How Credit Works
You’ve got to go in circles if you want to go places with credit.
But you want to be sure the way you’re using credit is better for you than it is for the credit provider.
The merchant you buy from also pays the creditor a fee, usually a percentage of the purchase price. Part of the cost of doing business is making it easy for people to buy — and that’s what credit does.
If your credit card bill invites you to skip a month’s payment without penalty, the lender isn’t doing you a favor. If you take the offer, you probably won’t owe a late fee, but you will owe finance charges on your unpaid balance. And any purchases you make after the due date you skipped will probably accumulate interest from the day you make them.
For example, if your credit limit on your credit card is $1,000, and you charge $400, you’ve still got $600 to use. And if you repay the $400 at the end of the month without charging additional purchases, your credit limit is back up to $1,000 again.
THE PRINCIPAL IDEAS
In most cases when you’re considering a credit agreement, you won’t be able to negotiate better terms with a creditor than whatever the standard offer is at the time. But that doesn’t mean you can’t find a good deal. Whenever you’re in the market for credit, doing some serious comparison shopping may help you find a lower interest rate, smaller fees, or some other way to save money.
VARIATIONS ON THE THEME
A line of credit is another type of revolving credit. Banks and other credit providers sometimes offer customers a line of credit to make it convenient for them to borrow larger amounts than they might be able to put on a credit card.
Often, when you have a line of credit, you get a pack of special checks that look just like regular checks. In fact, you use them the same way as conventional checks, and can write them for amounts up to the credit limit your lender sets. The difference is that you’ll get a bill, including finance charges, for spending the money. But when you repay, you can use the amount again.
As useful as credit cards can be, there are times when you need cash. If you don’t have the money you need in your bank account, most credit cards allow you to get cash advances at ATMs. The only thing is arrange for a personal identification number (PIN), just as you do with an ATM card.
With most cash advance arrangements, you pay a fee for the withdrawal and start owing interest from the moment you get the cash. And that interest may be charged at a higher rate than you pay on your regular card purchases. So you may want to use this alternative only in a true emergency.