12 Things you should know when getting your credit card

Getting your first credit card is a major milestone. Half the time, you’ve already read up about how credit cards work. To ensure you leave no stone unturned, it is key to understand the nitty-gritty which will help you plan, save, and use your card responsibly while you build good credit quickly. Here are 12 important terms you should know about your credit card

1.    CARD FEES: this is the price of the card. Some credit cards are free while some come with a charge just like the way your debit cards come at a fee of about NGN 1,000. Usually, if you are getting your first credit card, your card fees will include the cost of due diligence by the credit card firm. In some cases, these cost items may be separated. It is also key to pay attention to this charge because it may be a prepaid item or could be transferred to you as your first interest-free credit.

2.    ANNUAL PERCENTAGE RATE (APR): This is the interest fee on your used amount in a billing cycle. Although it is an annual amount, it is prorated monthly since your billing cycle is monthly. A good example is if you get a card with an APR of 24% that means that every month, you will be billed 2% on the credit amount used that is not paid up before the billing date.

3.    CARD BALANCE: A credit card balance is the total amount of money that you owe to your credit card company. The balance changes based on how the card is used. When you use your credit card to make a purchase, the balance increases. When you make a payment, the balance decreases. Any balance that remains at the end of the billing cycle is carried over to the next month’s bill. A good example is if you have a credit limit of NGN 50,000 and you spend NGN 20,000. Your credit card balance is NGN 20,000. Credit card balances are important factors in calculating a person’s credit score. It helps to calculate your credit utilization ratio which is an indication of how risky your money situation is. In the above example, the credit utilization ratio is 40%.

4.    BILLING CYCLE; A billing cycle, or billing period, is the length of time between the last statement closing date and the next. Your credit card billing cycle will typically last 25 days. The number of days in your billing cycle may fluctuate from month to month since the number of days in each month varies, but there are regulations to ensure that they are as "equal" as possible. During your billing cycle, any purchases, credits, fees, and so on are posted to your account and added or subtracted from your balance. At the end of the billing cycle, you are billed for all unpaid charges made during the billing cycle. Any activity on your account after the billing cycle ends will appear on your next billing statement. Check your most recent credit card statement or your online account to find your credit card billing cycle. If you need to calculate the number of days in your billing cycle, count the number of days between the beginning and the end of your last billing cycle.

5.    CASH ADVANCE; A cash advance is a short-term loan offered by your credit card issuer. When you take out a cash advance, you're borrowing money against your card's line of credit. It's like withdrawing money from the ATM with your debit card, except the cash comes from your credit limit rather than your bank account balance. That means you have to pay it back with interest. A credit card cash advance won't directly hurt your credit score, but it will hurt it indirectly by lifting your outstanding balance and your credit utilization ratio, which is a factor in credit scores. Pay off your cash advance as fast as you can. Since your advance begins accruing interest the same day you get your cash, start repaying the amount you borrow as soon as possible.

6.    CASH ADVANCE FEE; A cash advance fee is a charge by the credit card company for obtaining cash with credit. The situation is because the credit card company is borrowing cash on your behalf from the bank that owns the ATM.  This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance. The cost of a cash advance is also higher because there is generally no longer a grace period. Credit card companies want to make sure that they’re going to get their money back when you take out cash against your credit line. If there weren’t high fees and penalties associated with cash advances, the situation would be beneficial for consumers but detrimental to credit card companies.

7.    CREDIT LIMIT: Your credit limit is the absolute maximum amount of money that the credit card company will let you borrow while using your credit card or line of credit. They set your limit based on several factors including those they consider when assessing your credit scores, like your payment history and credit utilization. Higher credit limits offer you more flexibility when it comes to using your account. Additionally, how much of your limit you use can also affect your credit scores. Your payment history can give lenders a key insight as to how responsible you’ve been with handling your money and debts up until you applied to borrow from them. The more spotless and on-time your payment history is, the better the chance that a lender will think lending money to you is a good idea. The more comfortable a lender is with lending you money, the higher your credit limit could be, as the lender may be comfortable with letting you borrow more.

8.    CREDIT SCORE; A credit score is a number, generally between 300 and 800, that helps determine your creditworthiness. Credit scores are calculated using the information in your credit report, including your payment history; the amount of debt you have; and the length of your credit history. A credit score can significantly affect your financial life. It plays a key role in a lender's decision to offer you credit. While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating a credit score; Payment history, Total amount owed, length of credit history, types of credit, and new credit.  To maintain a good credit score, make sure to pay your bills on time: Six months of consistent on-time payment is required to see a noticeable difference in your credit score.

9.    CREDIT UTILIZATION RATIO: your credit ratio is how much you currently owe divided by your credit limit. It is generally expressed in percentage terms. Credit utilization rates are based solely on revolving credit — essentially, your credit cards and lines of credit. The rates do not include instalment loans like your mortgage or a car loan. Those factor into your credit in a different way. Credit scoring models often consider your credit utilization rate when calculating a credit score for you. They can impact up to 30% of a credit score, depending on the scoring model being used. A low credit utilization rate shows you're using less of your available credit. Credit scoring models generally interpret this as an indication you're doing a good job managing credit by not overspending, and keeping your spending in check can help you reach higher credit scores.

10. GRACE PERIOD; A grace period is a period between the end of a billing cycle and the date your payment is due. During this time, you may not be charged interest as long as you pay your balance in full by the due date. With credit cards, grace periods typically apply only to purchase transactions. If you use your card to get a cash advance or use a check you received from your card issuer, generally you must start paying interest as of the date of the transaction. To keep your grace period, make sure to pay your bill in full each month and on time. If you pay in full some months, and not in other months, you may lose your grace period for the month that you don’t pay in full and for the month after. For boon credit cards the grace period is usually around 3-5 days.

11. LATE PAYMENT FEE: The term late fee refers to a charge consumers pay when they fail to make a payment on a debt by the due date. Late payment might be caused by overspending and failing to make timely repayment due to insufficient funds. Waiting until the last day to make the most of the interest-free period resulting in a missed payment and so on. This may not sound much but these frequent late payments may affect your Credit Card rating. Thus, making your Credit Card provider reassess your creditworthiness, leading to a reduction in your Credit Card limit.

12. MINIMUM PAYMENT: A minimum payment is the smallest amount your credit card issuer will accept toward your credit card balance each month. You must pay at least this amount for your payment to be considered "on time," and to avoid late fees and other penalties. For BOON CREDIT CARD your minimum payment is between 25% to 33% this is a sign to show that you are still committed to the credit card, instead of ignoring your bills altogether. Please note that Paying only the minimum amount due on your credit card bill could impact your credit scores and cause you to pay a lot in interest. On the other hand, paying more than the minimum helps you save money, pay off your credit card balances faster and possibly improve your credit scores.

These are important things to know when dealing with a credit card. Credit cards have many benefits. Among them are convenience, security, speed and hassle-free operations. Care should be taken not to abuse the instrument so that the benefits can be enjoyed to the fullest.

At Boon, we provide easy access to revolving credits with generous limit. We intend to launch soon, please join our waitlist and be the first to know.

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