The first step you take towards building a credit history could be taken when you get your first credit card. When you use a credit card responsibly, you can raise your credit score. However, if you use your card foolishly, you can find yourself in deep debt quickly. Thus, it is important to understand the basics of a credit card before you start using your new plastic.
Things to Know Before You Spend
You will need to carefully study your credit card’s terms and conditions to learn all of the costs associated with your credit card. You will need to know your interest rate and all associated fees. Here are some common terms you will want to understand:
- Annual Fee: The amount you pay each year to have an account with your card issuer.
- APR: This is the interest rate you will pay if you carry a balance from month to month.
- Cash Advance Rates and Fees: If you use an ATM or convenience check to get cash from your credit card, you will likely pay a different interest rate and accumulate fees.
- Monthly Fee: Not as common as an annual fee, but some credit card issuers will charge you this amount to be a cardholder.
Most of these expenses are unavoidable and are dependent on which credit card you have. The key is to learn what you will be charged so you can be prepared to pay these costs.
How a Credit Card Works
When you qualify for a credit card, you will be given a credit limit, which is the total amount of money you can charge to your account. You will need to know this limit so you do not exceed it. If you do, you may be charged fees or have your transaction declined. For example, if you have a credit limit of $750, you cannot charge $1,000 to your card unless you have overdraft protection, which is not recommended for someone with limited or no credit history.
Whenever you pay for a transaction with your credit card, the money will be deducted from your available balance. If you charge $200 on your card with a $750 limit, you will be left with $550 to spend. However, annual and monthly fees and interest will be tacked on to these balances, so your available credit will be less–even without any shopping on your part. It can also take a few days for a charge to show up on your account, so keep that in mind before making a purchase on your card, particularly if you are near your credit limit.
Every month you carry a balance on your credit card, you will have to make a minimum payment. If you do not make that payment on time, your credit score will drop. It is also important to remember that it will take many years to pay off a credit card if you only make the minimum payments, and be very costly when interest is taken into account. Thus, it is important to pay off as much of your balance as you can each month to avoid excessive interest charges.
Know Your Financial Boundaries
It is imperative you do not spend money on your credit card that you cannot pay back. It can be tempting to buy whatever your heart desires, but you need to remember this is not free money. Only purchase something with your credit card if you can pay off the balance each month and never plan to pay back charges “eventually.”
If you do need to charge something and do not have the money to pay it back immediately, put together a budget so you can pay it back as soon as possible. Even budgeting an extra $50 a month is better than only making the minimum payment. You can also make more than one payment each month, which is an even faster way to pay off your debt.
Accept Your Mistakes
Since this is all new to you, accept that you will probably make mistakes. Following these tips will put you on the path to success, but you may still encounter problems. However, if you keep up with your payments and put aside money to pay off debt, you will develop a healthy credit score over time.