Credit Cards Dos and Don'ts

By learning how to shop for a credit card and learning what the benefits and drawbacks are, you'll be able to find the best deal and avoid a high credit card debt. A basic knowledge of credit cards is important for using them responsibly. Learn the key credit cards terms, the different types of cards, and how to choose a card.

Credit cards charge a fee on balances that you carry beyond the grace period. The interest rate on your credit card affects how much you pay in finance charges when you carry a balance. The higher your interest rate, the higher your finance charges will be. It is important to understand the interest rate you will be charged on a credit card before you sign up for the card. Some credit cards have a fixed interest rate and others have a variable rate.  A fixed rate is a set interest rate that you agree upon when you sign up for the card. Some credit cards may offer an introductory rate which is usually much lower than the normal rate. Be sure to read the fine print and find out how long the introductory rate lasts and what your new interest rate will be.

Starting February 22, 2010, new credit card regulations limit fixed interest rates increases to certain circumstances.

• If you are more than 60 days late on your credit card payment
• You had a promotional rate that has ended
• You’ve just completed a debt management program
• You have a variable interest rate and the underlying interest rate has changed

The credit limit is the maximum balance you are allowed on your credit card. If you go over that limit you will probably be charged an over-limit fee. it is important to know your credit limit and avoid any extra fees because they can really add up! Even without reaching or going over your credit limit your actual credit score is hurt by carrying too high of a balance on your credit cards. A large part of your credit score - 30% to be exact - is based on how much of your available credit you're using. This ratio of credit card balances to credit limits is known as your credit utilization. The higher your credit utilization, or the close your credit card balances are to your credit limit, the more your credit score is hurt. Maxing out one credit card is pretty bad for your credit score. Maxing out all your credit cards is much worse.

When you make a purchase on your credit card, you have a grace period. If you pay your balance in full during the grace period, you won't have any finance charges on your balance. Your grace period is typically listed on the front or back of your billing statement. Your statement may even include a disclosure stating the date by which your payment must be received to avoid finance charges. If you leave the balance on the credit card beyond the grace period, you'll see finance charges on your next billing statement.

Department store and gas credit cards are acceptable for starting out because they help you establish good credit. You should have no more than two department store and gas credit cards in your wallet at any time. It's a good habit to only use your department store or gas credit card when your balance is at $0. Otherwise, you could easily find yourself with an out-of-control balance that can take months, or years, to pay off.

Having an emergency fund keeps you from having to use your credit cards in case of a financial emergency. If you don’t already have one, you should build an emergency fund rather than making new charges on your credit card.

Will you be applying for a mortgage or car loan in the near future (six months or less)? If so, the only thing you should be doing with your credit cards is paying off the balance. Mortgage and auto lenders don’t want you taking on any new debt before approving you for a loan. So, if you’re going to be applying for a loan soon, leave the credit cards in your wallet at least until after you’ve been approved.