The American economy is fueled by credit and those who have mastered managing their credit are better off than those who do not. One of the simplest forms of credit for the average person to manage is credit cards. This type of credit is relatively easy to get even if the user has a history of bad credit or no credit at all. Because of this, thousands of people apply for credit cards with many oblivious to the pitfalls of owning one. Before you make this decision, here are a few things to know before getting your first credit card
It Affects Your Credit Score
How you use your credit card has a direct impact on your credit score. Paying your balance late or not at all will lower your credit score. However, if you’re diligent and pay your balance on time you’ll see a positive impact on your credit score. Even paying the minimum amount is better than paying late or not at all. A good trick to ensure you always pay on time is to automate your credit card payments. Check out this blog for more about credit scores [4 Hacks To BOOST Your Credit Score].
Understand Your APR
APR stands for annual percentage rate. This is the interest charged by lenders for the cost of borrowing. APRs generally range from 7% – 25%, but there are cases where the rate is much higher. Credit card issuers determine your APR based on multiple factors. The primary one being your credit score. Credit scores and APRs have an inverse relationship where the higher your credit score the lower your APR and vice versa. Another important thing to keep in mind is this rate is annualized. Therefore, to know your daily interest you must divide your APR by 365. This interest is applied and compounded daily. Keep this in mind when you do not pay the complete card balance by the due date.
Know Your Benefits
Even though most credit cards come with different perks, many credit card owners fail to make use of them. Perks can include travel miles, cash back, shopping discounts, and loyalty points that can then be converted to dollars. To maximize the benefits of your credit card, you should be using the perks that are offered. Travel miles can be used to lower the cost of a luxury vacation. Cash back can be used to lower your grocery bill. Retail credit cards offer steep discounts to shoppers. Lastly, loyalty points can be used to lower your credit card balance. Personally, I see these perks as a reward for using the credit card.
Know Your Obligations
When you start using a credit card, you are agreeing to the terms and conditions set out by the issuing credit card company. These terms include, annual fees, payment due date, APR, penalties, and arbitration. These terms are usually not negotiable and therefore should be known by the credit card holder. Preferably before they start using the card for purchases.
The terms and conditions of your credit agreement are usually accompanied with the credit card once you receive it. By federal law, it is written in layman’s terms thus making it easier for the average person to read and understand. Remember, by using a credit card you are creating a debt obligation, and the credit card owner should take this seriously.
Security Deposit
Credit cards that require a security deposit are easier to obtain than others that do not. The small deposit is treated as collateral in case the credit card user does not pay their balance when due. For persons who are just starting to build credit or those who have poor credit, this is a great way to build credit. After a certain period of time, with a history of paying the card balances on time, the card user may then apply for a credit card that does not require a deposit.
Owning a credit card is a big commitment that can affect your financial health. Above are things to know before getting your first credit card that will ensure you manage your new debt obligation responsibly.
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