A credit card is an important financial tool. It’s a convenient way to carry money without carrying cash, and a good way to pay for larger purchases over time. It also provides financial support in an emergency and lets you build a credit history.
Like any tool, credit cards work better when you know how they work. That’s why you need this guide to using credit wisely. With the information that follows, you’ll be able to take charge and stay in control of your finances.
Using a credit card is like getting a loan. Every time you charge something, you borrow the money until you pay it off later that month or over time. In exchange for this “loan,” the credit card company adds interest charges to your account, which you must pay along with the purchase amounts.
By using your credit card wisely and always paying your bills on time, you’re building a good credit history. This can help lay the foundation for your future success.
Know Your Limits
When you get a credit card, there’s a limit to how much you can charge to your account. This ceiling is imposed by the credit card company and helps keep your card charges at a level you can pay. If your balance goes over the limit and you try to use your card for purchases, it will probably be declined. That’s because, based on the agreement you signed, you can’t exceed the credit limit—and if you do go over the limit, you’ll have to pay extra fees.
One good way to avoid this situation is to know what your credit limit is, and to make sure that your balance is not too close to it. If your balance is getting up there, you may want to stop using your card and pay down your balance.
This not only protects you from accidentally going over the limit, but also gives you an added safety margin for use in a financial emergency.
As you continue to pay your bills on time, your credit line may gradually be increased. However, it’s always important, no matter how high your credit limit is, to make sure you’re not carrying too much debt and that you have a plan for reducing any outstanding balances you may have.
Interest Rates & Finance Charges
Finance charges are what credit card companies charge in exchange for letting you carry balances. They’re determined by the Annual Percentage Rate (APR) on your account. As a credit card user, it’s important that you understand how these finance charges work and how to handle them.
·Annual Percentage Rate (APR). The APR is the interest rate, on an annualized basis, that you pay on balances. If you carry a balance, the APR is the best indicator of what credit costs. The higher the APR, the more you will pay. Some credit card companies offer lower introductory rates for a limited period of time. Afterwards, these rates usually go up to a higher APR.
·Fees. Some credit card companies charge annual fees. You may also be charged late fees (for payments received after the due date), cash advance fees, and fees for exceeding a credit limit. Be sure to read your account’s cardholder agreement—it should describe all the fees and charges associated with your card.
·Grace Period. If you pay off the total balance on your account by the due date, any purchases you make during the next billing cycle will not accrue interest. This 20-30 day period is called the grace period. If, however, you are carrying a balance from the previous bill, any new purchases you make are usually added to your balance and begin accruing interest immediately.
·Cash Advances. Many credit cards allow you to obtain cash advances from your line of credit. You can get these cash advances with your card at banks and ATMs. You may also be able to use special cash advance checks. A cash advance is different from a regular credit charge—it’s more like a short-term loan that is often subject to different interest rates and conditions, such as:
FINANCE CHARGES begin to accrue immediately (ie. there is no grace period) and remain in effect until the advance is paid off completely. The rate may be the same as your APR, or it may be higher.
CASH ADVANCE FEES are charged for each cash advance you take. They are usually a percentage of the total advance—often up to 4%.
All About Credit Reports
One of the main reasons many college students get credit cards is to build up their credit history, so that in the future they can get approved for car loans, apartments, rentals and other types of credit. Yet there are often misconceptions about the credit reporting process. Here are the facts:
·Credit Report. Your credit report is based on your payment history (on-time and late) gathered from banks and other creditors. It includes monthly credit card and loan payment information and can also include monthly rent or utility payments. It may even contain information on bounced checks. Your total outstanding debt, as well as the amount of unused credit available to you, is usually included.
Credit card companies, auto financing companies, college loan issuers, and insurance companies all have access to your credit report. Even landlords and prospective employers have access to this information.
