Understanding your credit card

Jun 30, 2010 at 11:15 p.m. ET

As the saying goes, "Cash is king." But in a world where swiping a card is decidedly faster than counting back change or writing a check, it appears that there may be a new queen of the house.

Woman with credit card

With credit cards comes both responsibility and opportunity to manage your finances by being able to track your spending, improve your credit score and establish a credit history that may come in handy during tough times. The key to making credit cards work for you, instead of against you, is to understand your credit card.

Choose the right card for you

Before you sign up for that enticingly low-rate offer that comes by way of email or snail mail, shop around for credit cards. It could be that great rate only lasts six months or the annual fee eats up any savings you could enjoy from the low introductory rate. If you shop around, you may be able to find that same low rate with a card that has no annual fee. A general rule of thumb is that fixed-rate low interest cards are always better than variable-rate interest cards.

Know your credit score

Your credit score is the difference between being denied or approved for credit, and a low or high interest rate. Data from your credit report goes into five major categories that make up a FICO score. Payment history, amounts owed, length of credit history, types of credit used and new credit (i.e. inquiries) all comprise the three digit number. While federal law entitles you to a free credit report once per year (annualcreditreport.com), your credit score is generally available for purchase, at about $10. That investment can go a long way in ensuring you know where you stand and making necessary adjustments.

Finance charges

Finance charges can be calculated using the average daily balance, daily balance, two-cycle balance and/or two statement balance. To make sure you're getting the best deal on a card, ask how the company calculates the charges and how interest is calculated. Find out if there is a grace period for new purchases.

Avoid late fees

The average late fee on a credit card is $39, and at that rate, it's no time to be tardy! Avoid late fees by ensuring you use the preprinted envelope that comes with your statement, paying the minimum immediately, changing your due date if necessary, setting up automatic payments, or pay by phone.

Know the time for pay off

After the Credit Card Act of 2009 was passed, your monthly credit card bill now includes information on how long it will take to pay off your balance if you only make minimum payments. It will also tell you how much you will need to pay each month to pay it off in three years. The frightening reality of these numbers is enough to pay more than the minimum whenever possible.

Balance transfers

Before you transfer any credit card balance to a card with a super-low introductory rate, read the fine print and ask questions. Otherwise, you could end up paying fees and a much higher interest rate than you expected. Remember that balance transfers are not free and most charge against the amount being transferred.

Too many cards can be a bad thing

You know you have too many credit cards if you can't even cover the monthly minimums. On the other hand, you don't want too few either so that your score reflects no available credit. Find the balance by paying down your open cards to manageable level, but keep the line of credit open.

Take the time to know the ins and outs of every credit card currently in your wallet and put them to work for you, instead of the other way around.

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