Credit cards can be a wonderful tool to help you manage your money. They can also quickly pull you into a bad place financially. It is all in how you use them. You probably have some concept about a credit card, but you might not understand the details of how they work. This is usually what helps get people into trouble with credit cards. There are some details you should understand before you begin to use a credit card. You may have heard the term zero percent interest, but do you know what that means? Worry not, because I am going to explain the details behind zero percent interest in this article so you understand what it means. This also helps you decide which zero percent interest credit card is best for you.
What Is A Credit Card?
Before we can begin talking about zero percent interest credit cards, I want to make sure you understand what credit cards are. I am sure you know that a credit card is a piece of plastic that you carry around in your wallet. You also know that you can buy things with it. You can also use your credit card online. Each time you use your credit card, you agree to pay back the money you use. You are also agreeing to pay any interest or fees you may have.
The credit card is typically backed by a bank. That means a bank is allowing you to borrow money with your promise to repay it. It is similar to a line of credit. The bank agrees to let you borrow up to a certain amount of money. You can use that amount all at once, but you can choose to only use a portion of it. However, whatever amount you use is due within 30 days. If you do not pay the amount in full, you must pay interest on the money you used but are not repaying right away.
The credit card company always requires you to make a minimum payment. If you do not pay at least that much, you are subject to additional fees. Not paying the minimum amount impacts your credit score. You want to make sure you pay at least this much. Ideally, you would pay off the whole amount each month, but many of us cannot do that.
The way a credit card work is like this:
The credit card company gives you a limit of $5,000. If you have poor credit, your limit is going to be lower, but more on that later. That means you can use the $5,000 any way you want. You use $400 of the available $5,000. That means you now have $4,600 available and in about 30 days, you owe the bank $400. If you pay the full amount, you have no interest charges and your available credit is back up to $5,000.
However, if you only pay $200, that means your available credit is $4,800 and you have interest charges for the $200 you did not pay. Since you have good credit, I will say the interest rate is 10 percent. That means you must pay an additional $20, so your new balance due is $220 and your available credit is $4,780.
Why Is Zero Percent Interest So Appealing?
When looking for a credit card, you should always try to find one with zero percent interest. These types of cards are appealing because you are not charged interest for a set period of time. Typically, the credit card company gives you zero percent interest for 9 months or a year. This means for the next 9 to 12 months, you are not charged interest for any month that you cannot pay your balance in full. The only money you owe during that time is the money you charge. This is a great way to make large purchases, as long as you know that you can pay off the purchase before the time period runs out.
The downside to this type of credit card is if you do not pay off the entire purchase during the promotional time period, you are charged interest on the entire cost of the item, even if you have paid for some of it. Another downside is you could be teaching yourself bad habits by not paying off the full amount every month. You can get used to carrying a balance from month to month. That is fine when you are not being charged interest. Once that interest starts accruing it is an entirely different situation.
The Top Credit Card With Zero Percent Interest
With all this talk about zero percent interest credit cards, I am sure you are interested in finding out some of the best available. I mean, what is the point in knowing you have these options without knowing what they really are, right?
I am going to list some of the best options available to you and give you just a little bit of information about them. Remember, some of these offers are subject to your credit score. Just because they are available does not mean you qualify for them.
Chase Freedom Unlimited
This card gives you 15 month with 0 percent interest. Yes, 15 months. This is one of the longest periods of time you will find. In addition to 0 percent interest, this card has no annual fee. It also offers unlimited cash back rewards of 1.5 percent, which do not expire. There is no minimum for redeeming the cash back. If you spend more than $500 in your first 3 months after opening the account, you get a $150 bonus. For these reasons, if you qualify, this could be the best first credit card you can find. You should be aware that after the promotional period ends, the interest rate may be between 16.74 and 25.49 percent.
Discover It Cashback
Another card that offers zero percent interest is the Discover It Cashback card. This card offer 0 percent interest for 14 months. After that period, you can expect an interest rate of anywhere between 13.49 percent to 24.49 percent. There is no annual fee for this Discover Card. This card offers you 5 percent cash back at various places that change each quarter. They can be places such as Amazon or various gas stations and grocery stores.
You must activate these offers, but Discover also offers unlimited 1 percent cash back on every other purchase. That is automatic and you do not have to activate this cash back. The best part of this card is that Discover matches all of the cash back you earn for the first year. There is no limit on how much Discover matches. You can redeem any amount at any time and they do not expire.
