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Credit Card Tips For Beginners
The Truth About Interest Rates
If you currently have credit, you understand that interest rates are like service fees that you pay in order to borrow money. The longer your account is open, the longer you pay interest, which results in more profits for your lender. While credit is a tool that you can use greatly to your benefit, you need to remember that it is a business, after all. This is why credit card companies try to keep your account open as long as possible. The basis for interest rates is in this ideology.
Interest rates typically fall into one of two categories: fixed and variable. Fixed rates are exactly as they sound: an established rate that never changes. Sometimes they are also called "prime" rates. A decent fixed rate falls below 20%. Variable rates, however, can be tricky because they entail multiple rates that change over time. For instance, many companies offer low introductory rates to entice into joining their company. These low rates, sometimes even 0%, will often adjust to a much higher rate when the 30, 60 or 90 day term is over. Sometimes these adjustments can reach as high as 40%, so be wary of variable rates and understand the terms inside and out before signing the contract.
The Truth About Fees
Typically, fees are something that you pay as a penalty or as a due for membership. Some credit cards do have a membership fee, which is charged to your account annually. These cards usually offer other incentives like a lower rate or special rewards bonuses to compensate for their fee. While these fees can reach upwards of $100 these cards are sometimes better than comparable ones with no fees.
Of course, you have to pay fees if you violate your contract in anyway. This includes overspending your limit and not making your payment on time. In fact, that is how many people actually end up getting deeper into debt. When you can't make a payment, that's the worst possible time to have to face penalty fees but that, is the true nature of responsible credit management. Be sure that you know what kinds of fees to expect for every kind of behavior before establishing an account.
What is Liability
Just like with insurance, credit liability refers to what you are responsible for. The more credit you use, the more liability you have. Credit card companies look very carefully at this when deciding whether or not to issue you a card and how much credit to offer you if they do. The more credit they are willing to give you, the more they are willing to bet that you are responsible. This is important because everything you do with regards to credit after they issue this first amount will significantly influence your credit, potentially for the rest of your life.
If you make your payments on time and pay more than the minimum required amount whenever possible, you will be viewed by the three major credit bureaus as responsible, which will work heavily in your favor should you ever need more credit for larger purchases. However, a poorly maintained credit history can and will damage your credit score. This not only reduces your ability to credit, but it limits the terms under which you can accept credit. Having limited terms when setting up your account typically means higher fees later.
Part of your liability is your credit-to-debt ratio. This is a number that describes how much total credit you are allowed to have in comparison to how much you have used. While it might seem that you have a good chance of getting more credit if your current account is maxed out, the contrary is true. The more credit you have available says, supposedly, how good your credit score is. When you pay down one of your credit cards, your first instinct might be to close that account. However, it is actually wiser to keep your accounts open because the bigger your credit-to-debt ratio is, the more attractive you become to lenders.
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