Owning a credit card is a big financial responsibility. The purchasing power of a credit card alone is enough to feel overwhelming at times.
That's why you need to take a step back and study credit card terminology. Every card holder should know the following terms to avoid confusion and make the most of this financial tool.
1. Annual percentage rate
The annual percentage rate is the yearly interest rate on your card. APR rates vary depending on factors like promotional introductory offers and your credit score. Many credit card companies and banks often offer 0 percent APR for a certain number of months to entice you to sign up. Once the introductory period is over, the APR will move to your approved rate.
Additionally, credit cards may have multiple APRs — one for purchases and another for balance transfers or withdrawing cash.
If you always pay the balance in full at the end of every month, you don't have to worry too much about the APR. Otherwise, you'll end up paying more in interest by always carrying a balance.
2. Minimum payment
Every month, you have a minimum amount to pay. Remember, the minimum is not your balance; instead, it's only a percentage of what you really owe.
Paying the minimum might seem like a good way to save money, but it's not, because interest will continue to build. You should always strive to pay your balance in full at the end of every month. If not, try to pay a little more than the minimum.
3. Credit score
As mentioned above, APRs are often influenced by your FICO credit score. This three-digit number informs lenders of your reliability. High scores indicate you're a reliable borrower while lower scores indicate you struggle handling credit and are often late with the bills.
According to MyFICO, credit scores range from 300-850. Your score is composed of the following factors:
- Credit mix: 10 percent.
- New credit: 10 percent.
- Length of credit history: 15 percent.
- Amounts owed: 30 percent.
- Payment history: 35 percent.
To make the most of your credit cards, maintain a high score if possible by always paying your monthly balance and maintaining a low credit utilization ratio. Having a higher credit score may help you secure lower APRs when you open new credit accounts. Additionally, you may be eligible for higher lines of credit.
Check your score with one of the three credit reporting bureaus: TransUnion, Experian and Equifax.
4. Credit utilization
As The Balance explained, credit utilization is the percentage of credit you're using based on your credit limits. For example, if you have one credit card with a $1,000 limit and you have a $400 balance, the utilization ratio is 40 percent.
Avoid a high utilization ratio because it negatively impacts your FICO score. High ratios indicate you're close to maxing out your credit, which may make it difficult to afford payments. And if you find yourself in a financial emergency, using a credit card could be out of the question if you're close to the limit.
"Avoid a high utilization ratio because it negatively impacts your FICO score."
5. EMV chip
EMV smart chips are a new credit card technology that greatly improves the security of your financial transactions. These chips create unique identification codes for every transactions that can't be used again, which prevents thieves from stealing transaction numbers and replicating credit card numbers.
Contact your card issuer if you haven't received a new card with chip technology, as you don't want to leave your credit exposed to potential security breaches.
6. Annual fee
Pay attention to the fine print because some credit cards come with an annual fee, which is the cost of owning and using a card. Fees may range from $25-$500, according to The Balance.
Since an annual fee increases the cost of using a credit card, make sure that extra expense is worth it. Take full advantage of rewards programs and additional benefits to offset the cost of that fee.
By knowing important terminology, you'll be able to call yourself a responsible credit card user.
For more information about smart ways to manage your finances, contact Landmark Bank.
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