CapitalOne QuickSilver Cash Rewards
This credit Card is another card that offers zero percent interest for 15 months. After the 15 month period, the interest rate may be anywhere between 15.74 percent to 25.74 percent. This card also offers zero percent interest on balance transfers for 15 months. There is no annual fee with this card. CapitalOne also offers 1.5 percent cash back on all purchases, with no limits. There are no specific categories and you do not need to activate any offers. The cash back does not expire and there is no limit to how much cash back you earn. This credit card also offers a $150 bonus after you spend $500 within the first 3 months after you open the account.
One last card that you might want to consider is the BankAmericard credit card offers zero percent interest for 18 billing cycles. After the end of 18 billing cycles, the interest rate goes up to anywhere between 14.74 to 24.74 percent. This card does not have an annual fee. This card does not penalize you for paying late. Making late payments does not negatively impact your credit score. This credit card does have mobile banking, but does not have any other promotional offers.
Key Terms I Should Understand
In the section above, I mentioned a few terms that you may not fully understand. These are important terms when it comes to credit cards and proper usage of them. I want to take a few moments to give you some detailed information about them.
I want to start with your credit limit because this is the basis for your credit card use. This is the full amount that the credit card company allows you to use. This amount is typically dependent on your credit score. The lower your credit is, the lower your credit limit will be. This amount can change over time, if you use your credit card wisely. If you make regular payments on time and pay off the full amount, or most of the among, the credit card company will increase your credit limit.
The available balance is the amount of credit available for you to use. The bank gives you a set credit limit and as you use that amount, your available balance goes down. When you pay the credit card, your available balance goes up. I will give you an example in simple numbers. Your credit limit is $1,000. You spend $200 of it. That means your available balance is now $800. When your credit card bill comes, you owe $200 because that is what you used. You pay the entire amount of $200 and now your available balance goes back up to $1,000.
All credit card have some type of fees. You should be aware of them before you begin to use your credit card. Your credit card may have an annual fee. This is an amount they charge you simply to use their credit card. Some of those fees are fairly high and are not worth it, but you must understand what the fee is and why. There are plenty of credit cards that do not charge an annual fee. You should look for those first. Credit cards charge other fees such as a late fee when you do not pay the minimum balance on time. Credit cards also charge a fee if you go over your available balance. Many credit cards will deny the sale if you do not have enough money available, but others will no. You will get hit with a fee if you go over the limit.
Interest is where it gets a little more difficult. Most credit cards have an interest rate. It varies across credit cards and your credit score. In the examples I described above, I talk about simple interest, which is the interest you owe on the money you used this month. However, there is something called compound interest. This is paying interest on what you already owe. This is the way the credit cards get out of control.
I am going to use numbers to highlight what I mean, but keep in mind these are made up numbers to help the explanation. You owe $150, but can only pay $50. Interest is charged on $100. 10 percent interest is added, which means you now owe $110. For the next month, interest is determined on the $110, which is the $100 you used plus the interest on it, so now, you owe $11 more, bringing your total amount due up to $121. These numbers are only if you do not use your credit card during that month. This continues to happen each month until you pay your balance in full.
Some credit cards offer incentives such as zero percent interest for a set period of time. That means during that period of time, no interest is charged for money that you carry over from month to month. This is appealing because you do not have to pay off the balance in full to avoid interest charges.
What Is The Difference Between Secured And Unsecured Credit Cards?
You may have heard the terms secured and unsecured credit cards. Typically, secured credit cards are for those with bad or little credit.
A secured credit card is great for someone who needs to build up credit. It could be because you are young and you do not have any credit yet. Or it could be because you have gotten yourself into a tough spot and your credit score has dropped. No matter the reason, this type of card helps you build up credit. You should know that you will not find a zero percent interest secured credit card. These types of cards work a little differently.
They use your own money to help secure them. You give the bank a deposit of a specific amount. In some cases, your credit limit is the amount of your deposit. It may be $500. You can borrow up to that amount of money. Each month, you make regular payments on your credit card, just as you normally would. Over time, as you continue to make timely payments and make smart decisions with your credit card, your credit score improves. Then the bank increases your credit limit and gives you back your deposit.
An unsecured credit card has none of your own money backing it. You do not have to give the bank a deposit. You just have to have good credit. A typical credit card is considered unsecured.
Does My Credit Matter?
Yes, it is important for you to learn now that your credit always matters. It matters in many different aspects of your life. However, for purposes of this article, I am going to explain how your credit matters for credit cards. The type of credit card and credit limit you receive is based on your credit score. Typically, only those with good to great credit will qualify for a zero percent interest credit card.
