Using your credit card

According to the Federal Reserve, approximately 83% of adults in the United States currently have at least one credit card.

Although they may be costly if mismanaged, credit cards are also a valuable financial tool that may build or improve your credit when used responsibly. The key is understanding whether a credit card is the right decision for you.

How credit cards work

Using credit is one way to borrow money. Credit cards may be used to draw on a line of credit to make purchases with the understanding that you will pay that money back later with interest and, sometimes, additional fees.

• Establish a line of credit. Behind every credit card is a line of credit. A line of credit is an agreement between you and your financial institution that outlines the terms of your agreement to borrow money using your credit card. This includes your credit limit (how much you can borrow), your annual percentage rate (APR), and other fees. Annual Percentage Rate, or APR is the cost you pay for borrowing money, as expressed by an interest rate applied annually to a loan, such as a credit card or mortgage.
• Use card to make purchases. Every time you make a purchase with a credit card you are borrowing money from your financial institution under the terms you agreed to when you opened your line of credit.
• Make payments. If you charge purchases to your credit card, you will be required to make a regular, minimum payment to your account. Minimum payments are calculated by your financial institution as outlined in the terms of your credit agreement, usually as a percentage of your overall balance. Try to pay off your balance in full every month to avoid paying interest and fees.
• Build your credit history. Payment history accounts for approximately 38% of your credit score, so one way to build your credit score is to always pay your bills on time and in full. Also, people who use less of their available credit are considered lower risk, and so receive a higher credit score. A general rule of thumb is to use only 30% or less of your available credit.
• Know your rights. The Credit CARD (Card Accountability Responsibility and Disclosure) Act of 2009 requires that creditors disclose important terms, like fees and interest, before they open a line of credit for the consumer.

5 benefits of credit cards

Although you may rightfully feel cautious about using a credit card, there are lots of advantages of responsibly using one to make purchases instead of cash.

• Convenience: Credit cards allow you the flexibility to pay for purchases in-store, online, or over the phone. For expensive in-store purchases, paying with your card means you don’t have to carry large sums of cash.
• Credit score: Having a credit card impacts your credit score. Factors such as the amount of debt you owe, your payment history, and the length of time you’ve had your credit card may improve your credit score as long as you manage your card responsibly.
• Delay payment: Using credit to make a purchase allows you to delay making the payment until a later date. This may be helpful when you need to make an unexpected or emergency purchase and will either not have the funds to pay until a later date or need to pay for the large sum over a period.
• Cash advances: Some credit cards allow you the option to withdraw cash from your line of credit, which may be helpful if you need cash on hand and do not have any readily available. Keep in mind that many cards offer cash advance charge an additional fee for this service, usually in the form of a percentage of the amount of the cash withdrawal.
• Earn rewards: Certain cards offer rewards or incentive programs that offer discounts on travel or even cash bank in exchange for using the card to make purchases.

Remember, these benefits are meaningful only if you can maintain a low or zero balance on your card. If you end up paying too much money in interest, these benefits will have a lesser impact on your overall finances.

The costs of credit cards

Credit cards may come with a variety of costs, however, their costs stem mainly from carrying large balances. If you can keep your balance low, your bill paid, and you use your card responsibly, a credit card may be an excellent financial tool.

• Interest: If you charge something to your credit card and you don’t pay off the balance within the grace period, you’ll be charged interest on that purchase. Some transactions may not have a grace period and interest may start to accrue immediately. Interest on a credit card is also known as an Annual Percentage Rate, or APR.
• Fees: Some financial institutions will charge you fees specific to the type of credit card you use, such as an annual membership fee. If your card allows you to withdraw cash from your line of credit, you may be charged an additional cash advance fee, usually a percentage of your total cash withdrawal. Other fees include balance transfer fees, foreign transaction fees, and fees for late or returned payments. Make sure to check your credit card agreement for all potential fees.
• Enables overspending: Although this cost is indirect, one of the greatest risks of having a credit card is overusing it to pay for unnecessary items, or “wants.” If you overspend on wants and cannot pay off your balance, you will end up paying interest on those unnecessary purchases. Money spent on interest, even if it’s a few dollars, is money you can’t put toward your savings goals.

