When it comes to buying something now and paying for it later, credit cards are one of the most popular forms of consumer credit. They're sometimes called "revolving credit" because you can carry over your balance from month to month — as long as you make the minimum monthly payment on time.
Credit cards are flexible and convenient, allowing you to buy things without using cash. You also can use them at an ATM to receive a cash advance at a higher interest rate. And paying your monthly credit card bills on time will help establish a good credit score, which is important when you apply for auto or home loans.
However, credit cards also can have their drawbacks if used unwisely. Failing to make your minimum payment on time — or applying for a large number of credit cards in a short time — can hurt your credit score.
Credit cards can also make it easy to build more debt than you can handle comfortably. And many credit cards are offered at a low introductory interest rate, or teaser rate, which increases after a period of time.
What determines my interest rate?
Your interest rate is the fee you pay to the credit card issuer in return for letting you borrow money.
These rates can be variable or fixed. The interest on variable-rate credit cards is tied to an index, such as a bank's prime interest rate. The cards usually charge a set "margin" above the prime rate. In other words, the interest rate rises and falls with the prime rate.
Rates on fixed-rate credit cards, on the other hand, do not change from what the issuing bank sets.
There are different methods for calculating interest. Interest charges can start at the time of a purchase, on the last day of the monthly billing cycle, or at another time. Note that interest rates often are different for cash advances than for regular purchases. These often start accruing immediately.
What about annual fees?
In addition to the interest rate, some credit cards come with an annual fee. These are often found on credit cards that carry other benefits, such as reward programs. It's important to pay attention to such costs, since a card with a lower interest rate may be more expensive overall when you factor in the annual fee.
Online calculators can help you determine which combination of fee scenarios and interest rates will cost you the least, based on how you think you'll use the card. Regions Bank has calculators available at regions.com/calculators/credit.rf.
How can I avoid excessive credit card debt?
Before you apply, remember these tips for healthy credit card usage:
- Consider your ability to pay the monthly minimum charges before choosing a card.
- Ensure the card's interest, fees and terms fit your spending and payment pattern.
- Be sure to read the fine print on the disclosure statement. This is often where you'll find several penalties and other fees.
- Always try to pay off your entire balance each month. This helps you avoid paying interest and keeps your debt manageable.
- Take action if you find yourself struggling to make a monthly payment. Call your bank, which can offer alternative payment schedules. It's always better to be proactive before a late payment harms your credit history.
Learn more about credit cards offered by Regions Bank.