What 20-Somethings Don't Know About Credit Cards and Would Like to Learn (Part 1)

/ BY / Credit 101

Ask a group of young people who have never had a credit card what they'd like to know and you may be surprised at the questions they have. Here's a sampling of what we heard during a recent discussion.

Is there a limit on the amount of interest a credit card company can charge?

No. The sky is the limit when it comes to credit card interest rates. The only thing that can keep rates down is competition—if a bank charges too high a rate, its customers are likely to take their credit card business elsewhere.

What banks can’t do, however, is suddenly and without warning raise the interest rates on balances you’re already carrying on your card. This is a result of the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act). The CARD Act also requires credit card companies to give you at least 45 days advance notice if it is going to raise the interest rate on new purchases that you make with your credit card.

Why do interest rates change on credit cards?

There are a number of reasons. First, most credit cards today are variable rate cards. The interest that you pay depends on an index (like the prime rate) that can move up and down. Banks usually determine your rate by taking that index and adding a certain percentage to it—your rate could be something like prime plus 6%. (The CARD Act does require your bank to take certain steps before raising your rate; for details see the question above.)

Banks can also raise the interest rate on your credit card on an existing balance if you’re more than 60 days behind in your credit card payment. A bank may be able to raise your interest rate even if you aren’t behind on their card; many have language written into the credit card user agreements that gives them the right to raise your rate if you’re tardy with payments on an entirely different card.

Is it better to get a credit card that has rewards or one that doesn’t have rewards?

That depends on your situation and what’s important to you.

In general, credit cards that give rewards like airline miles or cash back do have higher interest rates. (They have to get their money back on those freebies somehow!) But if you’re going to pay off your account balance every month (which is a good habit to get into), the interest rate won’t affect you.

If you carry a balance each month, it’s probably a good idea to do a little math to see if you’ll be getting any benefit from a rewards card. Figure out how much you’re paying in interest on that card, and then figure out how much you’d be paying if you had a non-rewards card. Now compare that to how much it would cost to purchase the airline miles or other benefits that you’re getting.

This answer can also depend on your spending habits. If you switch to a non-rewards card, will you put the extra money you get from the lower rate of interest towards the cost of an airline ticket? If you don’t have a definite plan for saving and really want to take a trip, accumulating airline miles or other rewards with your card might be a good idea.

If you do decide to go with a rewards card, make sure you understand the reward restrictions. Can hotel points or airline miles only be used at certain times? Will they expire after a year or so? It’s a good idea to do your homework—and to watch carefully for any notices from your credit card company that the rewards program is changing.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.