How to Use Credit Cards Responsibly
Most people get their very first credit card when they’re in their twenties. But very few people actually learn how to use credit cards responsibly when they first sign up. In fact, most people don’t even understand the basic purpose of a credit card. Too many see it as “free money.” Of course, anyone who has ever signed up for a credit card and racked up a bunch of debt knows that someone has to pay for it!
How to get a credit card
First, let’s define credit cards and how they’re best used. Applying for a credit card means providing your social security number and annual income. A credit card company will check your credit score using your social security number. This score is a summary of how you’ve used your credit in the past. High scores means a higher likelihood that you’ll qualify for a credit card and will often be granted a high credit limit (the maximum amount you can spend using your credit card). When you first start out, you’ll likely qualify for a credit card with a low limit and if you use the card responsibly, it will help you raise your credit score. More on that later.
Understanding the numbers
When you apply for your credit card, it’s important to understand three numbers:
1. Annual Percentage Rate – The APR is how much you will be charged during a 12 month period for using your credit card if you don’t pay for what you spend each month. So for a credit card with 24% APR and you’ve spent $1000, you’ll pay a 2% fee on $1000 ($20) every month that you don’t pay the full $1000 off.
2. Credit Limit – Your credit limit can be very high, even unlimited, but means nothing if you don’t have the money to pay back what you borrow.
3. Annual Fee – Not all credit cards have annual fees, but those that do often offer rewards. Fees can range from $20-$200/year.
How credit card companies make money
It might be obvious to you now, but credit card companies make money off of annual fees, late fees, and APR penalties. People who never pay the balance of their card down to zero while continuing to make more purchases using the card allow their debt to grow out of control. In time, the amount owed far exceeds the credit card limit and without paying off the card in large chunks, there’s almost no way out. The credit card companies collect the fees on the debt unless and until the card owner stops trying to pay altogether. Then the debt is sent to a collections company who essentially pays the credit card company for the debt and then comes after you to collect it again, ruining your credit score in the process.
How you can use your credit card responsibly
1. Know Your Terms
When you receive your first credit card, sign up for an online account. This account will give you immediate access to your balance, the terms of your card, and will even let you make payments directly from your bank account. As soon as you create your online account, go to the terms page of your credit card. Go over your credit limit (the maximum amount you can spend using your card), your APR, and the payment due date each month.
The date your payment is due can often me changed if you call your credit card company. For example, if you get paid on the 10th of every month, it might behoove you to change the payment due date to the 11th. Make a note in your calendar to remind yourself to pay your credit card each month. Late fees range from $20-$40 and are often not reversible. The last thing you want is to owe an APR fee on your credit card balance and then a late fee! Those fees will add up quickly!
As soon are you’re clear on the terms of your credit card, you’re ready to make a purchase!
2. Pay it!
It goes without saying that when you buy things using a credit card, you then have to pay off the credit card from you bank account. Using your card responsibly means only buying things you can pay for. This might seem counterintuitive, but unless you have a very clear plan for making a large purchase, it is never a good idea to use your credit card to buy things you can’t afford using cash. One advantage of a credit card is paying for something you will be able to afford when you receive your next paycheck. Doing this means you won’t earn an APR penalty on the purchase you make because you’ll pay it off before it’s due!
If you must make a large purchase, go back to those terms! Be sure you understand exactly how much you’ll be paying according to your APR and the day of the month your payments are due. Now comes the most important part of paying for your credit card: pay more than the minimum! Each month that you owe money and you cannot pay the full amount, you’ll receive a statement showing what you spent, where you spent it, and how much you owe in a minimum payment. This minimum payment is the amount required to avoid a late fee. However, paying only the minimum month after month will cost you in APR fees and keep you in a never-ending cycle of making payment but never seeing your balance go down!
Even if you can only pay a few dollars more than the minimum each month, it’s worth it! And anytime you have extra money throughout the month, use it towards your balance. The sooner you can get your balance down, the fewer fees you will owe.
3. Keep it Secure
Credit card companies have made huge strides in keeping people safe from fraudulent activity. Cards are stolen and misused everyday, but rarely do criminals get very far. If a thief tries to make a large purchase, companies typically pause the transaction and verify it first. If a thief makes multiple small purchases, though, it’s possible he or she could get away with more (at least for a while).
The first thing you should do when you receive your credit card is make a color copy of the front and back. Keep that copy in a safe place. When and if your card is ever stolen, this is the easiest way to retrieve the information. If you have an online account, you can often retrieve information there but you might be surprised to learn that your full credit card number is almost never available on your online account!
In order to avoid criminal charges on your credit card, check your card statements regularly. With the advent of online banking, you can check your statements every day! Many credit cards also have purchase alerts. You can sign up for text and/or email alerts each and every time a purchase is made on your credit card. If you see a purchase you didn’t make, immediately call your credit card company and report it.
Often times, criminals use what’s called a skimmer, a piece of hardware installed in a credit card machine that reads and steals your card information. But good old-fashioned wallet theft is still incredibly common. Be aware of where you put your card and if you don’t use it often, keep it in a safe place.
Most criminal charges can be reversed, but not all. Keeping your card secure is the best and most responsible first attack on stolen cards!
Recap
There are huge benefits to having a credit card. If you apply and are awarded a card with any credit limit and financial terms, consider yourself in a great position to begin building huge opportunities!
Using your credit card responsibly builds your credit score. The more credit you have available to you, the more credit companies trust your ability to handle credit and will offer you more. As you gain more and more credit and use your cards responsibly, your credit score will skyrocket! Having a high credit score has massive benefits. If you’re trying to rent a property, credit score is important. Buying a home? Credit score is a major factor. Buying a car? Applying for a job?! You’ll need a reasonable credit score for all of those things. And it all starts with getting that first credit card and using it properly!
Having credit cards are an excellent source of security. Knowing that you have a way to pay for emergencies is calming. Some credit cards will even let you use your credit to take a cash advance. That’s a huge relief in a sudden and unexpected financial squeeze. And having one credit card (that you’ve used responsibly) will make it far easier to qualify for other credit cards that might further benefit you.
Most credit cards offer rewards now. Each card’s terms are different, but often times using your card regularly will build up points you can use towards specific purchases or miles you can use for traveling airlines. If you can pay for big purchases in cash but you put them on your credit card instead (immediately paying it off), you’ll be able to build points quickly! Do this enough times and vacations or big purchases could be free! That’s an awesome benefit!
Credit cards are a privilege. While having them can offer you huge benefits, they can also ruin your credit and create big time financial blocks in your life. Do the research and be sure you understand exactly what your credit card requires of you. There’s no reason to rush into a credit card, either, so if you’re feeling pressured by someone trying to convince you to apply for one, take a step back and do your due diligence. At the end of the day, you’re going to love how responsible card ownership benefits you!