{"id":1385,"date":"2017-03-02T18:23:33","date_gmt":"2017-03-03T02:23:33","guid":{"rendered":"https:\/\/www.workparentsleep.com\/?p=1385"},"modified":"2021-04-27T08:59:41","modified_gmt":"2021-04-27T16:59:41","slug":"credit-debt-guide-part-2-how-credit-cards-work","status":"publish","type":"post","link":"https:\/\/workparentsleep.com\/credit-debt-guide-part-2-how-credit-cards-work\/","title":{"rendered":"A Credit and Debt Guide: Part 2 – How Credit Cards Work"},"content":{"rendered":"
Credit cards can be powerful tools in the right hands by giving a family assistance in making a large purchase or allowing one to rack up\u00a0travel rewards while doing everyday shopping. \u00a0Likewise, mishandling a credit card can have devastating effects not only on your current financial well-being but on your family long-term goals as well. \u00a0To navigate the world of credit cards, there are many nuances to consider. \u00a0Let’s jump right in and help to answer the common question: How do Credit Cards Work?<\/p>\n
When deciding between cards for making purchases, it helps to understand the differences between what is available to you in order to make wise financial decisions. \u00a0Both debit cards and credit cards are accepted by the same places and often carry the same card appearance, but behind each card, you will find vastly different terms, services, and fees.<\/p>\n
A credit card is more than just a small piece of plastic in your wallet, but something that allows you to borrow money from a bank to make purchases. \u00a0I like to think of a credit card as my banking institution is providing me a small to medium short-term loan<\/strong>. \u00a0I emphasize “short-term loan” as the amount borrowed comes with what is known as a grace period<\/a> of 25-30 days in which you can pay the loan back with no penalties or fees. \u00a0After this period of time, if you have an outstanding balance on your loan, you must pay back what is know as interest on top of the money you have borrowed.<\/p>\n When deciding whether to use a credit card or not, there are many factors that one should consider based on your current financial situation and being able to use the card responsibly. \u00a0We want to list a few of the upsides and downsides that one might face that can help to determine\u00a0if it’s appropriate to use a credit card for\u00a0your family:<\/p>\n <\/p>\n Whether this is a shared family card for online bill pay to help raise your credit score or an emergency card for those “Honey, the hot water heater exploded and leaked into the basement” times, there are many factors to consider before choosing the right credit card for you:<\/p>\n If you currently have a credit card with a high-interest balance and are only making the minimum payments, you are probably cringing when looking at each of your statements and seeing the money flow out of your pocket in interest fees that being given\u00a0back to the credit card company. \u00a0Fortunately, you are in luck, as there are many credit cards that come with low to no transfer fees and a stacked introductory 0% APR on top of that to transfer these balances. \u00a0Nerd Wallet has broken down the Best Balance Transfer and 0% Interest Credit Cards of 2017<\/a>, showing pros and cons along with the best scenarios for using each card.<\/p>\n For some families, there will be a credit card with a rewards plan so appealing that an annual fee is outweighed by the perks of the card, but the majority of families are looking for a credit card with no annual fees. \u00a0The Points Guys, who do great work on rewards accounts of all kinds, put together a great breakdown of the 7 Best No-Annual-Fee Credit Cards for 2017<\/a>.<\/p>\n If you are a responsible spender there is no reason you shouldn’t be earning some additional rewards for the shopping that you are doing on a weekly basis. \u00a0We covered the Citi Double Cash Mastercard in the pros section of why to have a credit card above.<\/p>\n Sometimes we are faced with large unexpected expenses such as car repairs\u00a0or replacing a hot water heater. \u00a0These unplanned expenses might fall outside of your current budget, and because they can be time sensitive and often required, your credit card can become a great tool. \u00a0Finding a credit card with 0% Promotion APR for 12+ months will allow you to use the transaction on your card\u00a0as an interest-free loan where\u00a0the purchase can be cut down into payment chunks and paid off over time.