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The World of Credit Cards
by Tuong Tran

The World of Credit Cards | Getting Your First Credit Card | Choosing the Right Card | Glossary

Now that you have successfully made your initial transition to your new school and new life in America, it's time to look into other ways to make your life here easier. Some of you may have already noticed that credit cards are as common in the U.S. as having a nice car. Understanding credit cards and how to use them can be confusing and downright scary.

iStudentCity is here to help you understand credit and obtain a credit card and get the most out of using it. In this first installment of our four part credit card series, iStudentCity teaches you what you need to know in order to evaluate various credit card offerings. In the subsequent installments, we will give you strategies to get your first credit card, and guidelines to help you manage your credit cards so you can realize the maximum benefits.

Why is a credit card important?

For those of you new to the credit card world, a credit card is a plastic card issued by a financial institution. Each card has a revolving line of credit that you can access any time to make purchases, until you reach your credit limit. Using the line of credit is like getting a short-term, pre-approved loan from the bank, but the interest on the loan is much higher than a regular loan. However, if you use your credit wisely and pay off your balance in full each month, you effectively get an interest-free short-term loan.

Americans appreciate the convenience of credit cards and tend to use them liberally. With credit cards, you do not need to worry whether or not you have enough cash in your pocket to go shopping or even to take a taxi, since they are as widely accepted as cash at almost all merchants in the U.S. In addition, credit cards are much safer to carry than cash. If you lose your cash, it is probably gone forever. However, if you lose your credit card, you just need to notify your bank; your financial risk is minimal.

Credit cards can provide an extra source of money to use for unexpected expenses. More importantly, a credit card is often required to purchase goods online, especially for bookings travel (e.g. airline tickets, rental cars, and hotel rooms) since they offer protection for companies in case you don't pay the bill. Some cards offer bonuses like frequent-flier miles, cash back, warranties or rental car insurance when you use them to charge those purchases or services, so in many cases paying with a credit card has benefits over paying with cash.

What should I look for in a credit card?

Not all credit cards are created equal. The credit card terms vary widely from bank to bank, and even from one type of card to another provided by a same credit card issuer. These distinctions can make a big difference on how much you pay for the privilege of borrowing. The key credit terms to consider are the annual percentage rate (APR), annual fee, and grace period. Also consider credit terms such as cash advance fees, late payment charges, and over-the-limit fees.

Annual Percentage Rate: The APR is the annual interest rate your card issuer charges you for the money you borrow on your credit card. The APR varies from 9.9% to over 20% depending on the credit card issuer and the type of card you choose (lower and higher interest rates can be found, but are rare). The lower the APR, the less you will need to pay in interest if you do not pay your balance of at the end of each month.

Many credit cards carry a variable APR, although some offer lower introductory APR that is usually fixed for certain period of time. The variable APR is usually based on an index such as the prime rate plus a certain percentage, and the card issuer may adjust the APR on your account when the prime rate changes. If interest rates rise, your rate rises; if they fall, your interest rate drops with them. If your credit card has a variable rate feature, the issuer must tell you that the rate will vary and inform you how the rate is determined.

Annual fee: Some card providers charge an annual fee for servicing your account. These are usually credit cards with lower APR or linked to certain reward programs or cash rebates. The annual fee can range from $18 for a Wells Fargo Student MasterCard to $300 for American Express Platinum Card. You will need to evaluate the fee against the benefits on a case-by-case basis.

Grace period: The number of days, usually 25 days, between the time you use credit and the time you have to pay for it without incurring a finance charge. Be aware that a grace period generally applies only if there is no outstanding balance on the previous bill. Clearly the longer the grace period the better it is for you.

Transaction fees: You may also be charged late fees, application fees, delinquency fees, or cash advance fees, as well as fees for exceeding a credit limit. None of these charges should be a surprise if you've read the cardholder agreement sent with your card. If you don't understand an item in the agreement, call the financial institution that issued your card.

The card that is right for you will depend on your spending and usage patterns. If you don't plan to carry a balance on your account often, it may make sense to look for a card with a low or no annual fee, even if it carries a higher APR. On the other hand, if you travel a lot, it may make sense to choose a credit card with a travel reward program.

A word of caution

Using credit cards can make your life easier, but also requires that you take responsibility. Because credit cards make it easy to purchase things now and pay later, it's easy to lose track of how much you've spent. Make sure you don't spend more than you can afford, and make a habit of paying your bills on time, at least covering the minimum amount due. Skipping a bill is not like skipping a class. Not paying your bills can lead to a poor credit rating, which may affect your ability to rent an apartment, or secure a car loan in the future. I will explain how to establish and maintain a good credit history in the later installments.

The World of Credit Cards | Getting Your First Credit Card | Choosing the Right Card | Glossary

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