Are you familiar with how banks make money with credit cards? They do it in two ways– swipe fees and interest fees.
Swipe fees are fees that merchants pay when you swipe your credit card at their store. Interest fees are paid by you. The interest fees are what cause so many problems for people with credit cards.
How Does Interest Work?
- Credit cards give you a statement with all the charges listed every month. When you look at each month’s statement you’ll see charges for everything you spent using the credit card. There are no extra fees at this point.
- You will be told a minimum payment amount as well as a pay by date. If you only pay the minimum payment amount, the rest of the money that you haven’t paid back yet will start to accrue interest.
- Don’t pay the minimum amount, pay the full amount. Rather than paying the minimum amount you can, pay off each entire month’s statement. If you do that, you won’t be charged any interest at all. You will only be paying what you originally spent.
How Can You Use Your Credit Card Responsibly?
Even when you know the things you should and shouldn’t do with your credit card, it can be difficult keeping up with all that practically. If you’re like us and have quite a few credit cards, how do you keep them all straight and remember to make all the payments?
Tips for Using Credit Cards
- Setup automatic payments and don’t spend more than you have in your checking account. Go to your credit card account online and choose the option to set up automatic payments. Select the pay full amount due option. They’ll make the payments automatically each month on your due date.
- Don’t spend more money on a card just because it will earn you rewards. Have a plan for how you will meet the spending requirement before you sign up for a card.
- Downgrade or cancel cards with an annual fee after the first year. Some cards are worth keeping even with the annual fee, but most aren’t. Check to see if your card can be downgraded. Most Chase cards can be downgraded to a no annual fee version of the card. If you can downgrade your card it’s good to do so rather than just canceling them. Keeping them open will help your credit in the long run. If you close a credit card the account continues to age and will be factored into your average age of accounts as long as it is on your credit report. 10 years after closing the card though, it will disappear and drop off your credit report, which can bring down your credit score.
How Are You Feeling?
Do you feel a bit more comfortable using credit cards? I hope this was helpful! You don’t need to be afraid of using credit cards, you just need to know how to use them wisely so they’ll help rather than hurt you.
If you still aren’t feeling comfortable using them, or if you want help knowing how to manage paying off your credit cards, let us know below or in an email. We’re always happy to help!