Credit Cards for Beginners

Credit Cards 101

• A credit card is usually an unsecured line of credit, which means that it gives you purchasing power without requiring you to have money available to pay it back. Compare this with a bank debit card, which allows you to make purchases against the money you actually have in your account.
  
  A credit card essentially loans you money every time you use it. If you pay off the full balance of the card when it's due, this is a low-cost, short-term loan, and a great convenience. However, if you allow your balance to roll over from one month to the next, the credit card interest rate kicks in---at which point, you're paying more money in the future for something you've already purchased. If you spend more money on your credit card than you can afford, then every $100 in purchases can cost you $120, $150 or more by the time you've paid it off.
  
  

Interest and Fees

• The most important things to understand about your credit card are its interest rates and fees; these are provided in the legal agreement that came with your card. The agreement explains what fees apply to your card, and when they apply; for example, going over your credit card limit by even a dollar can hit you with a $30 over-limit fee. Missing a payment by a day, even if very little is due, can incur a similar charge. You can avoid most fees with proper planning, and you should try to avoid them to prevent the cost of your credit from going sky-high.
  
  Your interest rate is the other aspect of managing your credit; when a balance is carried on your credit card, the interest rate is applied to the new balance. Your annual interest rate determines how much is charged; it is usually divided by 365 and applied daily to your account. The credit issuer will charge you interest on your past interest (and any fees added to the balance), so your actual interest rate is higher than the stated annual rate. The best way to avoid this: Keep your balance at zero, or close to it.
  
  

Monitoring Your Credit

• Review your bills carefully to ensure that the only charges that appear are the ones you've authorized; this prevents credit card fraud and ensures that unscrupulous retailers won't sign you up for recurring charges without your knowledge. You should also watch your credit report for other forms of fraudulent activity; a free report is available once per year at annualcreditreport.com. Avoid other sites with similar names; these are actually advertisements for paid services.