If you have very good credit, usually a score of 740 or more, you can qualify for just about any credit card with the best features, incentives, and interest rate. A good credit score of somewhere between 670 to 739, means you can qualify for most credit cards with some fairly good rewards and promotions such as zero percent interest. When you have a credit score in this range, it means that you have a credit history of three or more years and no late payments. Credit card companies also look at how many other debts you have to help determine if you can handle credit card debt.
When your credit falls between 580 to 669, you may start to have some challenges getting approved for a credit card. It is not impossible, but now you are falling into category where you need to do more research about credit cards. It always helps to know your credit score before you begin to look for a credit card. This helps you understand what type of credit cards for which you qualify.
Can I Get A Credit Card With Bad Credit?
Yes, you can get a credit card with bad credit. However, it may be more difficult for you to obtain one. You may have a low available credit. Also, you may need to obtain a secured credit card, depending on how bad your credit score is. You most likely will not qualify for a zero percent interest credit card if you have bad credit.
If you have bad credit, you should be aware of some other points when it comes to credit cards. You should make sure to get a free copy of your credit report. Remember, you are eligible for one free copy per year. You should get one and review it. The first things you want to do is make sure it is correct. If you find errors on your credit report, you should fix them immediately. This helps to improve your credit score. After you do this, take a look at your credit score and understand it. You should also begin to take measures to improve your credit score. You should make sure you make all payments on time and work to reduce your debt.
After you have taken these steps, you should do some research to find the right credit card for you. There is a best credit card to get with bad credit because it is geared towards helping you improve your credit score. You may have to obtain a secured credit card until you are able to improve your credit score. A secure credit card is one that you give the credit card company a deposit to back your card. Typically, your credit balance is the same amount as your deposit.
What Is The Best Way To Use A Credit Card?
I may have mentioned it a few times already, but a credit card is a great money management tool as long as you use it properly. There are a few items to keep in mind when you are using your credit card to help you stay on track. If you can follow a few tips, you can keep yourself from drowning in credit card debt.
- Pay off your full balance each month. I know this can be challenging, but if you only use what you can afford to repay, you will be able to pay your credit card bill each month.
- Budget yourself. One of the best ways to stay on track to pay your credit card in full each month is to have a budget. I will go in more detail later in this article.
- Auto pay. You can set up so that you automatically pay a certain amount to your credit card each month. You should make this amount pays more than the minimum balance.
- Look for zero percent interest. The best kind of credit card you can have is one that does not have a balance. That way if you are not able to pay off your balance each month, for a short time you will not have interest charges.
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Why Should I Create A Budget?
I mentioned earlier that a good way to use credit cards is to pay the balance each month. I also said that the best way to do that is to create a budget so you know how much you can afford to pay each month. It is impossible to stay within your budget, if you do not know how much you can afford to spend. The average credit card debt per person continues to rise each year. The best way to stay on top of it is not to over spend.
Creating a budget is fairly simple as far as writing down all the numbers. It may not be simple for you to stick to, but that is another issue. The fastest way to create a budget is to write down your income in one column. In the next column, write down all of your expenses. Do not leave anything out. This is not the time to hide things. You would only be hiding them from yourself and it would serve no purpose. After you have written everything down, add up both columns. Then you subtract your expenses from your income and hopefully, you have a positive number. That is how much money you can spend each month after you pay all of your expenses.
Should I Save More?
It is always a good idea to save as much money as you can. You never know what is going to happen. There always seems to be some unplanned expense. You want to have money for emergencies, but you also want to have money for your future. The best way to save more money is to cut expenses. Now that you have all of your expenses written down, it is fairly simple for you to see where you spend money. It may be surprising to you to see how much money you spend and where you spend it. Most of us do not even realize where our money goes. Creating a budget helps you answer that question. Once you see where it goes, you can begin to make some changes and cut spending.
Now is the time to take a critical look at your expenses. Put your expenses into categories. Create a category of must have expenses. These are thing such as your mortgage or rent. Your car payment and utilities and food should go here. Keep in mind that just because these are must haves, it does not mean you cannot reduce spending in these areas. Take a look at what is left and see what spending you can cut.
Credit cards can be the best tool you have, or they can be your worst enemy. It all depends on how you use them. When used properly, credit cards provide flexibility with your spending. When used poorly, they can drag you into a vicious cycle of debt. Use them wisely.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.