A credit card is a powerful tool that can either be used for good, or used to damage a personâ€™s finances indefinitely. Too often, young people are not fully aware of all of the repercussions a credit card account can bring into the life of an irresponsible cardholder.
Cardholders that do not understand credit card jargon should spend time researching the realm of credit before submitting that first application. Take a look at some of the best pieces of info every young professional should know about credit cards.
Important key terms to know
- Annual fee – Some card companies charge an annual fee just for using the card.
- Annual percentage rate – These three letters (APR) represent the amount a person will be charged if a balance rolls over to a new fiscal year.
- Card member agreement – The cardmember agreement lays out the terms and conditions of the card.
- Charge-back – This is when a charge is returned to the cardâ€™s credit limit due to an erroneous charge.
- Credit utilization ratio – This is a number that represents the relationship between the amount of money currently being utilized versus the total credit available.
- Minimum finance charge – This is the amount of money a cardholder is charged if their monthly balance rolls over to a new charge period.
- Secured credit cards – Credit cards that offer credit on the presentation of collateral.
- Unsecured credit cards – Credit cards that work strictly on agreement of repayment.
The 30 percent rule for spending
It is generally thought of as good practice to make sure credit card balances never exceed 30 percent of the maximum line of credit on the card. Keeping the balance low keeps the risk of defaulting on the payments low.
It is also better for credit reporting to maintain a low balance on all sorts of credit. When lenders see that a potential borrower already has quite a bit of credit out, they are less likely to work with that applicant.
Payment parameters, dangers, and benefits
When it comes to making the payments on that new credit card, make sure to pay more than the minimum balance. It is also good to set parameters on spending. Try to keep the spending to a need, rather than a want. Avoid charging more than is possible to repay at the end of the billing period.
Get in the know about rewards programs
Many credit card issuers offer rewards programs for loyal customers. Take advantage of these offers, as they do typically benefit the cardholder over time. Though the benefits may seem miniscule, a long-term relationship with a credit company will always provide some type of perks for those who pay their bills on time.