Written by: Jessica (she/her)
3 min read | Published: September 26, 2024
Credit cards can sometimes get a bad reputation due to consumers not having enough knowledge to fully understand how they work. Let’s break down some key terms you should know related to credit cards and help you master your plastic!
Balance means the total amount of money owed on a credit card at any given time. Often, when you look at your credit card statement, you will see a couple of different types of balances listed. One example includes the statement balance, which is the amount of money that needs to be paid that month to avoid paying interest on your credit card. There may also be a previous balance showing last month’s statement balance, and a total new balance which includes any previous charges not paid yet, new charges, fees and interest assessed. Be sure to keep an eye on your credit card balances throughout the month so you’re not caught off guard when you receive your monthly statement.
Every credit card has a due date stating the date each month you MUST make a payment by to avoid paying any penalties or late fees. If you make a payment after your due date and the financial institution’s grace period, you could be charged a late fee. And if a payment is more than 30 days past due, it can be reported to the credit bureaus which may have a negative impact on your credit score. A helpful strategy to avoid late fees is to set up payment reminders in your calendar, so you always make your payments on time.
A credit limit is the maximum amount of money you can charge on your credit card. For example, if your credit limit is $2,000, then the maximum total amount you can charge on your credit card at one time is $2,000. Try not to charge more than 30% of your credit limit each month. This allows you to use your credit card for purchases and — hopefully — pay it off at the end of each month, which helps you avoid carrying a balance and accruing debt. Keeping your credit utilization at 30% or less can also help you maintain or improve your credit score.
Interest is what credit card companies or financial institutions charge for borrowing money if you carry a balance month to month. Interest rates are expressed as an annual percentage rate (APR) and can include things like finance charges, discount points and any fees associated with the credit card. The interest rate on your credit card is dictated by your credit score when you apply. If you only use your card for purchases and can pay off your credit card balance every month, you can avoid paying interest.
The minimum payment is the smallest payment amount you can pay by the due date to keep the account in good standing. A pro tip is to pay more than the minimum balance shown on your credit card monthly statement whenever possible. If you only make the minimum payment each month, you will pay more in interest, and it will take longer for you to pay off the total balance.
Credit cards can seem scary, but once you have a better understanding of how they work and begin to use them responsibly, they can be beneficial, helping you build your credit score and setting you up for success. A good credit score can help you when you’re making large purchases such as a car or your first home. With a positive credit history, you’re more likely to get approved for loans because you’ve demonstrated you know how to make payments to keep your credit in good standing.
https://www.cnbc.com/select/common-credit-card-terms/
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