A Quick Guide to Your Credit Card

Leveraging Credit

Credit cards are powerful financial tools that, when used responsibly, can help you build credit, get rewarded for spending, and buy necessary goods when you’re strapped for cash. While there are many benefits to having a credit card, if used incorrectly, your credit card could harm your financial well-being rather than help it.

Right now, 35% of US adults are carrying credit card debt each month, up from 29% over the same period last year. What’s more, according to a new survey from YouGov, 43% of adults don’t know what interest rate their credit card carries.

How Do APRs Work?

A credit card’s APR refers to the annualized cost of using a credit card to borrow funds. When an individual charges a purchase from a merchant that accepts credit card payments, they’re borrowing money from the credit card issuer. The credit card issuer pays the merchant, and the cardholder pays the credit card issuer based on the terms of their credit card agreement.

Depending on the type of transaction and when it’s paid back, some purchases may be subject to interest. For instance, the purchase APR applies to any balance remaining after the statement due date. Interest is determined based on the credit card’s APR. Thanks to several rate hikes last year, the average credit card interest rate is at a record high of almost 20%.

Most credit cards will provide an interest-free grace period of around 21 days to pay off your card. If you don’t pay off your card in full during this period, you will be charged daily interest on your balance that rolls into the next month. Because this interest compounds, it has the potential to grow quickly.

Paying Down Debt

The APR on a credit card is an important number to know before charging a purchase — especially if you plan on carrying a balance on your credit card account. This money funneled to your credit card company can easily cancel out any rewards you earn from using your card. This is why it’s so important to pay down your cards each month.

To pay down your cards, one common strategy is to pay off the smallest balance first and slowly work up to the larger ones. Or, if your debt seems unmanageable, you can also consider applying for a balance transfer card. These cards may offer 0% interest rates for several months or, in some cases, even years.

Regardless of the strategy you use, it’s worth researching the APR carried by your card. There’s nothing wrong with using a credit card. In fact, they can be key to alleviating financial burdens — just as long as you don’t let them carry burdens of their own.

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