Having a credit card is usually a good idea.
It can give you a good way to establish and then build up your credit history. Also, there are some credit cards that will let you earn rewards such as travel miles, redemption points, and even cashback, but chasing down these bonuses can lead you down to a credit card debt.
If you have issues paying your bills on time, saying “no” to buying things that you can’t afford, or just have a gut feeling that a credit card may not be great for you, then trust your instincts. Even though a credit card may be of big help when building up your financial health, it can also cause consumer debt when it is used improperly.
If you feel that you are ready to take on the responsibility of having such a financial tool, then keep reading to learn how to select, understand, apply, and manage your very own credit card.
Selecting the type of your credit card
Credit cards are not made equal, and we aren’t just talking in terms of rewards and interest rates. Your situation will determine which credit card you could and should apply for.
Student cards
Lenders do understand that a college student doesn’t have a lot of money. In fact, most college students’ debt to income ratios are usually facing the wrong direction. Although, lenders still make it quite possible for students to get credit cards through their student programs.
College students can get a credit card if they have an established credit union or bank account. These types of cards will often have high-interest rates, so watch your spending.
Secured cards
A secured card is an option for those who are looking to build or rebuild their credit history.
Having a secured card will let a potential borrower put down a deposit in exchange for a credit card from a lender. Often, the credit limit for the borrower is the exact amount of the deposit, but that isn’t always the case.
If you are unable to make payments, you lose your deposit. If you prove to be dependable over time, then you will receive your deposit back after closing the secured card and getting an unsecured, regular credit card.
Ensure that you are taking a secured card from an FDIC organization, such as a local credit union or bank. It is vital that you don’t spend a lot on this card because your credit limit will be quite low.
Store credit card
If you have been offered a store credit card at least once, then you know the drill. Store cashiers ask if you want to open a store credit card for a percentage off your purchase.
Normally a store card can be a huge trap into consumer debt. Just missing one payment in full can lead to high-interest rates and leave you struggling to pay down your bill.
Although, store cards will often accept a lower credit score than a regular credit card. If you are looking to rebuild your credit, but have a credit score that is in the low 600s, you could apply for a store card and get approved, when you would most likely get rejected for a regular credit card from a different lender.
Normally, the bank has hopes that you will have trouble paying off your bill – but if you are diligent, you can use a store card to rebuild your credit score. Store credit cards have very high APRs.
Traditional credit cards
If you have a good to excellent credit score, which is normally 680 or higher, then you will most likely be qualified to get a credit card.
Be sure to do some research to see what type of credit card will work for you. You can use a cashback tool to see what your spending habits are and find out which card will maximize your rewards.
Understanding the details of your card
Once you have decided on the type of card that you want to apply for, it will be time to start your research. You will need to understand all the details of your card before you sign your name.
First, evaluate the APR for the card. It is ideal to have a credit card that comes with a low-interest rate like 9.99%. You will want to avoid paying interest, but in the case that you do, you will need to understand what exactly you are being charged.
Will there be an annual fee on your card? With the exception of secured cards, there is no point to bother spending any money on an annual fee when you start out with a credit card.
What will the credit limit be? You won’t actually find out until after you have applied and have been approved. It is vital that you remember your credit limit to avoid maxing it out.
Apply for your credit card and read all the fine print
You can often apply online, but if you want to do it in person, simply go to your local credit union or bank. Be sure to look over the fine print while you are applying.
A credit card is structured to create debt. In order to avoid debt, it is vital that you understand the difference between spending and borrowing. Do you have a strict budget and only spend what you can pay off each month? Check for spending.
If you know that you cannot afford an item and use your credit card, then that is borrowing. Credit cards aren’t the best route to use if you need to borrow money. Although if you are going to use a card for borrowing, then you need to have the lowest interest rate possible. Starting to borrow at a 23% APR will harm your account.
Ignore the minimum due and pay in full
Credit card companies will offer you a minimum due in hopes that you will just pay a small amount of your bill so that interest will start accruing. That can be confusing when you see that on your first billing statement. The best thing to do is just act like the minimum due doesn’t even exist. Be sure to pay in full on your bill. Paying the minimum will just mean that you end up paying more to a lender.
Pay the bill on time
Paying your bill on time is the best thing you can do besides paying in full. Being just one day late can crush your credit score. If you know your bill is due Tuesday, but you can’t pay in full until Wednesday, then just pay as much as you can and then pay off the remainder when you can. It may seem that paying it off in full a day later would be better, but that isn’t how the lender sees it. They will see you as irresponsible.
Keep utilization rates low
The utilization rate is an amount of your overall credit limit that you spend. You should keep this rate below 30% of your available credit. Having a low utilization rate shows responsibility to lenders and helps to improve your credit score.
Be careful where you share your credit card information
You will need to protect your credit card. At least at one point in your life you will experience fraud, but it is always best to be proactive and careful where you share your credit card information.
Be sure to use your credit card, because your lender can discontinue inactive cards. If you feel uncomfortable using it, but still need to build your credit up, then purchase a small item a month such as a cup of coffee and then set up automatic payments, so you know that you will never be late on your bill.
We hope that this guide has been helpful to you. Don’t hesitate to ask your questions in the comments and learn more about how to switch credit cards and reduce your spending.
Still looking for more? Feel free to check out our comprehensive personal finance guide to learn more about managing your budget and staying financially healthy.