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Understanding the Basics of Credit Cards

Credit cards: They're everywhere. They're easy to get, yet, they have the potential to either help or harm your finances if you’re not careful. The key is understanding how credit cards work and how to use them to your best advantage.

What is a credit card?

A credit card is an actual plastic (sometimes it’s even metal) card issued by a financial institution that allows you to borrow money from a line of credit extended by that institution (to YOU). The cardholder agreement includes terms of borrowing that money - how much you are allowed to spend, when it needs to be repaid, and at what interest rate you will be charged if you decide to carry a balance.

How does it work?

Credit card companies make money by charging you interest on the money you borrow from them - assuming you don’t pay it off in full every month. They calculate this interest charge using annual percentage rates, or APRs, that may vary widely with each credit card, depending on your financial history and the type of program you’ve signed up for.

When you make a purchase using a credit card and don’t pay it off immediately, it’s called carrying a balance. You have a grace period, typically of a month, to repay the borrowed money; if you don’t, that’s when you get charged interest based on your APR and the outstanding balance.

To calculate what your monthly interest charge on your balance is, simply take your APR, divide it by 12, and that is your monthly periodic rate. To find out your monthly interest charge, you would multiply your monthly balance times that periodic rate. For example, if you have a credit card with a 20% APR, the monthly periodic rate would be 20 divided by 12, or 1.66%. A credit card issuer then averages your daily balance each month and charges you interest based on that amount.

Why should you get a credit card?

A credit card can be a fantastic financial tool. For example, having a credit card can:

  • Help you build your credit history by showing over time that you can borrow and repay money responsibly 
  • Allow you to make major purchases and pay them off over time
  • Take advantage of rewards programs such as earning airline miles for every dollar spent or “points” that you can trade for purchases (or even cash-back)
  • Provide a safer and convenient way to make purchases online or in-person without having to carrying cash

However, as great as they are, having a credit card also can have some disadvantages if you don’t stay on top of it. One of the biggest traps consumers fall into is getting used to using the card and not paying it off every month - and incurring expensive finance charges. Another issue is once you owe money on a credit card, you’ll be paying not only interest but also have to watch out potential late payment fees. It can become increasingly difficult to dig yourself out of debt as those charges accumulate, so be careful!

How can you apply for a credit card?

You can apply for a credit card through a community bank like Citizens Bank, or with a dedicated credit card company. You’ll need to provide information such as your name, address, date of birth, and social security number. Keep in mind, they will also check your credit history as well.

One of the best ways to apply for a credit card is with your current bank. If you have a savings or checking account, they will already have your banking information on file. And because you are a customer, paying your credit card bill can be as easy as transferring funds between accounts. Also, if you are a new credit card customer or are trying to rebuild your credit, it may be easier to get approved for a credit card if you already have a banking relationship.

At Citizens Bank, we make it easy to choose the credit card that is right for you, with a simple application process. Find out how to apply for a credit card that best fits your needs and then get in touch and let us know how we can help!.

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