That’s why it’s so important to make sure that your credit history is good, and that there are no problems. If you have a history of late or missed payments, or are over your credit limit, it may be very hard for you to get additional credit—and that includes car loans and mortgages.
·Credit Bureaus. Credit bureaus are the companies that compile your credit history to create credit reports. It’s very important to make sure there are no errors on your credit report. You can request a copy by calling any of the three main national credit bureaus whose names and numbers appear at the end of this brochure. If there are errors, these agencies are legally bound to correct them. Your credit report will include instructions about what to do if there are any inaccuracies.
What To Pay And When To Pay It
·Paying in Full. You can avoid paying interest charges on purchases by paying your bill in full each month. That way, you don’t carry a balance forward to the next month, which is how interest accrues.
·Paying over Time. Of course, sometimes you want or need to make a big purchase that you can’t pay off all at once. In fact, that’s one of the main reasons people get a credit card—it lets you carry a balance. But unless you’re careful, you could wind up paying off those books long after you’ve graduated. Make sure that when you’re contemplating a large expense or purchase, you factor it into your budget. That way you can plan on how long it’ll take to pay off your purchase. Don’t forget to calculate how much interest you’ll pay each month, too, since that really becomes part of the cost of your purchase.
·Develop a Regular Payment Pattern. Information about how you pay your bill is sent to credit bureaus every month. Some people mistakenly think that it’s better to save up for a few months and then pay off their balance in full. The problem is that for every month you don’t send in at least a minimum payment, it appears as a bad mark on your credit report—even if you pay off your balance in full the next month. The first thing companies look for when they see your credit report is whether you pay your bills on time every month.
·The Minimum Monthly Payment. Your monthly statement shows a minimum payment due amount. This is not a recommended payment amount. This is the absolute minimum amount you must pay and the date by which you must pay it to keep your account current. If you do carry a balance, it’s a good idea to minimize interest charges by paying off your balance as soon as possible. If you can, you should think about doubling or tripling the minimum due to pay down your balance faster and pay less in interest.
The chart below shows how paying more than the minimum due can save you a lot in interest charges. If you just pay the minimum due, you will wind up paying over $800 in interest charges, and it’ll take you more than 7 years to pay off a $1,000 balance!
Keep In Touch
Sometimes you may be in a situation that makes it impossible to make your monthly payments. When this happens, don’t avoid the problem by ignoring bills until you can pay them. The very first missed payment is reported to the credit bureaus and goes on your permanent credit report.
If you have problems that might affect your ability to pay your bills, call your creditors right away. In most cases, they really will try to help—sometimes, they might be able to reduce or freeze payments for a while. Or you may be able to work out a payment plan. Either way, the sooner you call, the more they can help you keep your record clean.
And remember, whenever you move, make sure your credit card company has your correct address. You’re still responsible for paying your bill on time, even if your bills don’t get forwarded to your new address.
Balancing Your Balances
One of the best ways to keep your finances on track is to put together a budget. It can help you figure out what you can afford to spend, set goals for saving and figure out which expenses are necessary and which can be cut back. Coming up with a budget is a two-step process:
1. Determine your monthly income. Add up any money you take home from jobs, receive from stipends, fellowships and scholarships, or any regular support you may receive from your family. Remember, a credit card is not a source of income.
2. Figure out your monthly expenses. These include rent, telephone, utilities and other bills. Then figure out your other expenses, including groceries, gas or transportation, books, entertainment like CDs or movies, and anything else you spend money on. Don’t forget to factor your credit card payment into your expenses. When you complete your budget, you’ll see how well your income covers your expenses. Make sure that you’re paying monthly expenses out of your income—not your credit. Don’t rely on credit to cover shortfalls in cash, or your balance will soon snowball into a huge debt. If you do have a shortfall, you should review your budget to see where you can cut expenses.
