The Fine Art of Borrowing

It’s good to think of your credit limit as a pre-approved loan. Just like a loan for a car, a home, or an education, your card purchases carry some obligations and costs. Spend some time to understand the terms of your card in order to be a better (and smarter) user of credit.

1. finance charges - take a close-up look
2. know your APR - does it fit your style?
3. the keys to the fees - get the picture
4. when to consider other loan options

1. Take a closer look at finance charges
   If you elect to pay your balance over a longer period of time, you will be charged a finance charge. Like interest rates on loans, finance charges and how they are computed can vary widely depending on who issued your card. Finance charges can also include service fees, transaction fees, or premiums paid for optional services such as credit card insurance or life insurance.
    
   Unlike with other loans, your finance charges can be added to your account balance, effectively making you pay interest on your interest. That’s why it’s always a good idea to make more than your minimum payment each month.
    
   Once you begin carrying a balance, new purchases are usually added directly to your total balance and will begin to accrue interest immediately. Cash advances also usually accrue interest immediately regardless of your account balance.
    
   Reestablishing your grace period can be tricky. If you send in a payment for the total on your statement, your balance will be reduced to zero only if you have not made any purchases since the statement was generated.
    
2. Get to know your APR
   Because institutions often use different systems for computing finance charges, your APR (or annual percentage rate) is a valuable number to know. It tells you the amount of interest you will pay on a loan over the period of one year. For instance, a $1,000 loan with an APR of 10 percent would be charged $100 interest over a year. In reality, this cost would probably be less, as your monthly payments would reduce the size of the loan over time.
    
   If you plan to carry a balance on your account often, it may make sense to shop around for a lower APR, even if you must pay a higher annual cardholder fee.
    
3. The key to fees
   Some card providers charge an annual fee for servicing your account. You may also be charged late fees, application fees, delinquency fees, or cash advance fees, as well as fees for exceeding a credit limit.
    
   None of these charges should be a surprise if you’ve read the cardholder agreement sent with your card. If you don’t understand an item in the agreement, call the financial institution that issued your card.
    
   If you don’t plan to carry a balance on your account often, it may make sense to look for a card with a low or no annual fee, even if it carries a higher APR.
    
4. When to consider other loan options
   In exchange for convenient and ready credit, card users generally pay higher interest than offered on standard bank loans. When making larger purchases that will require many payments over time, it may make sense to shop around for a traditional loan with fixed payments that fit your monthly budget.
    
   Keep in mind, though, that traditional loans require collateral or a co-signer, and the process for acquiring a traditional loan is much more complicated and time-consuming than for a credit card.
    
   Remember—you are the best judge of how much you can afford to borrow. Use your credit wisely, and you’ll build a solid credit history that will serve you for a lifetime.
    
   ***Stay in good graces
   Most payment cards offer a grace period within which you can pay off the total balance of your account and avoid any finance charges.
    
   In a way, it’s like an interest- free loan for up to 30 days: Purchases paid off during the current billing period do not accrue interest. In fact, many consumers pay their balance in full during this period.