Credit card, as the name implies, is an enabler for you to make purchases using borrowed money, from simple meals like a sandwich to sophisticated exotic trips like Russia [FIFA World Cup, 2018]. So long as the borrower (you or any cardholder) return the utilized money within the “grace period” of approximately one month or 28 days on average. Should you not pay back within the stipulated time frame, you’ll incur an additional interest expense – typically a fraction of used monies being owed to lenders – on top of the credit utility ratio.


In this article



Pros & cons of credit cards




Credit card companies offer 0% interest-free installment plans, consumer bundle package of up to 36-month repayment period for big-ticket purchases.

 A longer repayment period might affect debt utilization ratio or 609 credit score.

Possession of credit cards enhances consumption mobility (obviously safer) than hoarding thick wads of money, coupled with major brands being accepted globally than individual checks.


At times, your credit cards had reached the maximum allocated limits without you even knowing!


For most of you starting out as fresh graduates, building credit histories begin from cards, thereby forging trust with financial institutions in the long haul.


“It takes 10 years to build a reputation, but only 10 minutes late to destroy it”, said Warren Buffett.


Incentives of using several credit cards are actually helpful, essentially providing quality usage such as cash-backs and loyalty reward points – exchanging for offsets or discount vouchers.


Sky-high interest rate payments had actually gone beyond that of principle payments, said BBC News.

Credit card administration

Getting showered with a multitude of credit cards by the nearest banking branch? Before hopping on the popular card-wagon, question yourself again, “Am I able to afford interest payments on my debts”?


If you possessed the ability to pay up any outstanding balance on time every month, there won’t be interest penalty as charged (and vice versa). Going back to the last point of Pros & Cons of credit cards [KIG Hall, 2018], you can leverage on the incentive schemes to earn reward points. As a cardholder to multiple cards, EZ Credit Repair [2009] revealed that you’re exposed to various benefits such as loyalty points, cash rebates or airline mileages.


Inversely, most reward cards yield higher interests – till the extent of removing hard-earned benefits – which is a double-edged sword. Monthly balance brought forward (or carried over debts) is subjected to interest payments. Picking a low interest-rate credit card is definitely a viable option for fresh starters, no?


A typical credit card is issued by major banking corporations such as, but not limited to; Bank of America, JP Morgan Chase or Wells Fargo. The local financial institution has a list of determinants in building your reward ratio, fixed-income interest and payable fees. You’re strongly encouraged to apply for the right card at the right banks, at the right time of course. Normal transactions are processed by partnered vendor networks; Mastercard, VISA or AMEX, offering lucrative perks like fraud detection and car rental insurance [Money Sense, 2016].


Generally, the higher quality of one’s personal credit score, the higher the eligibility of card entitlements being secured. Individuals who have excellent credit ratings are often favored upon domestic banking corporations – structured rewards system, deferred payment schemes and lowest interest expense ratios.


Interest fee payable for consideration

In a broad overview, credit card companies generate revenue via 3-variable model:

      • Transacting fees as charged during merchandising for every approved credit card transaction
      • Interest payable for each failed attempts in debt recovery
      • Ancillary fees expense as stated in your application forms

The first fee payment structure has nothing linked to consumers. Cardholders are spared from any transaction fee incurred as (participating) merchants are liable to compensate for service delivery process.


One common misconception is on the number game – more loyalty points don’t equate to priority customer service. Most people assumed that a rewards credit card can overcome interest payments in the short tenure. This is not falsified information but generally hyped up by heavily-funded marketing campaigns, argued [Debtor’s Guide, 2013]. It merely takes one-single missed payment (beyond “grace period” of 30 days) to completely wiped out your reward points – steer clear of rewards cards in that case.


Pertaining to ancillary fees, credit cards contained numerous fee structures; annual (yearly) fees, late payment charges, bank overdrafts and others. Citigroup [2010] mentioned that cardholders may find a transparent list of implied charges in any application form. Consumers on borrowed terms ought to repay in a timely fashion else risk being penalized by an interest fee and a late payment – not to forget suffering from an unwanted damaged credit score!

Understanding line of credit

Schumer box, evidently seen on marketing collateral [Mishkins, 2013], encloses a diagram informing credit card applicants on key information. You’re fully responsible for your actions especially signing on the dotted lines. Below is a digestive summary on reading the Schumer box (without complicated terms):


APR purchase agreement

An interest rate is payable on total balance brought forward amount, likely any outstanding dues you did not pay off from the previous month. Kindly note that interests is being charged on a daily basis, the summation of overall balance as well as debt rollovers (differs from snowballing method) – an APR rate of 15% attracts approximately 0.0027% daily rate as opposed to fixated 15 percent interest rate expense, argued subject matter experts from Credit Repair EX [2014].


If you’re using a balance transfer promotion, credit card companies offering zero-percent interest period of six months to twelve months, it is an opportunity to consolidate the bills while servicing only the principle sum. Again, procuring of bulk items and asset classes can be of a good deal – securing interest free incentive as well as building up of borrowing histories [AAA Credit Repair Guide, 2010].

