Getting your first credit card can be an exciting experience. You can shop with ease; whether it is online or in a store, it can’t get any easier than uttering the words, “charge it”! In this day and age we hear lots on the news and online about credit card debt and how it can affect your credit score, but there are lots of myths and misconceptions out there. It is important to pay attention to the details about what being a credit card owner is all about. If you know how to use a credit card to your advantage, it can be a wonderful tool to help improve your credit score and build up your financial history.
Let’s start by outlining three things you didn’t know about credit card interest.
1) Credit card interest is the main way financial institutions generate revenue. This interest is expressed as an annual percentage rate. When you pay your minimum requirement, you pay very little of the principal (the actual amount charged to the card) and instead pay accumulated interest. Increasing your credit card payments slightly, even by $20 per month, can save you thousands in the long run because the payment is being put directly onto the principal.
2) Your rate can be negotiable. Often credit card rates hover around the 20% mark. This is based on national and international averages that financial institutions, credit bureaus and credit unions implement. If you have a good to excellent credit score, it may be worth calling your financial institution to negotiate your credit card interest rate. The bank may be willing to work with you on this as your payments are made on a regular basis and this is revenue they can count on. Also, many service providers such as financial institutions have loyalty departments whereby agents are available to speak to you about customer retention.
3) Interest-free periods exist! That’s right! The way to benefit from interest-free periods on your credit card is to pay the outstanding balance in full before the current month’s due date. Using your credit card this way is an excellent way not only to avoid generating interest on your purchases, but to also build up your credit history. Showing that you are able to pay off the balance on your credit card each month will help improve your credit score.
Now that you’ve learned more about credit card interest, do your best to use this information as a tool to improve your credit score and develop your financial literacy. When used the right way (and not to get yourself into more debt), credit cards can be an effective part of your financial life. For more information about your credit score and using credit cards, check out our educational resources.
