Advantages & Disadvantages of Credit Cards

TERMS to know! Balance transfer: the outstanding balance of one credit card (or several credit cards) is moved to another credit card account. This is often done by consumers looking for a lower interest rate. Usually has a fee. Cash advance: a cash loan from a credit card, using an ATM, a bank withdrawal or "convenience" checks. Credit score: a three digit number that summarizes how well a person or business has handled debt. The higher the number, the better. Credit limit/line: amount of money that can be charged to a credit card. The size of a credit limit, and how much of it has been borrowed, have a large influence on consumer credit scores. Finance charge: total cost of borrowing, including interest and fees, expressed in a dollar amount Grace period: time during which you are allowed to pay your credit card bill without having to pay interest on new purchases; usually 21 days. Invoice: another term for a bill; shows individual purchases and amount owed, including interest rates, fees, etc. Late fee: result of credit card company not receiving/posting your payment by the due date Minimum amount due/payment: lowest amount of money that you are required to pay on your credit card statement each month, usually 3-5%

Advantages 1. Convenience 2. Emergency payments Don’t have to carry cash with you to pay for purchases Safer & easier alternative to cash Can report missing/stolen card to the card company, who will stop accepting any charges on your card and you won't be charged for purchases made by someone else. If you make a purchase with a credit card and do not get what you paid for, the credit card company will help you solve your problem. If you have an emergency but have no cash on hand, you can use your credit card (responsibly). Allows for better flexibility on payments for that item/purchase.

Advantages 3. Affects credit score 4. Short-term & validation of payments If you use your card responsibly, you can begin to build a good credit rating for yourself. Later in life, when you need a loan, a lender will want proof that you pay your debts. A good credit card history will help you get your loan. A poor credit history will work against you. Employers look at your credit history, too. Depending on when you make your purchase and when your monthly bill is due, you can get extra time to save up and pay for what you just charged. If you can pay off the bill ENTIRELY, you are really making the credit card work for you. Some companies only take credit card payments, and you must show your card as a form of ID. Safety measures in purchasing

Disadvantages 1. Convenience 2. Emergency payments Credit cards do get stolen—it is your responsibility to keep a record of payments and check your invoice Need to make payments on time and in full when/if possible You may intend to always pay your bill in full and on time. However, most of us carry a balance from month to month. A credit card is not “free” money—you still have to pay back ALL of the money you owe; this can include interest payments. There is a potential to create overwhelming debt that you cannot afford to repay

Disadvantages 3. Affects credit score 4. Short-term & validation of payments If you use your card irresponsibly, you can create damage to your credit rating and hurt any future large-item purchases Cash advances can work for or against you—be careful! cannot take a cash advance for the full amount of available credit. interest rate is often significantly higher A transaction fee is usually charged. No grace period for cash advances. Using credit can impact your spending power, as it can reduce available credit, and can impact future spending based on any interest owed A court can order garnishment of payments, or require your employer to pay part of your wages to the creditor until debt is paid off So much for “short-term” payments!

What’s the difference? APR vs APY Credit vs Debit cards APR is the annual percentage rate, the interest rate charged on credit card balances; rate is applied each month (simple interest) APY is the annual percentage yield, or interest rates considering compounding interest Credit card—funds are borrowed from a credit lender (company, bank) and acts like a loan. Interest rates and fees are charged if payments are not made on time/in full Debit card—funds come directly out of your account rather than borrowed; can overdraw your account! *both have similar functions and can incur fees*

What’s the difference? Revolving Credit/Loan Installment Credit/Loan Revolving credit/loan: bank or merchant offers a certain amount of always available credit to an individual or corporation for an undetermined amount of time. Debt is repaid periodically and can be borrowed again once it is repaid. Example: Borrowing using a credit card Installment credit/loan: equal, periodic payments are made for a defined period of time. You pay the same amount each month, with part going toward interest and part going toward principal, until the loan is paid off. Usually for large-item purchases, requires a FULL PAYMENT each month Example: A car loan or travel/entertainment cards (i.e., American Express Green Card)