My First
Credit Card
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Credit card accounts are loans made by banks, gasoline companies, and department stores to individuals to pay for items and services up to a certain amount—your credit limit. The merchant or service provider collects what you owe from the card issuer, who you repay. You are allowed to pay off what you can afford each month, as long as you pay a minimum amount each time. You are charged interest, known as an Annual Percentage Rate (APR), either on a fixed or variable basis, on the balance you owe at the end of each billing cycle unless you always pay off the full balance by the due date.

Annual Percentage Rates
To calculate the interest on your loan each month, the lender will divide the interest rate by the number of days in the year. For credit cards that have a balance carried to the next month, there are two methods of calculating interest:

• Average Daily Balance Method. This method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. The resulting balances are added up for the billing cycle, and the total is then divided by the number of days in the billing period to arrive at the average daily balance.



• Two-Cycle Billing Method. If a new balance is not paid in full, the interest can become retroactive back to the date of purchase—essentially wiping out your interest-free grace period. Two-cycle billing affects card users who carry a balance now and again.

Other Annual Percentage Rates

• Cash Advances. A separate interest rate applies for cash advances (which would include gambling chips). The APRs for cash advances often are higher than the APR for purchases (for example, 14% for purchases and 18% for cash advances).

• Penalty APR. The APR may increase if you are late in making payments. For example, your card agreement may say, “If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.” Penalty APRs usually exceed 19.99% and it takes more than a year of on-time payments to lower the rate. In addition, some banks will apply the penalty if you are late with another creditors (e.g., utility, bank) payment!

Fees
The following are common fees and charges associated with credit card and loan contracts.

• Cash Advance Fee. A transaction fee is charged for cash advances (fee is usually 3% of the cash advance).



• Over-Credit-Limit Fee. A fee is assessed for exceeding the stated credit limit (between $25 - $39).



• Transaction Fee. Many banks charge a transaction fee every time you use an ATM or debit card. Banks usually charge transaction fees for the purchase of wire transfers, money orders, bets, lottery tickets, and casino gaming chips (fee is usually 3% of the amount).



• Insufficient Funds Fee. A charge is assessed for checks returned for insufficient funds (between $25 - $39).



• Late Payment Fee. Most banks and financial institutions assess a fee for late payments (between $25 - $39).



• Balance Transfer Fee. Some banks that offer credit cards charge a balance transfer fee to discourage you from transferring your balance to another credit card with a lower interest rate.

Minimum Payments
Paying the minimum—usually 4 percent of the outstanding balance—only prolongs the time it takes to pay off your credit card debt. Besides, it's precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Those increased payments will save you hundreds, if not thousands, in interest payments. For example, $2,000 charged to a card with an 18 percent interest rate will take 10 years to pay off, costing about $1,100 in interest.

Balance Transfers
A marketing practice the industry currently uses is the offering of low-interest rates for balance transfers. Credit card companies offer a promotional interest rate (usually 0.0 percent - 7.9 percent) to transfer balances from a competitor's credit card. The promotional offer normally lasts about four to nine months; thereafter, the unpaid balance will be subject to the card's stated interest rate (either fixed or variable, but usually 10 percent higher).

It's important to understand the relationship of finance charges to new purchases while you have a promotional balance. Most promotional rate solicitations will include a statement that reads: "We may allocate your monthly payments to your promotional APR balance(s) before your non-promotional APR balance(s)." This means that any monthly payment you make (that is not the full amount) will be first applied to the promotional rate balance amount before being applied to any new purchases. Thus, any subsequent purchases on the new card will be charged at the higher interest rate.

Credit Scores
Lenders use a credit score that is developed from your payment history on installment loans and credit cards. A credit score will have a dramatic affect on the interest rate you will receive for a credit card, auto loan, mortgage loan, home equity loan, personal loan, etc. Your first credit card is a good way to establish your credit score—just make the monthly payments. A good percentage of the credit score is based on your use of credit.

Most lenders use a formula derived from FairIsaac to develop a credit score. Once you arrive at the FairIsaac site, click on "Consumer Solution" at the bottom of the page and then "Credit Scores" on the left side of the page.

Debit Cards
Another card being used is a debit card. These cards combine the functions of automated teller machine (ATM) cards and checks. When you pay with a debit card, the money is automatically deducted from your personal checking account.

More information on credit cards.