Basics on Credit Cards

Many people get in trouble with credit cards because they don't fully understand how the card works. Most people only know that they get a piece of plastic in the mail that they can use to swipe in stores and pay the bill later. Understanding how credit cards work can help you use them responsibly.

Credit card companies make money when you pay interest. The company determines the amount of interest you pay each month by using the annual percentage rage, or APR. There are two basic kinds of APRs: fixed and variable. A fixed APR doesn't vary much over a period of time. Should your credit card company change the APR, they must inform you before it is increased. The variable APR can change from time to time. You can find out which kind of APR you have by looking at your credit card application.

The grace period is the number of days that you can pay off your credit card balance without receiving a finance charge. In most cases, the grace period only applies to new purchases that you make. If you already have a balance on your credit card from a previous month, new purchases will not have a grace period. Your grace period is usually printed on your monthly credit card statement.

In some situations, your credit card may have certain fees associated. The annual fee is a yearly fee you must pay for having the credit card. The late-payment fee is charged when the credit card company receives your payment after the due date. If you use your card for a cash advance you can be charged a cash advance fee that is either a flat fee or a percentage of your advance. A balance-transfer fee is incurred when you transfer a balance from another credit card. Should you go over your credit limit you could be charged an over-the-credit-limit fee.

Many credit card companies offer incentives for the use of their credit card. The most common type of incentive is a rebate on the purchases you have made. This rebate is sometimes is made in cash (via check) or as a credit to your credit card account. Frequent flier miles, car rental insurance, and travel accident insurance are other incentives that are offered. Another feature offered by many credit cards is insurance that covers payments to your balance should you become disabled or unemployed.

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