Keep Track To Stay On Track
It’s important to get into the habit of tracking your credit card spending. That way, you’ll
always know your exact balance and whether you can afford to make that large purchase. Plus, you’ll avoid surprises when your bill comes. It’s easier to keep track of your spending and control your budget if you have only one or two cards rather than multiple credit cards, gas or store cards. With so many accounts, you could miss a payment, or send it in late—and that goes right on your credit report.
GLOSSARY
Some of the terms used to describe credit cards may be unfamiliar to you. Here are some of the more commonly used words and phrases and their definitions:
Annual Percentage Rate (APR)
The cost of carrying a balance on a loan expressed as an annual percentage. To calculate the rate each month, divide the APR by 12. For example, if the APR is 18%, the monthly
rate is 1.5%. To calculate the daily rate, divide the APR by 365.
Available Credit
The unused portion of a credit line. Available credit is the credit limit minus the current balance.
Average Daily Balance
This amount is determined by adding the amount you still owe from your previous statement (if you didn’t pay it in full) plus all new purchases and cash advances, and then dividing the sum by the number of days in the billing period. It is shown on your statement each month that you use the card.
Balance
Your balance is the total amount that you owe on your account. This includes balances that you’ve carried over from previous months as well as any current purchases and cash advances. Finance charges or fees are included, too.
Cardholder Agreement
The issuer’s written statement of terms and conditions relating to a credit card account. The cardholder agreement is required by Federal Reserve regulations. The agreement states the Annual Percentage Rate, the monthly minimum payment formula, annual fee, if applicable, and the cardholder’s rights in billing disputes.
Consumer Credit Counseling Service (CCCS)
A nonprofit organization that provides free or low-cost counseling and guidance to people experiencing financial difficulty, CCCS can be reached by calling 1-800-388-CCCS.
Credit Limit
The maximum amount of money that your credit card company will allow you to borrow. If your balance exceeds this amount, your card will be declined when you try to use it, and you may have to pay over-the-limit fees.
Credit Line
A revolving amount of credit. Any amount up to the limit on the credit line may be borrowed to make purchases or cash advances. The cost of the purchase, plus interest, is then paid off over a period of time. As the outstanding balance is paid off, credit becomes available again to use for another purchase or cash advance.
Fees
These are often confused with finance charges. Fees are fixed amounts charged to your account. They include annual fees, late fees, application fees, or cash advance fees, as well as fees for exceeding a credit limit.
Finance Charge
These charges are based on your APR and your balances. They are also known as interest charges. They accrue at the interest rate charged by your account (APR). If you do not have a balance, you will not be charged any finance or interest charges.
Grace Period
When you pay off your balances in full by the due date, any purchases made within the next billing period will not accrue interest. This 20-30 day period is called a grace period. If you do have a previous balance, however, purchases you make will begin to accrue interest immediately.
Periodic Rate
The interest rate described in relation to a specific amount of time. For example, the monthly periodic interest rate is the cost of credit per month; the daily periodic rate is the cost of credit per day.
For Additional Credit Information:
·Consumer Credit Counseling Service
1 800 547-5005
http://www.debthelpnow.com
·National Foundation for Consumer Credit
1 800 388-2227
http://www.nfcc.org
Your rights as a credit user have been established through the Equal Credit Opportunity Act and Fair Credit Billing Act.
For more detailed information on your credit rights, contact the Federal Trade Commission at (202) 326-2222 (www.ftc.gov) or the National Consumers League at (202) 835-3323
Credit Bureaus
For information about your credit report, contact the three credit bureaus:
Equifax
Information Service Center
P.O. Box 740241
Atlanta, GA 30374
1-800-685-1111
http://www.equifax,com
Experian
National Consumer Assistance Center
P.O. Box 949
Allen, TX 75013-0949
1-800-682-7654
http://www.experian.com
Trans Union Corporation
National Disclosure Center
P.O. Box 390
Springfield, PA 19064-0390
1-800-888-4213
http://www.transunion.com
© Citibank, N.A. 1999
275 Eastland Rd.