Smart Credit
Getting your first credit card is exciting, but this big financial step should be taken cautiously and deliberately.
Credit Card Lowdown
A credit card allows you to borrow money to buy something now and pay it back a short time later when the bill comes. If you pay the entire amount charged by the due date, you will not be charged interest. You’ve borrowed interest-free for a short period of time.
However, if you charge more than what you can afford to pay back, you will have to pay interest on the portion you do not pay off. When you don’t pay the balance in full each month, you are said to “carry a balance.” Some people wind up paying thousands of dollars in interest on their credit cards because they carry a balance.
Your Plan: Pay If Off Every Month
So when you decide to get a credit card, plan to pay off your balance each month. This will allow you to build a positive credit history and score – which is important to your future. A good credit score can help you to get a car loan or mortgage with a low interest rate, rent an apartment, get a job, and get good insurance rates.
Learn about getting a credit card.
What to Look for in a Credit Card
Not all credit cards are created equal. Beware of the credit card offer that comes to you in the mail – it may not actually be as good as it seems. It is in your best interest to comparison shop for a card, considering a variety of factors.
When shopping for a credit card, look for:
- Low interest rate (APR). The lower the APR, the less interest you’ll be charged for any balance you carry. Still, plan to never carry a balance – the most financially savvy thing to do!
- Grace period. A grace period is how long you have to pay off the balance before you are charged interest on new purchases. It is best to go with a card that gives you a grace period, although be aware that it only applies if you paid off your balance in full every month.
- No annual fee. Why pay for the privilege of holding a card if you don’t have to? If you are new to credit, you may have to pay an annual fee, but after a year or so of responsible use, ask for it to be reduced or eliminated.
- Low penalty fees. If you make a payment after the due date or go over your credit limit, you could be charged a fee. While you should manage your account so this doesn’t occur, look for a credit card with the lowest penalty fees - just in case.
Need a Co-signer?
If you are under 18, you are unlikely to get a credit card by yourself – either you will need a co-signer or you can be added as an authorized user to someone’s card. If you are an authorized user or a co-signer, be especially conscious of making good on your debts. If you don't, the person who is your co-signer or who authorized you as a user on ehir account will be stuck paying the bill.
- If you made an agreement to pay for what you bought, do so. Someone trusted you enough to give you access to credit – don’t ruin it by running away from or forgetting about your obligations.
- If you don’t pay the bill on time, it can affect your co-signer’s credit score in addition to your own.
Stay Out of Debt
Starter credit cards may begin with low limits, but it is not uncommon for creditors to increase the limits after a year or two of use. Credit card companies allow you to run up huge balances and they make money by charging you interest and fees on the outstanding balance.
The increased availability of credit can make it very easy to “go crazy” and spend what you can’t pay back. It does not take long for a few purchases to add up to hundreds of dollars, then thousands.
Never charge more than you can afford to repay by the time the bill comes.
To avoid overspending, keep a record of all of the credit card purchases you make during the month. When you reach the limit of what you can afford to pay off, stop using the card until the next month.
Learn the warning signs of credit trouble.
Credit Card Purpose: Establish Good Credit
Remember, credit cards should be used to build a good credit score, not to supplement your income.
You want to build good credit for many reasons affecting your life and your future. A good score can help you:
- Get the job you want
- Get a good interest rate on a car loan
- Achieve future financial goals, like buying a house
Learn the about checking your credit report and score.
