One of the first things many young people do when they are striking out on their own financially is try to get approved for a credit card. There is a myth in our culture that credit cards are the best way to get what you want fast. Unfortunately, banks are smart and they exploit the public’s lack of knowledge on the basics of personal finance.
Credit cards are not “free money”. If you do not manage your credit wisely, you will be paying for that failure for years—maybe even for the rest of your life. Before you head to the bank, do your research. Not all credit cards are created equal, and not all credit cards are smart investments.
That said, there are some good things about credit cards, and if used wisely you can make money from them and improve your overall credit score. Below are the top five things you need to know before you get yourself into credit card trouble.
Credit is not free money
Some people look at their credit limit as free money. You can swipe a card and purchase something with money you have not earned, so it’s free—right? No. Credit is actually money that you are paying for. This is where interest rates come into play. For the right to borrow money from the bank (ie: credit) you are going to have to pay back that money and pay back a fee (ie: interest)
Pay attention to interest rates
The interest rate (the fee mentioned above) that you receive when you apply for a credit card is directly related to your credit score (in most cases). Pay extra close attention to this number, as it is what has the possibility to get you in trouble. If you’re offered a credit card with a 20% interest rate, you will need to take the total amount of money you spend on that card and add 20%. For example, if you spend $100, you have to pay the bank back the $100 as well as the interest of 20% at $20, so now you owe $120. Credit is not free!
Compare benefits of different cards
If you’ve decided that you can manage your credit card responsibly, take time to look at the pros and cons of different credit cards to see which one is best for you. Opening a credit card should never be a spur of the moment decision. Some cards offer a percentage of “cash back” on purchases. Some offer points to use toward hotels or airfare. Pick the one that works best with your lifestyle.
Pay it off consistently
Do not let your credit card debt accumulate. The rule of thumb is to never have more than 30% of your overall credit limit on your card.
Be smart about your credit
Control your credit card; do not let it control you. Stay up to date on your balance, payment due dates, and interest rate. Do not allow debt to take hold in your life. Do not use your credit card for “wants” instead of “needs”. Remind yourself that having a credit card is a responsibility and behave as such. If you educate yourself on managing credit, you can use the bank instead of letting them use you.