies are pretty good about removing fraudulent purchases from your statement so long as you notify them as soon as you realize your card has been stolen. But you still have to cancel the card, wait for your card issuer to send you a new one, and update your payment information with any online store or service provider that used that credit card.
You're better off just keeping your credit card information safe in the first place to reduce the risk of it being stolen. Don't leave your credit cards out where anyone can steal them or copy down the number, and only use your card on reputable websites that encrypt your information. Look for a little lock icon in the URL address bar, as well as an "https" at the start of the URL.
Check your credit card statements at least once per month for any charges you don't recognize and notify your card issuer immediately if you find any. You may also want to change the passwords on any online accounts you have associated with that credit card in case the thief got access to your card by hacking one of your accounts.
You want your credit card history to be a credit to you, not a burden, so use your cards wisely. If you make an effort to spend only what you can afford to pay back, guard your credit card information carefully, and always pay your bill on time, you should have nothing to worry about.
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