All about credit cards By Brett Klasko  Friday, December 15, 2006

When most people think of credit they think credit cards. So common nowadays and easy to use, credit cards can be great, but also very dangerous for the consumer. With a credit card, we can buy now and worry about paying later when the bill comes. But be careful, remember that eventually you will have to pay it off.

A credit card is basically a one-month loan allowing you to buy almost anything you want. Each card will come with a set credit limit, such as $1000 to start. Your credit limit is the maximum amount you can spend on the card before paying back what you’ve spent. So, if you buy that MP3 player for $500 on your credit card in January, but only pay $250 back to the credit card company, you will only be able to spend a total of $750 in February (or until you pay back the remaining $250).

Before you go applying for a credit card and join the 78% of college undergraduates carrying plastic today, think about your spending habits and whether or not a credit card would be good for you to have. Do you frequently impulse buy? Would you spend more money if you knew you had extra time to pay it back? Are you good at paying back your buddies, and do you do it on time without them having to hound you? Weigh out the advantages and disadvantages, but remember that you have to know youself.

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Advantages

• No need to carry lots of cash
  
• Easy to track expenses
  
• Buy easily on internet and phone

Disadvantages

• Higher limit than you might be able to handle
  
• Must be very organized and on time
  
• Potential for theft and fraud

If you receive a bill and pay it on time, you’ll incur no finance charge and you owe nothing more than the price of the purchase. However, if you are late to pay a bill, you’ll most certainly run into an interest charge and that $500 MP3 player will start costing you way more than that.

Maybe not ready for all the responsibility of a having your own credit card? You can always get a pre-paid card, similar to a credit card. With the Visa Buxx card (www.visabuxx.com) for example, you or your parents can put money on the card before you use it and you can always add money to the card whenever you would like. It acts as a credit card in that it offers all the advantages, plus you can’t get in trouble with overcharging as you can never charge more than what’s on the card.

So many plastic options – which to choose?

A charge card, like American Express, works much like a credit card but requires you to pay the bill in full each month as opposed to paying in full or at your own pace. While there is no credit limit to a charge card, if a bill is not paid in full, interest will be charged or even use of the card blocked. That interest is the annual percentage rate (APR), the one year interest rate for balances on a credit card. Let’s say your balance is $100 after paying your bill in a given month. That balance will be assessed a monthly interest rate charge of 1% (1/12 of the annual percentage rate) each month you carry the balance. So, you would now owe $101 the next month, and if you don’t pay it off quickly, the amount you owe will continue to grow.

A debit card is a cash substitute, in that you can only use the money that is available on the card. Money is immediately withdrawn from your bank account and debit cards are great for those not quite ready for a credit card. Want to know more about debit cards? Check it out in our Banking section in the Personal Finance Channel.

Some credit cards have an annual fee just for owning the card, even if you don’t spend a penny. But do a little research and you’ll be able to grab a card and avoid the unnecessary fee. Credit cards also have a grace period, the time between when you are billed and when you have to pay (you’ll usually have about 25-30 days).

Be careful with how much you put on the credit card and when you pay, as there are over-limit fees and late payment fees which both run about $25.

If you ever need to withdraw cash from an ATM using your credit card, be careful. You’ll be charged a cash advance fee which is comprised of a set fee and interest from the day of the transaction until the day you pay it off (essentially, absolutely zero grace period). Cash advances are very costly and should be avoided as best as possible.

Being smart with credit cards

• Keep receipts and check them against monthly statements

• Notify the credit card company immediately if you notice an error – you have 60 days to notify the card company and it has 90 days to resolve the problem. You are also still able to use the card while the company investigates.

• Notify the credit card company of a lost or stolen card – you aren’t responsible for any charges if you report a card missing

• Be careful – higher credit limits can tempt you to spend more than you can afford

• Don’t have too much credit - higher credit limits and more cards can count against you in the eyes of a creditor. They look at the maximum possible spending in case you go on a giant shopping spree

• Don’t max out your credit card – beyond risking an over-limit fee, creditors might find you a little too risky.

• Protect your card number – be weary of theft and fraud

• Read the fine print – there may be hidden charges or rising annual fees

Jeff Samotny contributed to this article.