July 20, 2020
Tagged As: Personal
Have you started getting credit card offers in the mail, or are seeing advertisements online? Without knowing all the terms companies use to describe their credit products, it can be quite difficult to know what truly would be the best option for you. So let’s try and make it a bit clearer, starting out with the thing that’s unique to you: your credit score.
How your credit score affects your credit card offers
There are a variety of credit cards that are typically available to those with certain credit score ranges, even those with no credit score at all. It’s also true that credit score is not the only factor that goes into a credit application: income, number of hard credit inquires (such as other recent credit card applications), credit card utilization, payment history, and other things can also play a role.
But as a general rule, as your credit score rises, you’ll be eligible for more appealing credit cards. Those could be cards that offer more cash back on purchases, or offer higher bonus rewards points for things like travel. They may have special introductory offers, better terms (like lower interest rates and higher credit limits), or even exclusive perks.
In order to get a better credit score, you need to utilize your existing credit responsibly and make timely payments on things like rent, student loans, or other debt.
Now that you have a basic understanding of how credit score affects your options, let’s move on to the details of credit cards.
Understanding annual percentage rate (APR)
If you don’t pay off the full balance of your credit card as listed on your statement by the end of that statement cycle, you are “carrying a balance” which creates debt. The annual percentage rate, or APR, is a number that represents the amount of interest you’ll pay each year on that debt.
However, it’s not quite that simple. While the APR represents an interest rate applied to debt over a year, most credit cards will actually apply an interest charge to your debt on a daily or monthly basis, applied after each given time period (day or month) that you carry a balance on the card past the statement due date. That amount is calculated by taking the APR divided by that time period (either 365 or 12, respectively) and applying it to the total debt. You’ll keep incurring debt as the balance goes unpaid, including debt that is charged on top of previous debt; a process known as compounding.
If you pay off your balance every month, the interest rate really doesn’t matter – because it won’t be applied. But if you regularly carry a balance on your credit card (or think you will once you get one), it’s best to find a card with a lower APR. Our Visa® Platinum Credit Card features an introductory rate of 3.9% APR for the first seven billing cycles, followed by an APR of 5.25% to 12.25%, based on your credit worthiness*.
So once you receive your statement and know how much you need to pay, how much time do you have to do so before you are in debt and charged interest? That would be your card’s grace period.
Check the grace period
A credit card’s grace period is the length of time between the end of its billing cycle and when the payment is due.
Your credit card issuer is required by law to provide your statement 21 days before it is due, so you have time to pay it off. Thus, charges to your card that happen during those 21 days aren’t applied until your next statement. That’s the grace period. Though 21 days is a required minimum grace period, many card issuers offer periods longer than that, including Hills Bank.
By taking advantage of your grace period, you can make large purchases without having to worry about paying for them right away. But be sure you have a plan to pay off your card’s balance by the time your statement comes due, because carrying credit card debt will eliminate your grace period.
Is having credit debt always bad?
In hard financial times, you might find it necessary to carry some credit card debt to get through until your next paycheck. And though you’ll end up paying more for the things you buy in the long run, it’s true that taking advantage of your credit card and accepting some debt can allow you to make purchases that would otherwise be unattainable. But if you want to get the most out of your credit card, it’s best to keep those types of purchases to a minimum.
One last note on credit card debt: if you find that you’re not able to pay off the entire balance of your statement by the due date, you should always make at least the minimum payment. You’ll still be charged interest on the remaining balance, but at least you won’t pay a late fee and take a hit to your credit score. The minimum payment can differ from card to card, so that’s another factor to consider.
Now let’s talk about another aspect of credit cards that you’ll want to know: the annual fee.
A credit card’s annual fee is the amount your card issuer will charge you each year, regardless of how you use your credit card. If the annual fee is $0, it’s possible to never pay anything more than what you charge to your card, just by paying your balance in full each statement cycle. However, many cards with annual fees also offer bonus perks like travel rewards, store discounts, and more. So your decision ultimately comes down to whether the perks and convenience your card would give you are worth spending extra money each year.
We offer a credit card with no annual fee and one with a $15 annual fee, which comes with the ability to earn points to redeem for travel and merchandise.
Rewards and perks
One of the best things about many credit cards is the ability to earn points to redeem for rewards, like fuel discounts, consumer products, free flights, hotel stays, and more. Most of these cards will also require an annual fee, so you should ask yourself whether you think you’ll spend enough to get enough points and make the extra cost worthwhile before you sign up.
Some cards will also offer a percentage of cash back, for general purchases or for those at specific kinds of stores or services.
Are you ready?
If you have other questions on credit cards, feel free to reach out. You can talk with a banker by visiting one of our locations or getting in touch with a banker of your choice from anywhere via chat through hillsbank.com.
*Rates subject to change after card is opened.