Getting your first credit card as an adult is a lot like getting your first bike as a kid or your driver’s license as a teenager. It’s an exciting moment that opens new doors to freedom and independence. But they also come with a lot of responsibility because mistakes can have frightening consequences in all three of those above cases.
People who use credit cards wisely win the tug-of-war contest with the banks that issue them. Responsible cardholders spend within their means, avoid fees and don’t fall into debt. The result is that they build their credit, lower the risk they pose to other lenders and rake in lucrative rewards from the card issuer — all while borrowing money for free.
But if you slip, the balance of power shifts in favor of the bank. Then, your financial life sinks into the quicksand of minimum payments, ever-growing balances, the risk of default and the loss of rewards to fees and finance charges.
If you just got your first card, or if you’re considering applying for one soon, it’s one of the most consequential moments of your entire financial life. Get off on the right foot by reading the following expert tips before you go shopping.
Remember, a Credit Card Does Not Give You Any Added Buying Power
Your first card should come with the understanding that it can’t cure whatever financial hardships you might be having and it doesn’t give you any extra money to spend.
“Whether you take a credit card out for your business or just for day-to-day spending, the most important thing is to never overextend your finances,” said Matthew Debbage, COO of Creditsafe and CEO of Creditsafe Asia and Americas. “Always make sure that you can keep up with payments and settle the debt. That would mean making sure that your income covers the payments, that you don’t overspend and that you keep a rainy-day fund just in case.”
Learn the ABCs of APRs — Educate Yourself Before You Apply
At some point or another, just about everybody signs user agreements that they don’t fully read or understand. Agreeing to a credit card contract should not be one of those times.
“When it comes to new credit card users, it is essential to understand the terminology that surrounds credit cards and how it translates to paying bills,” said Adulting Starts Here founder Donald Williams Jr., who coaches young people into adulthood. “Know what a statement and statement balance are along with what makes them different. Understand how long it usually takes for a transaction to go from pending to posted. When you understand these terms and how they translate to your spending, you can better plan your purchases to avoid debt, maximize your experience, and optimize points and rewards.”
Learn How Your Card Works and How To Work Your Card
Once you have a solid grasp on the fundamentals of credit cards, in general, you can avoid debt and improve your experience by understanding your specific card and its unique payment, rewards and fee structures.
“You can do a lot if you know when your statement posts each month and understand that only posted charges show on your monthly statement,” Williams said. “For example, if your statement posts on Oct. 20, you could make a purchase, say for a laptop, on Oct. 19. Since the laptop charge will not likely transition from pending to posted by Oct. 20., the charge will not show on this most recent statement. It will instead post to next month’s statement. This means that you don’t have to pay off that charge for another month, effectively giving you more time to pay for the purchase.”
Make Frequent Payments To Keep Charges Fresh in Your Mind
As a debt and bankruptcy attorney who specializes in helping people with debt issues, Ashley F. Morgan knows the dangers of carefree swiping. It’s easy to lose track of what you’re charging, and many people don’t realize the damage they’ve done until the monthly bill comes due. Instead, Morgan suggests paying for purchases shortly after you make them so you can see the money draining from your checking account in real time.
“Basically, instead of waiting till your statement cuts each month to send a payment, pay off the balance each week, or even every couple of days. This way, if you spend more money than you have, you will be aware of it sooner. Often, if you are paying only once a month, it is easier to not notice how much you have spent.”
Start by Focusing on the Things You Buy Anyway
Before you go shopping or link your card to Amazon, start by charging just the purchases that you would make whether you had the card or not.
“Use your credit card for everyday purchases and places where you usually shop or spend a lot of money,” said Lauren Davis, founder of the credit card and personal finance site Moolah Project. “This could be gas stations, grocery stores, or online retailers. Doing this will help you build up your credit history and improve your credit score. It will also help you accumulate points or rewards faster.”
Pay Your Statement Balance in Full Every Month
The reason that it’s so important to not charge more than you have the cash to cover is that you’ll incur finance charges if you pay less than your full statement balance. Thanks to compound interest, those charges are then added to your remaining balance and the larger sum now begins accruing interest all over again. The closer to the minimum you pay, the worse your situation becomes.
It’s called revolving debt, and it’s one of the easiest financial traps to fall into and one of the hardest to escape.
On the other hand, if you pay in full each month, you avoid finance charges, borrow for free and enjoy the full value of any rewards you gain.
“Don’t spend more than you can afford to pay back,” Davis said. “This will help you avoid debt and keep your finances healthy. If you do need to make a large purchase, consider using a credit card with a 0% APR introductory rate to avoid paying interest on the purchase.”
Never Miss a Payment
There are tips, tricks and strategies, and then there’s the cardinal rule — never miss a payment.
“Make sure to pay your bill on time every month,” Davis said. “This will help you avoid late fees and keep your credit score high.”
If you miss your due date, they’ll hit you with a late fee, but that’s small potatoes compared to what happens if you don’t pay for a full billing cycle after that.
If you don’t make at least the minimum payment within 30 days, your lender can report it to the credit bureaus that every lender and landlord in America turn to when deciding your fate. Payment history accounts for 35% of your score — nothing carries more weight — and a single missed payment can devastate your credit for years to come.
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