Visa Credit Card

There definitely isn’t a shortage of offers of credit cards online, in the mail, and anywhere else possible. However, it can become a hard task to maintain your credit card, and it can prove even harder to get the right credit card you need.

High Street stores are all too willing to give you a discount on the day if you sign up for one of their cards, and lets face it, that extra 10% is usually tempting whoever you are. Nonetheless before you know it you will be facing yet another monthly credit card bill.

One of the biggest problems with credit cards is that they can cover up that you are actually spending money. By not actually spending cash, you can feel that your purchases are not really costing you at all. Ultimately, this is an expensive illusion and your reality can become very painful indeed if you build up too much credit card debt.

Even if you pay the minimum payment by the due date, your credit card balance is barely affected. You may not make things worse by incurring late fees, but your debt levels remain unaltered unless you can actually pay down the balance.

Ask yourself just how long it would take you to get rid of the debt completely if you didn’t charge another penny to the account. Never consider getting a new credit card to transfer a balance unless the new card offers you interest free credit for a certain amount of time, ideally the time it will take for you to pay off all of the debt.

Many of the major credit cards are accepted everywhere, no matter where you go, so one should suit you. At the most, have two. This is a much easier way to keep an eye on expenditure, rather than having five or six credit cards to sort out each month.

Another temptation of credit cards are cash advances. Companies offer these because they are easy to get your hands on, especially at ATMS. Though handy, these advances come along with a high interest that is calculated daily, so you might end up biting more than you can swallow with a cash advance.

If you are one to use an ATM regularly, you will find that your debt will build up and soar over a small time of just a few months. Interest can go as high as 24%, so avoid this. It makes much more sense to avoid temptations such as rewards and bonuses. Try to opt for a credit card with no frills, no annual fee, and a low interest rate.

When trying to establish a good credit history, you can do so by using a credit card correctly. Your payments have to be on time. It is important that your credit rating stays healthy, especially in the case that you need to buy something big, like a car. During these times, you will be rewarded for having good credit history. As much as some of us love them, shopping sprees aren’t needed. Neither are cash advances and late payments. These all go into your credit rating, so if you are looking to use your credit card to build up good credit, only spend what you know you can afford to pay back each month.

We have discussed why credit card companies charge an interest in our previous post. Now lets take a deeper look at the world of interest rate.

So how does a credit card company determine the rate you’ll pay?

Obviously, not everyone will get the same interest rate. The exact formula for determining the interest rate is not known to public but we know the following factors play a part.

1) Inflation rate

Naturally the interest rate must be above the inflation rate in order for the business to survive.

2) The cost of lending

There will be borrowers who will fail to pay on time or default on their payment schedule. This has to be factor into the interest rate calculation as well.

3) Profit target

Since the credit card companies are out to make money, they have a minimum profit target to meet. They have to make enough money to cover their overheads and generate a profits for their shareholders.

4) Applicant credit history

The applicants’ credit history plays a very important role in determining what rate they will receive. A good credit history indicates to the card companies that the applicant is capable of managing his or her finance well, which in turn means low risk for the card companies. A poor credit history usually indicate high risk and thus the interest rate will be much higher.

5) Applicant income level

This is another important factor. Your income level determine how much credit you get as well as indicate how likely you can repay back the loan. Of course, a high level of income does not imply that the loan will be paid back on time and in full. But it give the credit card companies some assurance that you have an income source to pay back the loan which make you look less of a ‘credit-risk’.

6) The law of demand and supply

Since this is a free society, each consumers can choose which credit card companies to go to. So the credit card companies are mindful that they cannot charge usually high interest rate without proper justifications. It helps that card holders can easily change from one company to the other so the credit card companies will try their best to keep their existing customers.

6) The Federal Reserve

Each quarter of the year, the Federal Reserve will decide whether or not to “raise interest rates.” Its decision has big impact on the stock market as well as all type of interest rates.

The Federal Reserve set a “discount rate”, which is the rate it lends money to its member banks. These member banks typically make loans to other banks, who use that money to lend to corporations and individuals such as yourself. The higher the discount rate, the higher the resultant cost of lending.

The discount rate affects another rate called the “prime rate.” This is the average rate that the largest American banks charge on unsecured corporate loans. Since most credit cards are unsecured, prime rate is often used to determine the rate that cardholders pay.

For example, a cardholder with excellent credit may be offered a rate of “prime + 2 percent,” whereas a cardholder with poor credit may be offered a “prime + 14 percent” rate. Variable interest rates are almost always based on prime rate.

Although interest rate is important, you really don’t have to worry too much about it if you are a prudent credit card users. As long as you pay your credit card bill on time and in full, the interest rate is quite irrelevant to you.