Credit cards can be useful financial tools, especially when you need to borrow money or make large expensive purchases. They also can put you in debt if you don’t manage them properly. Here is a quick guide to understanding credit cards.
1. Why It’s Important to Own a Credit Card
Credit cards can help you pursue financial opportunities in your present and your future. They allow you to borrow money for large expenses; they can even help you in an emergency. Credit cards can also help build your credit history — that is, if you consistently make payments on time and keep your debt levels low. If you build a good credit history, you can find yourself less stressed and more financially literate. You’ll also have a better chance of receiving other loans, like a mortgage or auto loan, with reasonable terms and lower interest rates.
2. How Credit Cards Work
A credit card is an agreement between you and a bank or financial entity. First, you have to apply for the credit card. Then, if your credit history meets their standards, you will most likely be approved. Depending on the card’s issuer, you may have an annual fee for the card. Each month, you will receive a bill for your credit card along with a credit card statement asking for a minimum payment on your balance. If you choose to pay only that minimum amount, you may find yourself accumulating more debt due to the card’s interest rate. To avoid paying interest on your card, you might want to consider clearing your balance before the end of the month. (Remember, too, it’s wise to keep an eye on your credit as you work to beef up your score. You can view two of your free credit scores, updated every two weeks, on Credit.com.)
3. How to Properly Use a Credit Card
It is important to use your credit card carefully and responsibly. First, make sure you pay your credit card on time every month. This is crucial. If you miss a payment, you may get hit with a fee. And if you continue to miss your payments, know this will negatively impact your credit history, which could hurt you in the future when you try to secure a loan.
So pay off your charges in full every month, if you can. This will boost your credit score, ensure you always have a positive credit history and most importantly, keep you out of debt. If you do choose to carry a balance on your credit card after making your monthly payment, then I recommend using less than 30% of your available credit. (For best scoring purposes, you may want to aim to keep your credit utilization below 10% of your available credit.) This way you will never be too in over your head.
Remember, if you rack up charges on your credit card and can’t afford to pay them off, then you will likely continue to get hit with interest rate charges until you pay those balances down, leaving you more in debt than you’d planned. (Some cards offers 0% introductory or balance-transfer annual percentage rates that let you avoid interest for a period of time.)
Lastly, it is okay to own multiple credit cards, but it’s important to treat each card with the same care. Each month, try to pay more than the minimum or maintain a $0 balance. And if you are looking to open more credit cards, it’s a good idea not to do so all at once, as having too many inquiries in a short period could raise a red flag to lenders that hurts your score.