Credit cards can help get you out of a rough spot, but they can also put you in a rough spot. The difference between a credit card hurting you and helping you is you being educated about how credit cards really work. The purpose of a credit card is not for everyday use. It is kind of like a emergency fund. However, their are some things you need to know about a credit card before you decide to use it.
1. Understand the interest
In fact, credit card companies often rely on the fact that you will not understand how your interest is constantly compounding. Therefore, you need to protect yourself by understanding how compounding works in relation to credit card interest. The term “compound interest” means that any interest charges are added to the principal (which is the amount you originally borrowed) so that your debt grows exponentially.
If you have a $100 debt and it accrues 10% interest every month, then the first month you will be charged ten dollars (100 x 0.10). With compound interest, that ten dollars is added to your original debt, so now you have $110 of debt. The second month you are again charged 10% interest, which this time comes out to eleven dollars (110 x 0.10), so now you have $121 of debt. Compound interest has a big impact on how credit card interest works. Most people know their APR, which stands for Annual Percentage Rate. In general, your APR is supposed to equal the approximate percentage you will pay in interest over the course of a year. However, the actual amount you will pay is often slightly higher than the APR.
2. How it affects your credit
Most people are unaware of how credit cards affect their credit. Credit cards can be a great way to build good credit and maintain a good credit score, if used correctly. However, if you are maxing out your credit card and not making timely payments, then you will destroy your credit. Credit cards were not invented to be used as another source of income. So if you have 4 or 5 credit cards that are close to being maxed out or are maxed out, your credit score will be lowered.
3. How to use them wisely
Use your credit for monthly purchases such as gas, coffee, and small purchases. Payoff the balance every month. This will help you avoid paying interest on the credit card and will contribute to raising your credit score. Remember, credit cards are suppose to be used as an emergency fund or very small purchases. Do not get in the habit of going on shopping sprees, buying stuff on vacation, or going to the All-Star Game via your credit card
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