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I'm just starting out in my financial life and such, so I want to make sure I understand credit cards to avoid nasty surprises when I receive my bill.

I am starting to look at credit cards, and there are so many out there it is overwhelming. I have no clue what to even look for. I just want to know basically what I should look for in starting my credit.

Also, another question about paying back the bill. I do know you're basically borrowing money with a promise to repay it back. I do know I have to pay back monthly and there is a minimum limit, but what I am unsure is basically this... If I spent $1000 dollars for a month and my minimum is $10 dollars:

  1. Is there a recommended or a no incurring interest payment, like instead I pay $32 dollars and a interest penalty won't occur won't occur or does an interest always occur?

  2. Do I incur interest before or after I make my payments?

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Credit cards come with an interest-free grace period of ~25 days as long as you pay your balance in full every month. In other words, charges made in January will appear on a bill cut on Jan 31, and due around the 25th of February. If paid in full by 2/25, there's no interest. It is a very good idea to get in the habit of paying off your entire balance every month for this very reason.

Don't buy anything you can't afford to pay for at the end of the month when the credit card bill is due. You'll avoid interest charges, build good habits, and improve your credit score.

By just paying the minimum amount due, you'll be charged interest from the moment of purchase, and the grace period on new purchases goes away. Credit card companies make the minimum amount due relatively low as a way to encourage you to pay more and more in interest every month. Don't fall for it!

Look for a credit card with zero annual fee. Sure, rewards are nice, but it's more important to avoid fees, keep the interest rate low, and get in the habit of paying in full every month, in which case the interest rate won't matter.

Your bank or credit union is a good place to start looking.

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    I added a couple lines to first paragraph. You can re-edit or rollback if unwelcome. As a complete card newbie, I thought this helped illustrate the grace period. – JoeTaxpayer Feb 17 '15 at 1:37
  • So basically I need to pay in full Jan bill by Feb. 25, correct? If not I will be penalized with interest? They don't really make this clear enough on their sites and such. – Matthew Feb 17 '15 at 3:07
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    @Matt Different credit cards have different "statement closing dates" that will recur month after month, so don't take that Jan 31 date literally: your credit card may have a closing date of January 25 instead of January 31, in which case you need to make at least the minimum payment (but preferably the entire amount shown on your statement dated January 25) by February 19. Your next statement will be dated February 25 and will have all the charges incurred from Jan 26 to Feb 25 on it etc. All this info: statement closing date, total amount due, minimum payment, and due date.... – Dilip Sarwate Feb 17 '15 at 3:54
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    (continued)... all will be shown on the monthly statement. If you pay your credit card via the card web site, they make it easy to choose the minimum payment (it is usually the top choice), so don't fall for that; always choose to pay the statement balance. Also, you can set up the payment in advance if you elect to have the card company take the money out of your checking account via ACH. If you prefer to trust your bank more to "send a check" to the credit card company, be sure to check the fine print as to how much lead time is needed to make sure the payment arrives by the due date. – Dilip Sarwate Feb 17 '15 at 3:59
  • Okay, thank you. Now one thing is I wish to know, say I can pay my Jan. bill of $500 in full, say I paid $450. Now, will interested by calculated from Jan. Bill total, or will it be calculated by the remaining I have left on the bill? Basically, will it be I*(500) or I*(500-450)? – Matthew Feb 18 '15 at 1:25
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Credit cards are a basic building block of a stable financial plan. By using a credit card for every purchase above, say, the price of a coffee you gain a number of material benefits. You get the free use of the bank's money for about a month. You reduce the amount of cash you require to almost nothing. You get a handy budget tracking tool as many credit cards help you assign categories to expenses. You can typically download your transactions and import them into a budget app for handy record keeping. Many cards offer benefits such as extended warranties on items purchased, travel insurance, reward points and other benefits.

There is only one caveat: Pay the entire balance, in full, every month, on or before the due date. Don't even THINK about paying anything less and don't EVER be late.

  • Keith, I would say this answer doesn't help much, but I would suggest covering a topic that hasn't really been pointed out. How credit card interest works. That part can be confusing, especially when it comes to monthly/yearly fees that get tacked on. – dakre18 Apr 8 '16 at 15:00
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It's very simple: The whole purpose of a credit card for the credit card company is that you borrow money and then pay them extortionate interest for the rest of your life. The way you describe yourself, you are the perfect victim. So the obvious thing for you to do is to not touch credit cards with a barge pole.

IF you decide to use a credit card, then what you should really, really do is to pay back the maximum amount possible all the time. Best is to pay off the credit card in full if at all possible.

Consider this: If you owe them money, the interest rate is so high that with the minimum payment, your debt will be growing all the time. Spend $1,000, pay $10 a month, and next year you owe $1,100 without having used the credit card at all. If you pay $32 a month as you mentioned, your $1,000 purchase is actually a multi-year loan. If you need a multi-year loan for a $1,000 purchase, an ordinary loan from your bank will be much, much cheaper.

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    The first paragraph sounds a bit like Dave Ramsey's “there is no responsible use of credit cards.” There's a more balanced view that includes the benefits cards offer, although that's not quite what the OP asked. He asked strictly about interest and payment which Rocky seemed to address pretty well. – JoeTaxpayer Feb 17 '15 at 12:40
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    The last paragraph is incorrect. In the US, the (CARD) law requires that the minimum payment shown on each monthly statement must be the sum of all finance charges and fees billed during that month plus enough of the principal owing to pay off the entire debt in a "reasonable amount of time" (which most card companies interpret as 100 months). So, if only the required minimum monthly payments are made in timely fashion and no new charges are made, that $1000 balance will not increase to $1100 in a year's time as gnasher729 claims. – Dilip Sarwate Feb 17 '15 at 14:57
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    This sounds like you have something against credit cards. Also, I do not understand why you would make a comment that does not help me at all... Instead you are basically belittling me with your rude comment. I came here to confirmed or get the correct information, I am not going to be the fool who doesn't understand. – Matthew Feb 18 '15 at 1:13

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