What is a Credit Card?
Credit is a valuable and necessary financial tool. Getting a credit card is a huge step in your financial life and it can either be a great tool to help you establish a positive credit history, or it can be an easy way to get yourself into serious debt.
A credit card is a flexible payment tool accepted at over 30 million locations worldwide, and if the card balance is paid off every month, then no interest is charged on purchases made. Essentially, a credit card is short-term credit that is granted without the consumer paying any interest.
Here are some important things you should know before you get a credit card:
1. Credit Card = Real Money
Although a credit card is a piece of plastic, the reality is it represents real money and so you should treat it in the same way you treat cash. It is important to know that you will be expected to pay the credit card company at least a minimum amount for the purchases you make by a specific monthly date. If you do not pay or you do not pay on time, then your credit card company may choose to charge you a late payment fee which will ultimately make your purchases cost a lot more.
Late payments, or not paying the minimum balance, can also negatively affect your credit score. Lenders look at your credit score to determine your creditworthiness and lower credit scores and unfavorable credit reports can cause them to charge you higher interest rates and can make it more difficult for you to secure other lines of credit or loans.
2. Take Control = Set your own credit card limit
Credit card companies may approve you for a certain spending limit but it is important that you set your own limit based on what you can afford to spend and stick to it so that you can manage your payments each month. You might even want to restrict what you allow yourself to buy with a credit card. For example, you might allow yourself to use credit for clothes and appliances but pay cash in restaurants and grocery stores.
3. Know the Market = It pays to shop around
It is important that you find a credit card that is best suited for your needs. This means that you should comparison shop for a card that offers you the best interest rate, rewards and annual fees and also a low or no-fee credit card in order to save on the annual fee that some companies charge. Finding the right credit card for your needs can mean extra perks and less hassle when paying your bills.
4. Be in Control = Budget
It is important to budget – that is, you need to organize and manage your finances so that you have an overall picture of where your money is coming from, when it is coming in and how it is being spent. A budget should be flexible and changing according to your circumstances. By budgeting, you are able to achieve short-term goals like paying the monthly bills on time and also to achieve longer-term financial goals like buying a home, a car, paying for a wedding or a holiday.
A budget is key to financial control and it is vital that you are in complete control of what you are spending on your credit card. Only charge to your credit cards what you can pay off in full when the bill comes. If you make only the minimum monthly repayment you may never get out of debt. You might not use your credit card as much if you start believing that you have to pay off your entire balance at the end of each month.
Also, it is important to remember that when you take a cash advance on your credit card, the interest starts accumulating immediately and not on the due date of your credit card bill. It is therefore vital to budget and manage your finances as the over-use of credit cards can leave you with a debt that is very difficult to pay back.
5. Knowledge = Know the facts
Before you get a credit card, it is important that you understand the terms and conditions of the card as well as any hidden charges that may be payable. For example, some credit card companies offer an ‘introductory’ rate. It is important to know that this rate is only temporary and so you must establish what the rate will be after the introductory rate ends. After the first year, most terms and conditions, such as, interest rates, annual fees, cash advance fees and late fees, can change if your card company gives you 45-days notice. Changes are usually sent to you by mail so ensure that you read everything your issuer sends. If you have any questions about a credit card offer, check the company’s website for more information or call the company before you apply.
In summary, owning and making purchases on a credit card can be a great way to start building for your financial future however it can also be an easy way to be overwhelmed by debt. It is important to understand how you can use your credit card so it works to your advantage and not against you and so – start small, plan and know your financial limits.
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