15 Jan Credit Cards 101
You step up to the counter in your department store, and you present a piece of plastic to the clerk, or you slide it through a slot in the machine. These little rectangles look very much alike, but they can be very different. Debit cards are set up to access the money in your checking account. A prepaid card has money that you have given to the clerk loaded on it. A credit card accesses a set credit line – that is, money that a bank or other lending institution is willing to let you use to buy things. In a few cases, that rectangle of plastic is a replacement for what was once known as Food Stamps – a subsidy for families or individuals who are in need of emergency food.
In this Credit Cards 101 tutorial, you will learn how credit cards acquire spendable money, and how they function as a credit line. You will also learn about good and bad ways to use them.
Credit Card Defined
If the rectangle of plastic that you present to the clerk is a credit card, you are not using your money. You are using money borrowed from the bank to purchase goods or services that you might not otherwise be able to afford. This can be a valuable tool if you are setting up a household or starting a business, or even if you are going on a vacation.
Some cards are set up in such a way that if you pay off your mini-loan at the end of the month, you will not be required to pay any interest on it. You might wonder how banks make a profit on such loans. The answer is that eventually, those cards do develop an interest charge. In addition, many of us are subject to impulse buying, or we have emergencies that require developing a larger balance that can be paid off in one month. This results in a balance that is held over to the following month and might accrue interest.
Why Have a Credit Card
If you have no credit rating at all, it is hard to get a loan for large purchases, such as a car or a house. A small credit card can be a way to establish a credit rating. If you charge items that you would need to buy anyway, such as gas for your vehicle, and then pay it off at the end of the month, you show that you can responsibly handle your money. After you have the card for a while, if you have made your payments regularly, it is likely that your credit will go up and your credit rating will increase.
This will help when you are ready to buy or lease a car, or if you need to rent or purchase a home. In addition, banks encourage their customers to build up credit. Responsible borrowers are their bread and butter.
There are additional perks for you for using a credit card. Many companies offer points or discounts for using their card. If you like spending plastic, credit card arrangements are often more transparent than the fees charged for prepaid cards or even for standard bank accounts.
Affective Use of Credit Cards 101
While there are many effective uses for credit cards, they are a bit like fire. You might be familiar with the adage that fire is a good servant, but a bad master. Credit cards are quite similar. Used judiciously, they can be a good thing. Used impulsively, they can be a budgetary disaster.
Here are the basic rules for credit cards:
2. Unless you have purchased a big-ticket item such as an appliance, pay off in full each month. The benefits you might accrue from carrying a balance are very small compared to the interest you will pay on credit card charges.
3. Never spend more than 30% of your possible credit. If you find yourself approaching that limit, make a payment.
4. Space out your credit card applications. It is a good idea to have at least six months between applications for a new card.
5. Use your online account access to check your card once per week, and more often if you use it frequently. You will stay on top of your running balance, and you will be able to spot any problems before they develop into something ugly.
Fixing a Runaway Credit Card 101
If you’ve never had a credit card, being approved for your first one can be a heady sensation. Unless you applied for it to purchase something specific, one of the best things you can do for yourself that first day is put the card away and refrain from using it for at least 24 hours. This will give you time to reflect whether you really need that fancy dinner, or whether it could wait until payday.
If you’ve given into impulse spending one too many times, or you’ve had one of those incredibly bad budget months where it seems as if everything you touch seems to break, you might find yourself in that unenviable position of being behind on your payments or having too many payments to make in a month.
This, too, is part of credit card 101. Make your minimum payments on all your cards if you possibly can. If there are any you cannot pay, call them and explain what has happened. Pay off your smallest card first, then use the money freed up from making that payment to apply to the next smallest. Soon you will have your debt paid back down to manageable levels.
Credit cards can be beneficial for many uses. They are great for emergencies, and they are generally more secure than carrying cash or even a debit card. However, it is essential to remember that when you use them, you are borrowing money that has the potential to accrue interest.