Why Do I Need a Credit Card?

Until now, you may not have needed a credit card. Cash or checks have always worked for you. They still may, but, there are many circumstances in which a credit card is necessary and it's always a great convenience.

Establishing a credit history:

As you begin to need more "things of your own," you may need a way to finance your purchase. Credit cards are a form of an unsecured loan, meaning that you do not need any collateral to "back up" your line of credit. Credit cards allow you to purchase today what you may not have all the cash for until tomorrow. For example, if you need that new home computer, an investment of $2,000 or more, the ready money may not be sitting in your checking account. With a credit card, you can make your purchase now and pay for it over time. Very handy.

By using a credit card and making payments, you also begin to establish a credit bureau report in your name. Hopefully, you will make those payments on time and thus demonstrate that you can use credit in a positive way. In the future, when you need to buy a car or rent an apartment or house, your good credit history will allow you to get the best possible rate or deal. Conversely, a bad credit history will hinder your ability to move up and on.

Travel needs:

In some cases, a credit card is necessary to make hotel/motel reservations or rent a car. Knowing that transportation will be waiting for you and that you have a place to crash when you reach your destination definitely takes the edge off the anxiety of travel.

What's Your Credit Card Story?

Credit cards come in one shape, but many "sizes". Depending on your credit history, or lack thereof, and how you plan to use the credit card, you will want to apply for the card that is best suited for you - and for which you are most likely to be approved. Let's look at your options depending on your history.

You have never had a credit card in your own name:

Right now you may be using your parents' credit card. The card has one of their names on it, but you can make purchases on it because they have you named as an authorized user. Since the card is in their name, the transactions you have made and the way payments have been made are all part of your parents' credit bureau report. You do not have your own credit history for credit card usage. Limited credit history will make it more difficult for you to get that first card. But, GetApproved.com is here to assist you. Read on.

You have a credit card with a low credit limit:

You may have a credit card, but since it is your first card ever, you most likely have a low or modest credit limit. You may want to ask for a credit line increase, or maybe it's time to shop for a new card that will offer you more. Credit card issuers usually look for at least 6 to 12 months of transactions, and more importantly, payment history on your card. Making timely payments, whether the minimum or the total payment due, will start you on the way to developing a good credit history.

If it is a higher credit line that you want, simply call your issuer and ask for a credit line increase. Most issuers will grant or deny that request during the telephone call. If you think it is time for a new or different credit card, please read on.

You have an established credit history:

If you have been using a credit card in your own name for at least 6 to 12 months or more, you have established a credit history. The question is --- have you established a good or bad credit history? If you make regular purchases or receive regular cash advances, say 2 or 3 per month, or even 4 purchase/cash advances per quarter, you have received periodic or monthly billing statements and have had to make payments.

If you have made all your payments (whether minimum payment due or the entire balance) on time, you have an established a good credit history. If you have been late with a payment once or twice, but within 5 to 10 days of the payment due date, you are still in pretty good shape with most issuers. However, if you have a missed a month's payment and maybe even incurred a late payment charge/fee, you may be establishing a history of late payment. Although an occasional late payment is not totally detrimental to your credit history, a pattern of this behavior will begin to appear on your credit bureau report and it will become more difficult to get unsecured or even secured credit. If you do one thing with your credit card --- Make Your Payments on Time!

If you have good credit, you will most likely qualify for many credit cards. However, there are income qualifications, which differ by issuer that may apply if you're looking to obtain a Gold, Platinum or Titanium credit card.

If you have a bad or marginal credit file, you may find it more difficult to get a credit card with favorable terms and conditions (low Annual Percentage Rate, no annual fee, rewards programs, etc.). In order to re-establish or improve your credit rating, you may need to accept a credit card with less favorable terms. But if you make timely payments, don't exceed your credit limit and in general act responsibly with your credit management, you will improve your credit file and be able to qualify for "better" cards in the future.

You have had serious financial difficulties or severely bad credit history:

If you find yourself without a credit card because it was revoked due to non-payment, severe delinquency, or even a bankruptcy, you may still be able to get another. In order to re-establish your credit history, you may need to accept a card with less than favorable terms and conditions (high Annual Percentage Rate, an annual fee, no rewards or other features and benefits) to get re-started. GetApproved.com can help you see if you will qualify for a new credit card.

If you do not qualify for a standard or classic credit card, you may need to accept a secured credit card to re-establish your credit. A secured credit card often requires that you make a deposit to the lending institution to "secure" your line of credit. This can vary from a portion of your credit line to an amount equal to your credit line or even an additional amount above your credit line. Application fees may also apply.

How do YOU use a Credit Card?

There are two types of credit card users:

Non-Revolvers (also called Convenience Users or Transactors) - Non-Revolvers pay the entire balance due on their credit card every time they receive their monthly statement. Why would you do this? Well, to begin with, you won't have to pay any finance charges. Let's face it, credit card issuers are in the business of offering you convenience, but they are also in the business to make money! In the credit card world the primary way this is done is by assessing finance charges, or interest payments on any unpaid balance on your card.

