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In the United States, it has been up to the states to set limits on interest rates and usury on their own. While there are several ways that companies have tried to circumvent these laws, limits on the maximum allowable interest rate are generally seen as a good thing. Predatory lending has been a problem for most of human history, but these laws can help to protect consumers.
The information below is current as of 2018. Laws change often, please check the accuracy of this information by checking current state laws.
Usury rates change from time to time. If you see an error, please let us know!
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Let's start with some basic definitions:
Credit Cards allow you to take out short term loans to finance every-day purchases. These loans are available up to a certain amount - your "credit limit." They're fast, convenient, and secure. At the end of the month, you can pay for the cumulative amount of the loan (your balance) or you'll be charged interest on the outstanding amount. Interest rates on credit cards are typically substantially higher than other loans. The card issuer may be a credit card company, a bank, or a private company working with a credit card company.
There are only four major credit card networks:
Debit cards, by comparison, are issued exclusively by banks and credit unions (learn the difference between banks and credit unions here). They're like having an instant checkbook in your wallet. The money you spend on a debit card is instantly transferred out of your bank account to the vendor's bank account. That means that rather than hitting a spending limit as you do on a credit card, you can run out of money available to you on a debit card by running out of money in the bank account that's tied to the card.
Whereas debit cards are usually offered free with a checking, savings, or money market account, credit cards often have an annual fee associated with them. This annual fee is in addition to any interest you accumulate in the course of carrying a balance on your credit card.
The last big difference between a debit card and a credit card is that credit cards typically offer their card holders some perks or rewards for being a member. Those perks can be anything from travel upgrades to concierge services. It depends on the card, your financial standing as a card holder, and the card network as to what perks you'll get. These perks are paid for via both the interest that's generated off of cardholders who carry a balance, as well as the annual fee on the card.
Should I get a debit card or a credit card?
Debit cards are broadly seen as a better place for young people to start, since they don't allow you to go into debt and will force you to adopt responsible spending habits (or run out of money). The first time you have a card in your wallet, it becomes very easy to spend money. An all too common problem for first time credit card holders is spending more money than they can pay back at the end of the month, and having to carry a balance on the card. These balances are charged a high rate of interest, which can be debilitating for those in a precarious financial situation.
However, debit cards don't allow you to build credit history, which can also be problematic for young people. Having a credit history is important when very large purchases become necessary - like cars and houses. The size of these items usually requires taking on a loan and banks want to see some experience with paying loans back regularly before they'll entrust you with a large amount of money. A credit card helps establish that understanding of debt, and therefore a credit history.
There are many good first time credit cards than can help young people and those without credit history understand how to use debt.
The bottom line is that you should probably start with a credit card, learn how to use it, and then get a beginners credit card to start establishing credit history. Make sure you find one that fits your lifestyle, there are hundreds of options.
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Banks are a nearly ubiquitous institution in modern life. Virtually everyone has a bank account and most have multiple accounts, credit cards, mortgages, investments and more. Where do credit unions fit in though? This is one of the most common questions and misconceptions in the financial industry. You're not alone and we're here to help!
What is a Bank?
Banks are for-profit financial services organizations that store money and offer a variety of services to account holders. One of the biggest reason that banks exist, other than being a safe place to store money, is to issue loans. Those loans have interest and fees that deliver profit to the banks. In this way, banks are able to sustain their operations. Banks also commonly offer low interest instruments like CDs or Certificates of Deposit that they can make money on by loaning that money at a higher interest rate.
What is a Credit Union?
A credit union is a financial services organization that is a not for profit entity - specifically, a cooperative. Because of their non-profit status, the fees that credit unions have on their loans tend to be lower and the interest rates on the loans tend to be lower. Similarly, the interest rates on deposits at credit unions tend to be higher than at traditional banks. The financial products offered by credit unions are essentially the same as what are offered by banks but the terms are generally more consumer friendly. As cooperatives, credit unions have members and the institution exists to serve the membership. As a member of a cooperative, you are generally entitled to voting rights and an ownership stake in the enterprise.
Unlike banks, credit unions are often only open to members that meet specific criteria. That might include employees of a business, members of a certain labor union, residents of a certain area or military veterans. Usually, membership is open to family members of qualifying individuals as well.
It sounds like credit unions offer a lot of advantages over a bank. Is that true?
This depends on the individual, but for many people, if you can qualify to be a member of a credit union, it can certainly have advantages over a bank. Some of those advantages are below:
Just a few of those are below:
So, should you use a bank or a credit union?
Many people use both. If your needs are more complex than basic checking and savings, a simple credit card and maybe a simple personal or car loan, a credit union may not be the right choice for you. In that case, it makes sense to use a credit union where you can for their lower fees and member-friendly policies, then use a bank when you have to for the financial products that you can't find elsewhere. If you travel frequently, it probably also makes sense to have a bank account that will allow you easy access to branches and ATMs in any major city and the convenience of a superior online banking experience. At the end of the day though, it's hard to argue with the fact that credit unions exist to serve their members and can save you considerable amounts of money with lower fees and better interest rates.