Credit. People use it for everything from routine daily purchases to large investments like houses or cars. But what is credit? All the jargon can make getting a credit card a bit intimidating or overwhelming, but understanding what credit is and the terms associated with it is an important first step towards building good credit and keeping credit card debt manageable.
[url=http://www.howstuffworks.com/]Howstuffworks.com[/url] breaks the ins and outs of credit into language we mortals can understand.
Using a credit card is, in essence, borrowing money. The annual percentage rate (APR) is the measure of the cost of credit expressed for an entire year. In other words, if interest was calculated on your balance only once per year, it would be at the APR. The periodic rate is the portion of the APR applied your outstanding balance. In other words, if your APR was 12 percent and your interest is calculated on a monthly basis, the periodic rate would be 1 percent. This means at the date interest is calculated, you would owe the money you charged plus 1 percent. It is important to note that these rates can be applied on a daily or monthly basis and can change due to economic fluctuation or other factors.The free period is the time during which you can pay your balance in full and avoid finance charges. Annual and transaction fees are common with credit cards and are disclosed at the time you sign the contract. They typically range anywhere from twenty-five to several hundred dollars annually.
So now you want a card, but you don't understand which payment plan would be the right one for you. There are three types of plans typically used by card companies. The adjusted balance is the simplest of methods; it takes the balance (if you had one) from the previous period, adds the new charges, subtracts any payments you made throughout the period, then multiplies this number by your annual interest rate. This type of payment plan is beneficial to the cardholder because it is clear and easy to follow each period. The average daily method, which is the most commonly used, tracks your day-to-day balance. It adds charges and subtracts payments each day, then at the end of the period it computes the average of each daily total then multiplies that number by the monthly interest rate. Finally, the previous balance charge method multiplies your previous balance statement by the monthly interest rate to find the finance charge. The method is not very beneficial because it means you are being charged a whole period after you paid ' watch out for this!
The balance on your account, your interest rate, and the way your finance charge is calculated all affect how much you will pay. Late fees and over the limit fees are commonplace with credit card companies. After a set number of late payments occur issuers raise the interest rate on the card - meaning more of your monthly payment goes to interest and your balance becomes harder to pay off. Timely payments helps keep debt manageable and keep interest rates as low as possible. Making the minimum payment is acceptable, but if you continue to make charges, you can amass debt so large your minimum payment won't cover your monthly finance charges.Simply put, credit cards should not be feared and are quite useful when used properly. By paying on time and staying within the limits of your card, you will build credit that will pay off when you want to make larger purchases in your life. Unmanageable debt can be avoided when you know all terms of your contract and are aware of what kind of payment plan would be best for you.
Have more questions about credit cards? Visit for [url=http://money.howstuffworks.com/credit-card.htm]http://money.howstuffworks.com/credit-card.htm[/url] for more information.
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