Finance Charges vary widely from introductory rates as low as 1.9% to rates as high as 29% or even more. If you plan to pay off your balance every month, interest rate (Annual Percentage Rate - APR) is irrelevant and you may want a card that offers rewards, cash back or other features and benefits just for using it to make purchases. You may also want to look for a card with no annual fee. But, as well intentioned as we all are, there may be a time, (a little too much holiday shopping or that must-do trip to Cancun), that you need to revolve that balance, so shop wisely and try to find the card that gives you what you want at a fair price.

If you are a non-revolver, you may be interested in a charge card, rather than a credit card. Charge card balances are due in full with each billing cycle.

Revolvers - Many people use a credit card to make purchases for which they simply don't have the money at the time they want to buy. That's o.k. - it's what credit cards were invented for. If you think, or know, that this is how you'll use your new card, shop for a card with a low Annual Percentage Rate - APR. It's a very competitive market so, look for a card with a low rate - or low enough for you - that will also give you some "perks" that suit your lifestyle.

How Much Will I Pay?

Two of the most important items to scrutinize when you are shopping for a credit card are: Annual Percentage Rate and Average Daily Balance Calculation, especially if you, like most Americans, revolve a balance.

Annual Percentage Rate - APR is the interest rate cost of carrying a balance. It is expressed as a percentage rate. You will see offers from 0.0% APR up to 29% APR or more. One factor that will determine the interest rate for which you will "qualify" is your credit history. The better your history, the better the interest rate offers you will receive, or if you apply, the better your rate of acceptance will be.

Be sure to also understand the "advertised" rate may be an introductory or teaser rate and will only last for a specific period of time - usually 3 to 12 months. After this period, the interest rate will rise. Although this can be a good offer if you want to transfer a balance from a credit card with a high rate be sure you know exactly when the lower rate will end. Then your choices are to either be satisfied with the new, and undoubtedly higher rate, or shop around and move your balance again before the introductory rate period ends.

As you see, the interest rate is one factor to consider, but another very important one is how that interest rate is calculated.

The credit card industry has several common methods of calculating interest rates. Let's look at the most common, and if you are a revolver, you can then select a card that offers you the best method.

Two Cycle Billing is the most expensive of the common credit card billing calculations. If you do not pay off your balance with your first billing cycle, there is no grace period.

Average Daily Balance (ADB) is the most common method but it is not the least expensive for you.
Previous Balance (PB) is calculated on the outstanding balance at the end of the previous month. This is less expensive to you than ADB, but it is hard to find.
Adjusted Balance is when adjustments are made for payments, credits, and any other adjustments during the billing cycle, before interest is calculated. Again, this is infrequently found.

As you can see, there are many different ways of looking at, credit card offers, including different APRs and different ways of assessing that interest rate on your account. And, wait there's more: Be sure to consider the additional fees and charges that might be added to your balance.

Other Credit Card Charges

It is important to be aware of other fees and charges that can be applied to your credit card balance.

Annual Fees or Annual Membership Fees are not as common as they once were. Charge cards like American Express and Diner's Club charge annual membership fees, but they also offer additional features and benefits. Credit card issuers will charge annual fees because they have an extremely low Annual Percentage Rate, or they feel that due to your credit history you are a more "risky" customer, or just because they want to.

Cash Advance Fees are charged when you use your card to get cash from an ATM or bank teller. Cash Advance fees are charged as either a flat rate or a percentage of the cash taken. Be sure to check this fee if you plan to use your card for cash. Charges can range from a flat fee of $2 to $5. Remember, any time you take cash, you will pay finance charges from date of the transaction.

Late Fees are charged by almost all credit card issuers and assessed when you do not make your payment by the due date. Many issuers once offered a 5-day grace period after the due date, but this practice is fading. Most payment due dates are now set at 20 to 25 days after the close of your billing cycle. The back of your statement will tell the exact time on the due date that your payment must arrive to be posted on that same day. Find out if you will be charged a fee, and send your payment in time for it to arrive and be posted by the due date.

These fees have increased steadily over the last several years. They now range from $10 to $30.

Over-the-Limit Fees are applied when you exceed the credit limit on your account. Most issuers will allow you to charge up to a certain percentage over your credit limit. That doesn't mean you can avoid the over limit-charge. Watch your spending and avoid these charges. If you have a card with a low credit limit, you may want to get another, with a different payment due date to allow you some flexibility in spending and payments.

Like late fees, over-limit charges are in the $10 to $30 range. Avoid them.

Minimum Finance Charge is usually a flat $0.50 to $2.00 that is added whenever you revolve. Try to avoid cards that assess this charge.

All the fees discussed here must be disclosed in your credit card offer. The easiest place to find these is in the "Schumer box" on the back of your credit card offer or in your cardholder agreement.

Balance Transfer Fees are charged by some issuers if you want to move a balance from one card to another. The issuer, of course, wants you to leave that balance with them and is trying to discourage you from moving it. Be careful. While the new card may entice you with a lower APR, you need to assess the impact of the transfer balance fee to see if you really want to change cards. (See Calculators).