What exactly is a credit card it? Contrary to popular belief, credit cards are not free money. You can’t just swipe it to buy that new couch for your apartment and then walk away none the poorer. Instead, think of credit cards as being a short-term loan. So if you want to buy that couch for your apartment, but it costs more than you can pay right now, the credit card company will loan you the money when you swipe the card. Then, at the end of the month, you have to pay them back in the form of a credit card bill. In light of this, these are something you should know before you get your first credit card.
First the good:
1. They help you establish a line of credit. If you pay your credit card bills in full and on time each month, you will build up good credit. This basically means you’ve proven you can be trusted to pay back your borrowed money. This will make it easier to lease an apartment or buy more expensive items down the line.
2. Rescue in emergencies. Say you hit a pothole and get stuck on the side of the road with two flat tires. How are you going to pay for a tow truck and new tires? You don’t have that kind of money! With a credit card, you cover the cost now and then pay it off slowly, when you have the money. (An emergency is not your favorite jeans are on sale. If you can’t afford it, don’t buy it.)
3. Theft Protection. If your wallet or purse gets stolen and you had cash in there, that money is gone forever but if you had a credit card in there, all you have to do is call up the credit card company, tell them it was stolen, and they can freeze the funds so you don’t have to pay for things you didn’t buy.
Now for the bad:
Paying interest. When you get that credit card bill in the mail, it will show you the full amount due, the minimum amount due and the due date (among other things). If you pay the minimum amount due by the due date, the credit card company will charge you interest on the rest of the bill. The amount of interest will vary depending on your plan but it means that, if you only pay the minimum each month, that $200 couch could cost you $400 in the long run just because of interest.
And finally, the ugly:
1. Bad credit. If you do not pay the minimum or the full amount due on your credit card bill by the due date, this gives you bad credit. If you continue to not pay in full or miss the due dates, your credit will get worse and worse. If you have a bad credit it will be harder for you to buy or rent expensive things in the future. Having bad credit will follow you in life until you can slowly build your credit back up.
2. Debt. Basically, you are in debt to the credit card companies each month until you pay the bill in full. If you continue to make purchases with your card that you cannot afford and then continue to just make the minimum payments month after month or year after year, you will find yourself in serious debt. Also, your interest rates will go up over time meaning it will take even longer to pay that debt off. This will cause mental stress than wears on your mind and body over time. It also means little to no savings, no retirement plan, missing out on trips or events with family and friends and countless other things you’ll want or need to do in your life.
In light of all this information, if you choose to get a credit card, here are responsible tips for how to use it to build good credit:
- Create a budget for yourself and stick to it
- Start setting aside money for savings.
- Only pay for things with your card that you have the money for.
- Pay your credit card bills on time.
- Pay the full amount whenever possible.