      • APR Variable section: If you realized that your interest is being pegged to a prime rate (or base rate for that matter), a “variable” APR is applied and governed by the Feds (Federal Reserve) – normalizing interest rates to inflation, daily rate sensitive to every basis point announced by Feds.

» Relevance: Calculate your interest rate here!


APR transfer agreements

Bulge bracket banks do allow cardholders to shift credit card debts to a series of approved cards. Sim & Maksimovic [2015] agreed upon using debt consolidation strategies for about 6-12 month period. It is unlikely for further extensions and subjected to discretion of regular procurement process – not all cards are friendly!


APR cash advance agreements

Looking to withdraw via line of credit, also known as cash advance utility, you may use your personal card in convenient ATM machines or queuing up for a bank teller service. Mishkins [2013] warned against such actions due to the interest being levied upon any borrowed amount, on a daily basis too. You’ve to honor the request of bank overdrafts and repay hefty interests to unsecured financing banks.


APR penalty agreements

The penalty of missing a payment is not as simple as forking additional six-month higher interests. You may be further liable to local laws or even received a 25 basis points plunged in individual credit score.


How yo avoid interest being charged Upon”

Apart from the dos, here are the dons of statements from credit card companies. Take advantage of any “grace period” being mentioned in the contractual agreement.


Pay off minimum payment

Card issuers do not run free lending campaigns, but protected by sophisticated legal laws. You’re due for interest rate charges (sometimes unfathomable rates) as long as there is a late charge. A local credit card company often widens the interest spread to the maximum based on the prevailing market rate – having been authorized to do so.


Annual fee expense

Annual fee, self-explanatory nature, is a type of expense incurred directly by you. It is a form of “service fee” for utilizing applied cards. Fret not, most credit card firms offer indefinite fee waivers unless the applicant has average to bad credit rating. Do not belittle the yearly cost of card ownership!


Foreign & local transacting fees

      • Transfer fee structure: Shifting of credit card debt attracts a fee, you’ll be charged per transaction. Listed fees are usually 3-5% of total shifted sum unless otherwise stated.
      • Cash Advance fee structure: Drawing on borrowed money do attract daily interest, based on prime rate from the Feds.
      • Foreign transaction fee request structure: Any expenses abroad attracts network utility purchase fees. Traveler credit cards are typically waived off due to targeted market audience (i.e. Capital One & Discover), VISA or Mastercard services charged 3% on average per transaction.

» Relevance: Check out hot trending credit cards without transaction fees!


Frequently seen penalty fees

      • Late payment fee: Paying the bare minimum is aggravating. But missing a payment is devastating. Once the grace period is over, a decline in credit score is disastrous – nothing beats that.
      • Temporary credit limit increase: Possessing a good credit nature, companies do offer attractive extensions on borrowing lines. The coverage depends on your relational contracts but of rare occurrence these days.
      • Return or Bounce payment fee: A bounced check or failed credit card bill entices a return payment; you have to compensate for extra legwork by the claim handling officer.


Rewards program eligibility

Similar to the Schumer box guide above, a rewards card requires cardholders to understand the eligibility and usage: Adhere strictly to the terms of service. Banks regularly changed their policies on rewards program albeit tossing out lucrative promotional campaigns – bearing in mind that a late payment can potentially wiped out all benefits being accumulated. Some financial planners tied up with irrelevant retail merchandising outlets which are of not much relevance, avoid these rewards cards at all cost!

Are you a fresh credit builder?

Just graduated from college or restarting your entire borrowing history, fret not, here are some useful tips in handling new debts. Firstly, you have to possess excellent credit. This is because debt financiers have a certain degree of trust towards newcomers – significantly low APRs and high rewards rates – attempting to sign young people up to boost market share. Observe the following guide below to avoid debt pitfalls:


Apply for secured credit card

Instead of the traditional debit card, wanting a branded outlook, why not sign up for a secured card. The only requirement is to pledge a cash deposit or asset as collateral. Reason being, the issuer significantly lowers the risk of lending defaults therefore willingly opens up to general public including those with poor credit or just starting out.

» Relevance: How do secured cards function?

» Relevance: List of secured credit cards to choose from


Obtain student credit card validation

Not enough lending records to produce? One segment, particularly student cards, caters to young college students above age 21. An employment income may be needed depending on the local financial institution. It is advisable to hold a steady one-year income or monthly allowance from parents or guardians.

» Relevance: Ready Credit designed for student cards – really?


Apply for sub-card

If you can piggyback on your parents’ credit cards, applying for a sub card is fantastic. It helps to control your individual expenses as “someone” is watching your back. Although the main focus is not on you, having a secured sub card can attain similar benefits to that of a normal card. Most issuers do lodge reports on authorized user’s activities to credit bureaus, thereby fetching higher recognition on your credit score [Wallet Primer, 2014].

» Relevance: How do authorized users increase lending histories?

Relevant Topics

» What is Credit Repair: Learn the art of building up your credit score here!


This article was originally published on December 23, 2013. It has since been updated.