6 Important Credit Card Lessons Your Parents Didn’t Teach You

6 Important Credit Card Lessons Your Parents Didn’t Teach You

Our parents taught us many of life’s important lessons, but did they adequately prepare us for smart credit card use? Maybe not. Here are six credit card lessons your parents might not have taught you.

1. Credit cards offer more fraud protection than debit cards

Credit cards offer a much greater level of protection against fraud than debit cards. Many credit companies come with $0 fraud liability, meaning you aren’t responsible for any reported fraudulent spending. In most of these cases, the creditor will credit your account immediately. However, with debit card purchases, it can take the bank up to two weeks to refund your money, and even then you might still be held responsible for a certain percentage of the charges.

2. You must be proactive to build your credit

A common myth is that an open credit card account is all you need to build your credit. Credit scores reflect an individual’s relationship with debt management. Lenders and creditors want to see how you interact with finances, especially if you are going to take on more debt. This doesn’t mean you need to be in debt to have a good credit score. Instead, a credit score is established through paying your bills on time, whether that be your credit card bill or your mortgage.

One of the biggest factors in determining your credit score is your credit utilization ratio. Lenders want to see how much debt you have versus how much credit you have access to.

Build your credit by using and paying off your credit card, making payments on time, and asking for credit line increases.

3. Keep your credit utilization ratio as low as possible

Generally, it is important to have a credit utilization ratio of 30 percent or less. For example, someone with $500 of debt on a $1,000 total credit line will look worse to creditors than someone who has $5,000 debt with a total credit line of $30,000.

Calculate your credit utilization ratio by dividing your debt total by your credit line total. For example, $500 of debt divided by a $1,000 credit line would equal a 50 percent credit utilization ratio, whereas $5,000 of debt divided by a $30,000 credit line is just over 16 percent. Remember, your credit line total is the combination of all lines of credit you have open.

4. Interest payments can make debt hard to pay off

A few thousand dollars of debt can feel like an impossible hurdle if you try to pay it off in minimum payments only. You will feel like you are making zero progress on your debt when you have to pay interest. Interest makes anything you purchased with a credit card more expensive. Did you really mean to pay double for that clearance shirt?

5. Differences in interest rates do matter

Perhaps your parents didn’t make a big deal about the difference between an A and A-, but when it comes to interest rates, the difference is noticeable. Even a half of a percent can make a big difference when it comes to your monthly payments on a loan. Getting a $20,000 car loan for three years at 4 percent doesn’t seem much different from the same car loan at 3.25 percent, but it is. The difference is $6 a month, or $216 in the lifetime of the loan. Wouldn’t you rather that money go to something necessary or fun instead of an interest payment? The same is true of paying interest on a credit card.

6. Rewards don’t negate debt

We know your mom always told you to look at the bright side of things, but credit card rewards are not the bright side. If you are constantly running up credit card debt to benefit from rewards points, then you will be sorely disappointed by their rate of return. There is no credit card on the market with a reward program that makes going into debt worth it.

Pay off your monthly credit card bill to ensure you benefit from the rewards, but aren’t being burned by the interest rate.

How a Credit Card Cash Advance Costs You More Than a Purchase

How a Credit Card Cash Advance Costs You More Than a Purchase

Credit cards are all about convenience. With one swipe, anything we want or need is right at our fingertips; and that includes cash. That convenience comes at a steep price, however — quite literally.

Credit cards call it a “cash advance” when you use them to take cash out at an ATM, or use one of their convenience checks to pay for purchases (for example, when the vendor doesn’t take credit cards, but will take a check).

Here is what you need to know before even considering a cash advance, and some alternative solutions for when you need funds fast.

What is a credit card cash advance?

Taking a cash advance is done much the same way as making a withdrawal with your debit card. Instead of taking your own money out of your bank account, however, you borrow directly from your credit card. You may also receive checks in the mail from your card issuer that allow you to make credit card purchases via check payments. Again, this is not your money — the checks will pull funds from your credit card account.

What happens when you take a cash advance

Most credit card issuers impose entirely different terms on cash advance transactions. First, you will be charged a transaction fee, which will either be a flat rate or a percentage of the cash advance you’re withdrawing (typically between 2 percent and 5 percent). Additional ATM fees and foreign transaction fees if you’re out of the country may apply as well.

In addition to fees, you’ll likely be hit with a much higher interest rate. In some cases, the APR can be double the percentage for regular purchases. This catches many people off guard, since they’re unaware different terms apply for cash advances. The longer it takes you to pay off this amount, the more that hefty interest will pile up.

There is no grace period for cash advances, either. Typically, you have a month or so to pay off a credit card purchase in full before accruing any interest charges. This doesn’t happen with a cash advance — you pay interest starting the day you make the transaction.

Credit card companies also typically impose a separate limit on the amount of money you can take in a cash advance. This will often be much lower than your actual credit card limit.

How much will this actually cost you?

Let’s say you are going out for dinner with friends, and you need to get a quick $40 from an ATM using your credit card. First, you will be hit with the cash advance fee. Next, you will start incurring interest on that withdrawal immediately (possibly around 30%). Furthermore, the operator of the ATM may also impose its own fees, which can be anywhere between $3–$5 per transaction. You could be looking at anywhere from $10–$15 in fees for taking out $40 (and that’s assuming you pay it off by the next billing cycle). As you can see, that $40 dinner could wind up costing you $15 extra. Now imagine if you were borrowing $1,000 or more!

Alternatives to credit card cash advances

Simply put, you should always use a debit card to access cash instead of a credit card. Most major banks offer debit cards that can be used at in-network ATMs for no additional fees. In addition, many banks and credit unions are part of a larger ATM network that allows transactions for no additional fees.

If the issue is that you’re simply short on money, or stuck living paycheck-to-paycheck, a cash advance is not the solution. Instead, consider ways you can bring in extra income. Perhaps you can take up a part-time or side gig, sell a few items on eBay, or throw a big garage sale.

When is it Ok to take a cash advance?

A cash advance isn’t the best option, but if it’s your only option in an emergency, take it. Be sure to understand that there will be fees involved and that you need to repay the money you borrowed as soon as possible.

Cash advances should never be used for everyday expenses, “fun” money (shopping or gambling, for example), or even to make ends meet until your next paycheck. It can be all too easy to fall into a cycle of cash advances, which will ultimately lead to credit card debt.