Credit Card Guide

Americans are in love with their credit cards. According to the Federal Reserve's most recent figures, the average person has about $2,800 of credit card debt. And they are paying an average of 18 percent interest on their balance -- meaning they wind up paying far more for everything they charge than the item is worth.

With credit card companies finding new and more devious ways to slap customers with fees, it is more essential than ever to break the habit of credit card spending.

Of course, the best way to break that habit is to cut up your cards. If you do want a credit card, save it for emergencies or travel expenses only. And make sure the card you carry is the best one you can find. A good credit card will have a reasonable interest rate as well as acceptable fees. Before you agree to a new card, remember to read the fine print carefully -- information on fees and rates changes is often hidden.

Master the basics of credit cards below, then start shopping. Some great places to begin include bankrate.com, CardWeb.com and CreditChoice.

Revolving credit
Most credit cards offer revolving credit, meaning you can carry a balance from month to month. You will be required to make only a small minimum payment each month. Revolving credit is how the companies make money -- they profit by charging you interest on the balance you carry.

Interest rates
A credit card is basically a form of borrowing. As with any other loan, the privilege of borrowing does not come free. Companies charge interest on the amount you borrow. Cards come with either variable or fixed rates. Although a fixed rate is usually a better idea, it is really a false attraction. Companies can change their terms at any time as long as they give customers 15 days notice. (That's one reason to make sure you read the inserts that come with your monthly bill.)

Annual percentage rate (APR)
This is a yearly rate, expressed as a percentage, that is your cost of credit. Companies must reveal this rate on card agreements and your monthly account statements. You will also see a periodic rate, which is the rate applied to your monthly balance. These rates can change, so take note of them on your bills.

Introductory rates
You may be tempted when an offer for a "pre-approved" credit card arrives in the mail -- you know, the envelope with "you've been approved" stamped across it in big red letters. Be careful. Many of these cards have a low teaser rate. But those rates often last for only three to six months, after which the company jacks the rates right back up. And those rates often apply only to new purchases, not to balances you transfer to the new card.

What is more, many companies practice the classic bait-and-switch. Few people who respond to the promise of a card with a 7.9 percent fixed rate, for example, will actually get approved for that rate. Keep in mind that the terms of your card are pegged to your credit history. No one is going to give you anything but a high rate if your credit history is bad. Most people will get cards with less favorable terms.

Balance transfer
The amount you move from one card to another card, usually in an attempt to get a lower interest rate.

Cash advance
Cash you can borrow from you credit card company. You will have a cash advance limit, which will appear on your statement. Companies typically charge 2 percent of the total as a fee for the privilege, as well as applying an interest rate, which is usually even higher than the rate applied to purchases.

Grace period
The time between when you make a purchase and when the company begins charging interest on that purchase. Grace periods, typically 25 days, have been shrinking to as little as 20 days, making it more difficult for even those who pay off their balances regularly to avoid interest charges. The grace period disappears if the cardholder already has a balance on the card.

Late fees
This fee is charged for late payments. Some companies begin slapping on this fee as early as the date the bill is due. Fees run about $15 to $29.

Inactivity Fees
Inactivity fees are the latest trick. Hard as it is to believe, companies are charging a fee of $15 a month of more on customers who do not use their card frequently. (They are not making enough money off those of you who pay your balances off regularly.) If you see such a fee, do not sit back and take it. Call your company and tell them you will not stand for it. They probably will wipe out the fee. After all, even though they don't make much money off you, they probably still want you as a customer -- just in case you screw up someday and run up a balance.

Don't miss Rules of the Credit Card Game.

Back to Money home page.

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