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If you’ve never utilized a credit card before, it can seem intimidating and confusing. Credit cards do have the power to help you build credit and cover for any emergencies; however, if they’re not used responsibly they can also lead you to debt. Getting your first credit card is a milestone and knowing the details of credit cards will set you up for success.
What is a Credit Card
A credit card is borrowed money from a financial company that allows you to make purchases. It is a plastic card with a unique number, expiration date, and security code. The security chip and strip on the card allows you to insert the card to make payments through POS systems used by retailers.
Once you use your credit card, you have a grace-period that ranges from 25 to 30 days. This is the amount of time you have to either pay the minimum amount due, a little more than the minimum or pay it in full. As long as the minimum is paid off after each grace-period, you will not receive any penalties such as late fees from the financial institution and your credit will not be damaged.
Keep in mind that your bank will assign you a credit limit for your credit card. This is the amount that you’re allowed to borrow from the bank before it’s maxed out. Once a credit card is maxed out, you can no longer use it until you pay some off. It’s important to remember that paying off the minimum each month is crucial as not paying your card off can lead to damage to your credit report.
In exchange for the bank allowing you to carry over your debt month-to-month, your credit card will charge you interest. Your interest rate is dependent on your credit history and the credit card you choose. It’s important to note that credit cards that offer rewards will often have a higher interest rate.
Benefits of Using a Credit Card
Credit card rewards
If you decide to pick a credit card with rewards, the interest rate will be higher, but you will receive other perks. Rewards can range from receiving cash back to travel rewards. Cashback is usually a percentage the bank is willing to give back to you after each purchase you make. Travel rewards may include airline, hotel or airline credit.
Building your credit score
Using your card responsibly and taking ownership of your credit card can lead to building your credit score. Continuously paying off your credit card and paying more than the minimum each month can ultimately raise your credit score. Your bank will get reassurance that you pay your bills on-time and may even raise your credit limit.
Cover large purchases
Another benefit of having a credit card is if you need to purchase something now, but don’t have the funds a credit card can cover it for you. You’re able to pay off large purchases in small amounts each month to avoid paying at full price each month.
Disadvantages of Using a Credit Card
Getting into debt
You can easily get into debt if you’re careless about your spending and don’t have the best spending habits. Some poor spending habits to look out for include missing your savings goal, shopping out of boredom, or not sticking to a budget. Keep in mind that a credit card is money you don’t actually have yet. Always try your best to spend less since unexpected debt may accumulate rapidly because credit cards are convenient and easy to use. Some credit cards provide a block you can turn on for certain charges such as restaurants if you have exceeded your budget. Become aware of the resources available to curb your credit card temptations.
Your credit score can suffer
If you miss your payment minimum or max out a credit card completely, your credit score will suffer. If you don’t pay the full amount of your credit card by the due date, your credit card payment will be considered late. Late fees will begin to accumulate and depending on your credit cards late fee policy you’ll be fined as much as $39. Every month you miss a payment will result in this charge on your next bill. Additionally, your credit score may drop because your payment history contributes to 35 percent of your credit score makeup. After 30 days of not paying off your credit card, an entry will be added to your credit report. Between everyday expenses, paying off student loans, and maintaining an emergency fund try your best to prioritize your credit debt when paying your bills on time.
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Other disadvantages your credit card issuer may enforce are revoking your rewards due to consistent late payments. In extreme cases, after missing your bill for 180 days the card issuer may write the account as a charge-off and this would stay on your credit report for seven years. This could cause a rift in your living situation. Leasing or renting an apartment may become challenging as most landlords and property managers use your credit score to choose tenants.
Maxing out your credit card would be detrimental to the health of your credit score. Your credit utilization ratio is the amount of credit you have used compared to the amount of credit you have available. Maxing out a credit card puts your credit utilization ratio at 100%. It would be difficult to keep your credit in good standing when 30% is the recommended ratio to remain under. Your credit card issuer may think you are not in good financial standing to make future payments, this may lead them to close the account. If this happens call your issuer immediately and attempt to pay off as much as possible. This effort may show your credit card issuer that you have the funds to pay off the remaining balance and they may reinstate your card.
A high-interest rate can make a small debt large. You can owe a small amount, but depending on how high your interest is and how long it will take you to pay it off, you’ll pay a larger amount. Interest is commonly expressed as an annual percentage rate (APR) which is the fee for borrowing money. Interest is charged on the full amount of money you owe each month. This could increase over time according to how much you pay off. Start saving money by keeping your debt small and paying off as much as possible each month to avoid high-interest rates.
The Bottom Line
Having a credit card can be a wonderful responsibility. Try your best to maintain a low balance and if you can’t pay it off completely at least attempt to make small payments whenever possible. In the long term, paying off your monthly balance will be better for your wallet and your credit score.