Be sure to check whether your APR is fixed or variable. A variable APR is subject to increase or decrease over time and according to the market.

How to pick a credit card

Credit cards have a wide variety of features, and it is important that you take the time to do your research and compare offers before committing to any credit card agreement. Remember, there is no single best credit card, so if you decide to use one, you should select the option that makes sense for you.

• Try to find an option with a low, fixed APR: A low, fixed APR will allow you to predict the amount of interest that you will owe on purchases over time.
• Choose a card with a grace period: Grace periods allow you the flexibility to make payments at a time of month that works for your budget without incurring any late fees or interest charges.
• Weigh the cost of any annual membership or participation fees: Cards that carry annual fees may seem costly but could also offer benefits that make those fees worth paying. Be sure to carefully review fees and benefits to weigh whether a card with annual fees is right for you.
• Make customer service a priority: Look for a creditor that offers 24-hour, international support. You will want to make sure that you have support from your creditor if you encounter any issues with your card in those situations.
• Select a card with rewards that serve your lifestyle: Cards offer a wide variety of rewards programs, including travel discounts, mileage rewards, or even cash refunds. Choose a card that serves your personal priorities. For example, if you have a specific airline that you use for mileage rewards, it may make sense to use a card that earns miles for that airline.
• Prioritize security features: Features like a chip, PIN, and fraud alerts are helpful tools to help ensure that your information and money remain secure.

In some cases, credit cards might seem like great deals until you read the fine print and disclosures. Read all credit card terms and disclosures carefully and ask questions if you need clarification.

Card security and fraud prevention

Almost half of all Americans with a credit card have had to deal with fraudulent charges. Credit card theft can happen in a variety of ways but understanding how it happens is the first step to preventing it.

• Dumpster diving: This happens when your information is stolen from discarded bills or statements and the thieves then use your information to make purchases. Be sure to safely discard your documents by shredding anything that contains sensitive information.
• Hacking: This may happen when a store or website where you have shopped has their information stolen, and your account information is compromised. Be sure to make purchases only on websites that offer secure payments.
• Theft: Even though cards are still considered a safe alternative to cash, they are still at risk of being physically stolen from your person. It could even be possible for someone to take a photo of your card and then use the information to make a purchase. Be sure to avoid lending your card to anyone and be careful about where your card information is displayed.
• Social engineering: This happens when you are tricked into divulging information, like credit card information, or buying fake products or services, typically via phone or the internet. Be careful about ever giving your information out over the phone or online – you should do so only with a representative from a trusted source after you have verified their identity.

Key points

There are lots of important considerations when choosing a card or deciding whether a credit card is right for you. Keep these key points in mind.

1. They are a way to borrow money: Credit cards may look like debit cards, but they function completely differently. Every time you make a purchase with a credit card, you are borrowing money.
2. It costs money to carry a balance: Unless you pay your balance off in full and on time, you will owe additional money to your creditor in interest charges and fees. The APR, which may be fixed or variable, determines the cost of borrowing money.
3. There are many options available: Credit cards come with a wide variety of features, fees, and rewards programs. To decide whether getting a credit card is the right choice for you, do your research and compare offers from multiple creditors.

Next steps

• Do your research and compare offers: There is no single best card out there, but you should compare offers to find the best deal for you. Select a card that has manageable risks and rewards that serve your lifestyle.
• Use only strategically: Credit cards may be an excellent way to earn rewards and build credit history, but they are also a common source of debt. Be sure to use a credit card only if you can pay off at least the minimum balance, although paying off your full balance is recommended.
• Monitor activity: Credit cards can put you at risk of your card or information being stolen, so monitor your account very closely, and keep an eye on your credit report to watch for suspicious activity.

The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.

Article written by EVERFI