How Credit Cards Really Work

Credit cards are the modern currency of convenience. In Malaysia alone, there are a couple of hundred credit cards offering all kinds of perks and benefits that you won’t find it hard to find something that fits your lifestyle. Interest rates, credit limits, and the kind of freebies you receive may vary but one thing holds true for all credit cards: misuse and mismanagement can only lead to sleepless nights and exhaustion from having to hide from debt collectors.

So before you swipe for another gorgeous pair of Jimmy Choos, you better make sure you know how credit cards really work and stay away from debt.

How Credit Cards Make Money From You

Credit Card sins

Finance charge
This is the annual percentage rate (APR) that varies according to the type of card or transaction as well as your credit score. Every time you make a purchase, transfer balances to another card, or get a cash advance, you get charged with interest. Don’t make the mistake though of thinking that fixed interest rates are not subject to change – because they are. You need to be vigilant about changes in interest rates.

Balance transfers
Card companies allow you to consolidate debts for multiple accounts into one credit card account. This option comes with interest rates as well. However, you may take advantage of balance transfer promotions some companies implement. These promotions may last from 6 to 24 months, wherein you will enjoy low or zero interest if you use your card to pay off debts from another account.

Late penalty fees

Late monthly payments subjects you to additional charges. If you get in the habit of paying late, the penalty fees could increase even further. There is no ceiling to penalty rates card companies can charge you. Also, penalty rates can apply to all your credit cards, even if you have been paying on time for all other cards.

Overlimit fees
The credit limit is the maximum amount you could charge to credit and exceeding this limit subjects you to additional charges. Usually, your card will be declined if you exceed your limit but if you authorize your card company to allow transactions beyond your credit limit, you get penalized by up to 29.99%.

Annual fees
Some credit cards charge annual credit card fees. Banks profit if the annual fee turns out to be much higher compared to the total worth of the rewards you get from your card.

Manage Your Credit Like a Boss
At a glance, the interest rates and fees would not seem much but do not make the mistake thousands of cardholders have made before you – which is to underestimate how fast these little fees can accumulate and bury you deep in debt. Be diligent in monitoring your transactions and cross-check your receipts against your credit card statements. Contact your card company immediately if you find any discrepancies or any suspicious activity.  Make an effort to completely understand the kind of interest rates and fees you are subject to so you avoid any unwanted surprises.

About the Author:
Michael Vincent writes for Compare Hero – Malaysia’s leading comparison website, allowing you to compare the prices of a broad range of financial products, from credit cardsto insurance plans.

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