<\/p>\n There are often times when all of our current 0% APR Promotions have run their course, and we are stuck with a credit card balance that we need to pay down over time. \u00a0In these cases, you want to pay close attention to your credit card’s current purchase APR and make sure that it is at a percentage your family feels comfortable with. \u00a0You can test different balances and interest rates here with this Loan Calculator<\/a>\u00a0which should give you a good idea of how much interest you are looking at paying over time.<\/p>\n <\/p>\n All credit card purchases are subject to a base interest rate knows as the Annual Percentage Rate or APR. \u00a0This can vary between credit cards depending on factors such as your credit score, current income level, and other factors determined by the financial institution you are applying with. \u00a0Understanding credit card interest will help you manage your payments and determine in any given situation whether using your credit card is your best option.<\/p>\n <\/p>\n When you receive your credit card you will be provided with an Annual Percentage Rate (APR) that will be applied toward all purchases made with that card. \u00a0To better understand how credit card companies charge interest we are going to break that number down.<\/p>\n Let’s use a typical APR of 14% and a credit card balance of $1,000 for our example scenario. \u00a0First, we will take this number and divide it by the number of days in a year, 365. \u00a0This gives us what is called\u00a0our “Daily APR” at 0.038356%. \u00a0At the end of each day, your\u00a0credit card company takes your daily APR and multiplies it against your current balance to come up with your daily interest charge. \u00a0On our first day, this is equal to $0.38, so they add that to your current balance giving you a new balance of $1000.38, plus any additional purchases and minus any additional credits or payments. \u00a0This process then repeats every day until the end of your monthly statement cycle. \u00a0Keep in mind that, on day 2, the daily rate of 0.038356% is being multiplied by your new balance of $1000.38 and not $1000.<\/p>\n If you are looking for an additional breakdown of interest payments by daily, weekly, monthly, or quarterly rates see the following chart:<\/p>\n <\/p>\n Here is a list of some of the most commonly used terms you might stumble across in relation to credit cards.<\/p>\n Part 1:<\/strong>\u00a0Owning Your Credit and Debt<\/a> Credit cards can be powerful tools in the right hands by giving a family assistance in making a large purchase or allowing one to…<\/p>\n","protected":false},"author":1,"featured_media":1386,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[62,34],"tags":[205,202,203,237,204],"yoast_head":"\n<\/h1>\n
Credit Card Pros and Cons<\/strong><\/h1>\n
Credit Card Pros:<\/h2>\n
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Credit Card Cons:<\/h2>\n
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How to select the right credit card for your family<\/strong><\/h1>\n
If your family needs to transfer a balance from an existing credit card<\/h3>\n
If your family wants to avoid paying additional annual fees<\/h3>\n
If your family wants to earn cash back or other rewards<\/h3>\n
If your family is in need of making a large purchase and paying it off over time<\/h3>\n
If your family plans on carrying a balance on the credit card from month to month<\/h3>\n
Understanding\u00a0Credit Card Interest<\/strong><\/h1>\n
How is Interest Calculated?<\/h2>\n
Interest Rates<\/h3>\n
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Glossary of Credit Card Terms<\/strong><\/h1>\n
General:<\/h3>\n
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Rates:<\/h3>\n
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Fees:<\/h3>\n
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WPS SERIES GUIDE FOR:\u00a0A Credit and Debt Guide for Parents<\/h2>\n
\nPart 2:<\/strong> How Credit Cards Work
\n<\/a>Part 3: Building Your Credit\u00a0(COMING SOON!)<\/span>
\nPart 4: 0% APR Credit Card Promotions to the Rescue (COMING SOON!)<\/span>
\nPart 5: How Do I Get Out of Debt?\u00a0(COMING SOON!)<\/span>
\nPart 6: Managing Your Money and Bills\u00a0(COMING SOON!)<\/span>
\nPart 7: Understanding Your Credit Score\u00a0(COMING SOON!)<\/span>
\nPart 8: How to Make Credit Cards Work for You\u00a0(COMING SOON!)<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"