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All About Credit Cards: What You Know Might Be All Wrong

Between student loans and car loans, mortgages and credit cards, the average American has at least three sources of debt. But instead of working toward financial freedom, every year fewer and fewer Americans are able to say they’re debt-free. Are you one of the many Americans carrying the heavy burden of debt? If so, chances are one of the monthly dues overwhelming you is a credit card payment.

If you struggle with how to use a credit card, the best way to pay off a credit card or how to pick a credit card, you’re not alone. But before you do anything, you have to know where your debt is coming from in order to create a pay-off plan. After that, you need to understand where your money goes — and learn the ins-and-outs of credit card basics.

If you don’t have a credit card, you’re in the minority: 7 in 10 Americans have at least one — and if you’ve got one, you’ve probably got about 4, say recent statistics. And with so many different types of credit cards available, choosing the right credit card is essential. It's important to do your research and find a good credit card that fits your lifestyle. For example:

Credit card types

  • Basic credit cards are ideal if you want a low, fixed rate and no annual fee. These credit cards often advertise introductory rates, which means that you'll have a lower annual percentage rate (APR) for a specified period of time, either on balance transfers or purchases, or both. This is best if you wish to carry a balance each month, or if you have an existing balance to transfer from a higher APR card. But know that the rate will eventually rise, when the introductory period is up, to a rate the credit card company must disclose up-front.
  • Rewards credit cards work if you charge a lot of purchases and pay off your balance each month. Each purchase you make may add up for benefits like airline miles, hotel stays, or cash back. Be sure to find one with the right rewards for you. After all, you want to make sure you're going to use whatever you earn. Hard-earned rewards should never be wasted.
  • Secured credit cards are a match for those who have serious financial troubles that have compromised the ability to obtain credit. Secured credit cards work like unsecured credit cards but require a deposit in the issuing bank. The credit limit is generally set at the same amount as the deposit. Choose a secured credit card carefully. Look for a secured credit card with no application fee and a low annual fee. Most importantly, make sure it reports to all three credit bureaus: Equifax®, Experian®, and TransUnion®. You may use a secured credit card to rebuild credit, but only if your credit is being updated with your new, good credit habits.
  • Student credit cards are specifically targeted at post-secondary students, who have little or no credit history. While these credit cards often have high APRs, the right one, used wisely, can be a valuable tool in building credit. One thing to keep in mind: federal law now restricts credit card companies from issuing a credit card to anyone under 21 who cannot show proof of income and the ability to pay back the debt incurred, or who doesn't have an adult co-signer.

Fees

Regardless of the type of credit card, the fine print is important for disclosures and fees. While many credit cards have fees, you can find no-fee options or you can avoid fees through smart usage. The most common fees are:

  • Annual fee, charged each year for the use of the credit card, and is charged separately from purchases. It is most common with rewards and affinity credit cards.
  • Late payment fee, charged if you make your monthly payment after the due date. The amount is disclosed by the credit card issuer. In addition to the fee, if you make your payment after the due date, your APR may rise.
  • Balance transfer fee, incurred if you transfer another balance. It may be a set amount, or a percentage of the transferred balance.
  • Cash advance fee is charged if you use a credit card to withdraw cash at an ATM, or over the counter at a bank. The fee is in addition to the APR charged for cash advances, and doesn't include charges assessed by the bank that owns the ATM.
  • Application fee may be charged by some credit card companies just for applying for a credit card. It's important to note that not all companies charge an application fee.

So if having a credit card is almost a rite of passage, then we all know what’s true (and what’s not) about responsible credit card use, right? Probably not, which is why credit cards are the top source of debt for 25 percent of Americans.

Let’s debunk the myths — starting today.

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