Credit Cards Tips

Interest Rates

There are basically two kinds of interest rates: fixed and variable. Fixed, or prime rates, never change. If you have good credit, then any fixed rate that is offered to you will likely be a lower one. This is basically anything under 20%. If you are rebuilding your credit or are new to the credit world, you could be susceptible to a fixed rate that is higher, some as high as 30-40%. Fixed interest rates are determined by credit card companies, and they must determine that you qualify for them before they approve you.

Variable rates can mean nearly anything that is liable to change. Most of the time, if you have a variable rate you know what your time frame is before the change occurs. Many cards have variable rates that provide a low introductory offer but then jump up after a period of a few months. Low introductory rates are designed to entice you to open an account, whether a new one or for the purposes of transferring your existing balances.

Card Fees

If you are very careful, you can avoid paying fees. Some cards have an annual fee of anywhere from $50 - $100, that you have to pay no matter what. Other cards offer service for no annual fee. Keep in mind that in regards to annual fees, these charges often correspond to the size of your interest rate. For instance, your card may have a lower APR but might feature a relatively high annual fee. When you look closely, you could end up paying the same amount for a card with no annual fee.

Another thing that you need to keep in mind is how penalties break down. All credit card companies will charge you fees for missing a payment. Sometimes these fees are somewhat unreasonable. There is always a grace period for payments, but each penalty has its own fee. However, you can control this by always reading the fine print when you sign up for a card.

Liability

In terms of credit, liability is the amount of money you have borrowed, or in other words, the total amount that you are responsible for paying. The more credit you are given, the more liability you are willing to take on. The credit bureaus and the credit card companies can determine how much credit liability they are willing to risk on you, depending on your credit score. If you have a high credit limit, it means that these entities feel that you are a worthy investment.

At first glance, then, it might seem that having a low credit limit is a good thing. In terms of risk, your risk, yes, it is good. However, in terms of liability, this is not good. The reason for this is that credit card companies determine your creditworthiness based on two things: your payment history, and your credit-to-debit ratio. If you have a low limit, it means that it is very difficult for you to show a long history of consistent payments. A low limit also lowers your credit-debit ratio. The credit-to-debit ratio shows how much credit you have overall in comparison to how much you have used. Your goal should always be to have the largest margin possible between these two numbers.

One of the most interesting components of credit liability is that it usually works contrary to how you think it should. For example, the more credit you use, the more opportunity you have to improve your credit by making payments. Conversely, simply having an open account does not necessarily show that you are a responsible credit user, even though you have no "liability." Ironically, if you pay off one of your cards, it is usually not wise to close the account, even if you never plan to use it again. Closing the account will shrink the magic ratio by removing part of your approved credit limit.