Your Quick Credit Card Guide
Credit Cards Are Amazing…But They May Not Be For You
So you want to open a credit card. This is an excellent idea-for people with self-discipline. Credit cards, when paid on time and in full before due dates, help establish your credit, help build your credit, provide a convenient way to pay and many secret or overt perks as well. I put everything that I can on my credit card because the cashback money I earn every month is basically free money.
Now, on the other hand, if you know that you lack self discipline, if you have trouble affording to pay your bills every month, or even if you have the money but have trouble remembering to pay your bills each month, a credit card is NOT for you. If you rack up a balance on your credit card, the interest rates are going to be outrageous, and you will destroy your credit. If your credit is wrecked, it will cost you even more money because you may have trouble getting approved for housing, loans with good interest rates, etc. Yes, this is a worst case scenario, but I want to scare you straight.
And don’t think that all you have to pay is the minimum payment. You have to pay your statement amount in full AND on time. EVERY month. Talk to some of your friends who have a credit card. I’m sure any one of them who has ever missed even ONE payment will tell you how they saw their credit score plummet immediately. If you think you might mess this up, even a few times, then do NOT open a credit card. It would end up harming you more than helping you.
But, if that person described above does not sound like you, read on. I have prepared a beginner’s credit card guide to get you started on the wonderful world of credit cards.
Credit Card Terms
- APR (Annual Percentage Rate): this is a credit card’s interest rate when you carry a balance. You should not even be concerned about this because this only applies if you are carrying a balance. It shouldn’t matter if it’s 12% or 483958439% of balance carried, because if your balance is always $0, then 0 x anything is still 0. If you have been ignoring everything I’ve said so far though, and plan to get a credit card and not pay in full each billing cycle, you should look for a credit card with a low APR (and not just the introductory APR should be low).
Credit Report vs Credit Score
These are actually pretty self-explanatory. Your credit report is a report on your credit. It lists things like your past and current credit card accounts, mortgages, loans, etc., and things associated with credit accounts like your credit history, credit inquiries made on you, how much you owe debtors, how long your accounts have been open, how consistently you make payments that are on time. You are allowed one free credit report annually from each of the reporting agencies (see below). You can access that free report only at AnnualCreditReport.com. Unless you are preparing for something big like applying for a loan, most people suggest spreading out the three free reports over the course of the year.
Your credit score is a numerical score, typically anywhere in the range of 300 to 850 (the higher the score the better). There are three credit reporting agencies that will score you: Transunion, Equifax, and Experian. Your score will probably be slightly different at each one.
Check out this article with more info on credit scores here.
Credit Card Do’s and Don’ts
Yep, I’m back to beating you over the head about paying your credit card in full, every month. Your mindset and financial awareness are going to be key in using a credit card responsibly. That is the ultimate tip I can give you out of this entire credit card guide. Every month, budget how much money you would like to spend and then how much money you will actually have in your bank account.
Try not to spend above your desired budget, but know that it’s okay if you go a little over that as long as it’s less than what you have in your bank account (I mean, ideally though, you’d be under budget). Think of your credit card like a debit card. Your debit card should (if you’ve opted out) decline a purchase if you try to buy something and there isn’t enough money in the account to make the purchase. Think of your credit card the same way, don’t use it if you can’t cover your credit card balance with what’s in your bank account come credit card due date time.
More credit card do’s and don’ts:
- Do keep your credit utilization low (below 30%). You can find this by multiplying your credit card limit by .30
- Example: say your card has a $8,200 limit. Your credit utilization could be calculated by 8,200 x .30 = $2,460. You should try to spend less than that to achieve a good credit utilization rate.
- Do not close credit cards if you can help it. Try not to open anymore accounts than what you need in the first place by thoroughly researching your cards before you apply for them. If you do close an account, understand that it may impact your credit score negatively, at least for a little while. When you close an account, you lose that card’s credit limit, which makes your credit utilization appear higher. Even though you’re spending the same amount as always, now it is out of a bigger percentage of your overall credit limits.
- Do not use a credit card for a cash advance. Just don’t. You will end up paying for it.
- Do use your card. Sometimes companies will cancel an inactive card. If you’re worried about spending more than you have, just start yourself slowly. Just pay your bills and a couple nights out with your card or do a little shopping (just a little!!). Just buy some things you KNOW you can pay come credit card due date. Ease yourself into it. But, do use it a little.
- Do set up automatic payments if you tend to be forgetful.
- Do protect your credit card just like you protect your bank account information. While most good credit cards won’t hold you accountable for purchases made on your stolen card, it is important to be vigilant anyways about making sure thieves don’t have access to the number. Make sure websites are legit before you enter it online, don’t leave it sitting out in public, etc. Use common sense here.
Picking The Right Credit Card For You
From personal experience, I know that this can be overwhelming. There are so many options out right now, it can make you want to not pick anything and just give up. I’d like to discuss some types and how to narrow down the type of card you want.
- Secured card: you usually have to put down some money here, sort of like a debit card (like $50 on a card with a $200 limit). You eventually get your money back once you prove to be a responsible card user and your credit card company will want to switch you over to a non secured card. These are usually for an individual that is young and maybe does not have a long credit history (has no credit) or for someone who is trying to repair their credit (has bad credit).
- Rewards/cashback cards: these are cards with, you guessed it, rewards. These can be a variety of things, and can really be specialized for you and your interests. Rewards can be in the form of cashback (like 2% on all your purchases, or seasonally rotating categories like 5% on groceries in quarter 1, and 5% on airlines in quarter 2, etc. I am a fan of seasonally rotating categories with a high percentage of cashback plus 1-2% on all other purchases the rest of the time), or points which can then be applied towards things like airline travel, hotel stays, etc. If you are interested in this category and have a hobby you spend a little on, I’d suggest just getting started by googling “credit cards for [insert hobby here]”.
- Low interest: cards that are best for if you plan on or already do carry a balance
- Balance transfer: cards that’s are best for if you plan on or already do carry a balance
And if you need more details, you can check out this article with more info on types of credit cards here.
So, there you have it. Hope this quick credit card guide helped you make a little more sense of credit cards and maybe got you on the right track for using one responsibly.