Buy now. Pay later. That’s the essence of credit. For most people, credit cards can provide financial freedom to make important purchases that can be repaid at the end of the month while accruing rewards points.
Sometimes, credit cards are seen in a negative light, but they aren’t inherently good or bad. Like most things in life they are best handled with moderation and common sense. By being aware of how credit cards work, a savvy consumer can take advantage of the flexibility that credit cards offer while capitalizing on the accrual of rewards points.
So, how do you choose the right credit card for your lifestyle?
1. Educate yourself
When you are considering a new credit card it is important to find out a few key pieces of information. Questions like: “What is the interest rate?”, “What are the monthly or annual fees?”, and “Are there any rewards offered?” are great places to start.
2. If you can’t pay for it in cash, don’t pay for it with a credit card
Your credit card is not free money. It’s providing you with a loan. Plan for paying off your credit card like you would plan for taking out a loan for a home or car. Be careful not to overextend your debt.
Let’s say you make a $5,000 purchase on your credit card. Assume the interest rate is the typical 18 percent and you pay $180 a month. It will take you about three years to pay off your debt—and that’s only if you don’t add to your balance.
3. Pay off your card every month
Paying off your credit card every month allows you to avoid interest charges while potentially capitalizing on receiving rewards points to use for airline miles, statement credits, gift cards and more.
If you must use a credit card for a purchase you can’t pay off the same month, it is important to prioritize paying the balance of your credit card in the coming months to avoid interest charges.
4. Pick the best card for you
To attract your business, many credit card companies offer rewards programs. The rewards might include things like cash back, airline miles, gift certificates and more. Rewards can be a great perk for cardholders.
Think about the kinds of rewards that make sense for your life. If you’re a regular traveler, airline miles or hotel savings might be ideal. If you don’t travel but intend to use your credit card for daily purchases that you would be making anyway, a reward points card is the best fit for you.
If you are thinking about transferring an existing credit card balance it is important to look for a card that offers a low or no balance transfer fee and has a better interest rate than your existing credit card.
5. Key terms to know
To evaluate which card is best for you, you need to understand a few key terms:
APR (Annual Percentage Rate) – This is the interest rate you pay on a credit card each year.
Periodic Rates – This is the interest rate on your card for a single month. If your APR is 18 percent, your periodic rate is 1.5 percent (APR ÷ 12).
Average Daily Balance – This is the method by which most credit cards calculate your payment due. An average daily balance is determined by adding each day’s balance and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card’s periodic rate. If you have a card with an APR of 18 percent and a monthly periodic rate of 1.5 percent, and you have a $500 average daily balance on your card, your monthly finance charge will be $7.50.
Late Fees – If you make a late payment on a credit card, you will be charged late fees in addition to your balance and interest. Late payments can also cause your interest rate to rise.
Annual Fees – Some credit cards charge annual fees that you must pay regardless of whether you use the card or have a balance on it.
Promotional Rates – Some institutions offer low short-term interest rates on credit cards to customers willing to transfer their balance or open a new card. Once the promotional rate expires, a Go-To rate will kick in, so know what that rate will be
At First Financial Bank, we’re here to help. Let us know how you’d like to use your credit card, and we’ll be happy to recommend one that’s best for you.