The Devil is in the Details
Why credit cards are one of the best financial tools you can use if you know the rules
I am revamping the paid vs. free content, and (after some feedback) I feel the info in articles such as this one is so important that going forward I am making these Sunday deep dives free as well. That being said, please share this article with at least one friend, family member, or colleague. This information is truly invaluable. More details about the paid content will come later this week, but I promise the info given to paid subscribers will still be incredibly valuable and contain info worth hundreds more than the subscription price.
If every American followed this article’s instructions, US consumers as a whole would save about $120 billion per year. Credit cards are dangerous if they aren’t used correctly, but if used properly credits cards are one the best financial tools available. Specifically, credit cards can help build an individual’s credit and many cards provide reward points that go toward hotels, airline tickets, electronics, and many other items. However, many consumers do not know the correct way to select and use cards. In this article, we are going to start with the basics and break down the most important terms.
Annual Fee
An annual fee is charged to the cardholder in order to keep the credit card account open. Annual fees vary in size from absolutely zero all the way up to $5000. Usually the higher the annual fee, the more rewards and perks accompany the card.
Rewards
Rewards vary by card, but as a broad definition they are the cash back, points, and credits that come from having and/or using the card. For example, the Platinum Card® from American Express comes with hundreds of dollars in credits toward airline and hotel spending, as well as reward points that accumulate as you use the card that can be redeemed for airline flights as well. As long as the card is paid on time each month, the rewards are the most important factor for determining which credit card to use. Similar to rewards, many cards have perks as well. For example the Platinum Card® also offers access to several different airport lounges. The Chase Sapphire Reserve card offers a complimentary DashPass from Door Dash, access to airport lounges as well, and Global Entry or TSA PreCheck® or NEXUS Fee Credit.
Annual Percentage Rate (APR)
Annual percentage rate is the interest rate stated as a yearly rate. APR is determined by three main factors: the card, the cardholder’s credit score, and the Federal Reserve’s interest rate. Therefore, APR varies by individual and overtime. A better credit score typically leads to a lower APR. The cardholder will not be subject to interest if the statement balance is paid by the payment due date.
Billing Cycle
The billing cycle is the period of time where all the charges that appear on the statement date are accumulated. An example billing cycle is January 23rd through February 20th. In this example, all charges to the card on January 23rd through February 20th will appear on the statement.
Statement Closing Date
The statement closing date is the last day of the billing cycle. All charges from the first day of the billing cycle until this day will appear on the statement balance.
Statement Balance
The statement balance is the amount owed at the end of the billing cycle. This is the most important number. The cardholder must pay this balance to avoid an unpaid balance amount that will accrue interest. If the statement balance is paid in full, there will be no interest, fee, or penalties assigned. The statement balance is different from the current balance. The current balance contains all charges to the card regardless of billing cycle. Therefore, it is not unusual to have an amount leftover on your current balance after paying the statement balance.
Payment Due Date
The payment due date is the day the statement must be paid. A credit card statement will show the total balance on the credit card, the minimum payment amount and the payment due date.
Minimum Payment Amount
Paying the minimum payment due protects the cardholder from late fees and other penalties, but not interest. If the credit card balance is less than the minimum payment amount, then the balance will likely need to be paid in full. The minimum payment is likely 1-3% of the outstanding balance, including accrued interest and applicable fees. It’s important to note that paying only the minimum payment amount still results in interest on the unpaid statement amount. For example, if a cardholder paid a minimum payment amount of $75 out of a statement balance of $575, the cardholder would still be charged interest on the $500 that remains unpaid. Using an APR of 20%, that unpaid amount results in an additional $8.33 rolling into the next statement.1
What Does This Mean for My Credit?
The most important step is always paying the statement balance on or before the payment due date. Consistently paying the statement balance on time will have a positive effect toward the cardholders credit score. Therefore, credit cards should largely be used like debit cards: with the slight caveat that the money needed to pay off the statement balance must be available by payment due date when using a credit card, instead of physically available in the account at the time of purchase when using a debit card.
This is calculated by taking the APR (which is a yearly rate) of 20% and dividing it by 12 for the months in a year. Next, take that number (0.016) and multiply it by the unpaid balance of $500.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.
Great information!