Financial literacy is an important topic. A lot of people want to know more about personal finance, but don’t know where to begin.
A good place to start is with something you might use every day – your credit card. That little plastic rectangle in your wallet represents a lot of information. What you do with that information can save you – or cost you – a significant amount of money.
Three critical pieces of information are represented by the letters A,B and C. This article will explain the ABCs of credit cards, and teach you how to use this information to your financial benefit.
A is for annual percentage rate (APR)
Your annual percentage rate determines the amount of interest charged on your credit card balance. This percentage is applied to the amount you owe. It’s quoted based on the rate you’d pay over the course of a full year, but it’s applied to your balance every month.
So, suppose you have a credit card with a 29% APR and you owe $1,000 on that card. Twenty-nine percent of 1,000 is $290. That’s how much interest you would pay in a year, if your balance didn’t get any bigger or smaller. That $290 would be divided into 12 monthly increments of about $24.17.
A recent CardRatings credit card interest rate survey found that average credit card APRs range from 17.24% to 30.74%. While the exact numbers may change over time, the point is there are huge differences in the APRs that different credit cards charge. That means shopping around can save you a significant amount of money.
For example, suppose that instead of paying a 29% APR, you were able to find a card with a 24% APR. That same $1,000 balance would cost you $240 a year instead of $290, a savings of $50. You can probably think of a lot better things to do with $50 than giving it to a credit card company if you don’t have to.
Paying attention to a credit card’s APR is important when you are choosing a card, but it remains important for as long as you have that card. Review your statements and any correspondence from your credit card company to make sure you are aware of the APR changes. Also pay attention to APRs offered by other credit cards, to see if there might be a better deal out there for you.
B is for billing cycle
Credit cards generally bill on a monthly cycle, but it isn’t always at the beginning or end of the month. Your credit card’s billing cycle may fall somewhere in between.
Why is this important? You need to be aware of your credit card’s billing cycle so that your payments aren’t late. While you may rely on mailed statements, emails or text alerts to notify you of a new credit card bill, it’s helpful to keep the billing cycle in mind in case you miss a notice. Perhaps post reminders on your calendar.
You may have seen recently that the Consumer Financial Protection Bureau plans to force credit card companies to lower late fees from an average of $32 to $8 dollars. Even so, $8 is too much to pay – especially if you are regularly late with your bills. Over the course of a year, $8 a month would add up to $96 – the equivalent of paying an extra 9.6% on a $1,000 balance.
➤ SEE MORE:How a credit card late fee cap could hurt consumers
Speaking of extra interest, in addition to late fees credit card companies often apply a penalty APR to balances that are overdue.
Besides letting you know when it’s time to pay your credit card bill, being aware of the billing cycle can remind you to make sure you have money available for that bill. Especially if you’ve been using your card heavily, coming up with the cash on short notice can be tough. It helps if you know in advance when that bill is coming due.
You might be wondering if setting up automated payments would eliminate the necessity of keeping up with your credit card’s billing cycle. It might, but automated payments don’t solve the problem of making sure there’s enough money in your bank account to cover those payments. Minimum payments on credit card balances often vary from month to month. Because of that, they are not the best fit for automated payments unless you’re sure you’ll have enough funds in your account to cover your costs.
➤ SEE MORE:Should you make a credit card payment twice a month?
C is for cash advance
Using your credit card to get money from an ATM is called a cash advance. There are also other types of transactions that are considered cash advances. These include:
- Using a credit card to gamble
- Obtaining foreign currency with your credit card
- Having your card linked to a checking account to cover overdrafts
This is important because cash advances are typically charged a higher APR than purchases, and may also incur a fee for each transaction. In addition, cash advances start accruing interest immediately, as opposed to after a grace period at the end of your billing cycle.
It’s also very important to note that there are important differences between “cash back” and “cash advances.” A cash advance allows you to get cash back using your credit card at an ATM or with a teller, and often involves high fees, while credit card cash-back rewards are something you earn when using cash-back credit cards.
It’s best to avoid using a credit card for a cash advance unless absolutely necessary.
➤ SEE MORE:Can you get cash back with a credit card?
Knowing these credit card ABCs can save you money
APRs, billing cycles and cash advances are three basics of using credit cards. Understanding them can save you money in the following ways:
- Reduce interest charges by choosing a credit card with a lower APR. The credit card market is very competitive, and rates change frequently. It pays to regularly do some comparison shopping to see if you can qualify for a lower APR.
- Avoid late fees by being aware of your credit card billing cycles. For people on a tight budget, this means not only remembering to pay the bill but also preparing to have enough cash available when the time comes.
- Minimize cash advance charges. Using a credit card is not a cost-effective way to get cash. Interest accrues more quickly and at higher rates than for purchases, and there may be fees involved as well. Read your credit card terms carefully to make sure you know what types of transactions will be treated as cash advances.
- Protect your credit score. People with lower credit scores are generally charged higher APRs. The ABCs of credit cards can help you avoid missing payments. They can also help keep your balance down, by minimizing interest and fee charges. A good payment history and lower balances are both positive factors in building credit scores.
Basic fundamentals are important. Keeping the ABCs of credit cards in mind should help you use credit more successfully.
