There are many advantages to owning a credit card. You have to understand though, that with great power, comes great responsibility. We’ve seen people dig themselves deep in debt and even ruin their whole lives just because of irresponsible credit card use! So before you fill out that application form for a shiny card that opens many doors, make sure you are familiar with the following terms and concepts:
1. Annual fees/Membership fees
The privilege of having a credit card does not come free. There are annual charges imposed so you could continue using your card. To sweeten the deal for first time card holders, most banks waive this fee for your first year of use. For the succeeding years, though, you have to pay this diligently, unless you can somehow convince your bank to waive your annual fees for life. (Yes, this happens sometimes).
2. Finance charge
Simply put, this is interest charged on top of the amount you owe. It is computed using your annual percentage rate added to the total amount you charged on the card. If you’re unsure about annual percentage rate, you can simply call up your bank to find out.
3. Late payment fees
Whenever you fail to settle payments on the due date set on your bill, you will be charged late payment fees. These extra charges are usually hefty, so always pay at least the minimum amount due before the deadline.
4. Cash advance fees
Some banks let you withdraw cash using your credit card, as long as the amount is within your monthly spending limit. To avail of this option, you have to pay cash advance fees on your next billing. Like late payment fees, cash advance charges are not cheap, so utilize this option only as a last resort.
5. Monthly effective interest rate (MEIR)
On top of late payment fees, any unpaid balance not settled before the next bill will accrue interest in the form of MEIR.
6. Minimum amount due
This is the minimum amount you have to pay on or before the due date to continue using your card. It’s usually just 5% of your total amount payable. As long as you pay that, your account will remain active. However, the unpaid balance will be charged interest as discussed earlier.
7. Due date
This is your payment deadline– the last day you can pay before you get charged interest or finance charges. As mentioned earlier, you may only opt to pay the minimum amount due on this date.
8. Cut-off date
Credit cards have monthly billing cycles. On the last day of your billing cycle, which is your cut-off date, all your fees will be calculated for the current month. Any charge made after your cut-off date will be billed for the next month, so you have more time to prepare for payment.
9. Statement date
This is the day you receive your bill, along with the breakdown of your transactions for the month. It is usually mailed to you a few days after your cut-off date. Upon receiving your statement, immediately check your amount due and deadline– to make sure you won’t miss any crucial payments.