Credit Cards For Beginners
Credit cards can be a very useful tool, but they can also ruin your life if not used properly (as evidenced by the fact that credit card debt is currently the highest it’s been since the 2008 great financial crisis). People aren’t paying off their plastic, and yet, if you open your mailbox right now you’ll probably find several offers for credit cards. You’ve been preapproved?! And you’ll get a zero interest rate for the first year?! What?! I’ll tell you what: credit cards rely on you to misuse them so that they can take your money. Credit card companies make the most bank off of people who don’t know how to use this little tool. So you need to learn to game the system and use them right. Here are credit card tips for beginners.
First, get one
Don’t let the statistics frighten you (too much). Some people pride themselves on not having any credit cards and then, whoops, they cannot get approved for a loan or repayment plan on anything because they don’t have any credit. Having no credit can be just as harmful as having bad credit. So take the plunge and get your first card.
Get a high limit
If you can get approved for a high limit, that looks good for your credit. If a credit card company is willing to lend you a lot of money, that means you must’ve done something right with your finances.
And use very little of it
Keep your spending at 20 percent or less of your limit. Your spending to limit ratio is very important in building your credit. So, if you get a limit of $5,000, you shouldn’t be spending more than $1,000 of that each month. This is another reason getting a high limit can help your credit.
But do use it
You should use at least ten percent of your credit limit if you’re going to build your credit score. Simply opening a credit card won’t help your credit. You build credit by showing you can responsibly borrow money, and you can only do that by using your credit card.
Set up notifications
You can use various financial apps to get a notification when you’ve reached your 20 percent spending limit. It’s very important to keep an eye on this because it’s easy to suddenly spend an extra five or ten percent on that card without realizing it.
Don’t get drawn in by the affiliate coupons
Many credit card companies have deals with chain vendors like restaurants, gas stations, movie theaters, and grocery stores. Be very cautious about even looking at these deals. They’ll often offer something like “Twice the reward points when you spend $100 or more at this vendor.” But you’ll wind up convincing yourself that you need $100 worth of some product that you don’t need, to get the points. When you do that, you lose money.
Never spend money you don’t have
This is where credit card companies get you. Credit cards are, essentially, loans, but you shouldn’t treat them as such. Do not fall into the trap of thinking, “I don’t have the money in my bank account so I’ll just put this purchase on my card and pay it off when I can.” It’s a very slippery slope and it’s how people wind up in major credit card debt.
Essentially, treat it like a debit card
Just treat your credit card like a debit card. Check your bank account and tell yourself that the money you spend on your credit card will come out of that account. So you’d better make sure it’s in there.
Don’t let zero interest rates affect your spending
Credit card companies entice you with zero interest rates for the first year or six months of spending. But it’s exactly those zero interest rates that entice you to spend money you don’t have because you feel like there won’t be consequences. Keep in mind that if the first year’s interest rate is zero, it’s typically because, when interest rates do kick in, they’ll be high. So having $3,000 of unpaid credit card bills when, let’s say, an eight percent interest rate kicks in means you pay $240 in interest fees.
Always pay in full
While it can be nice to keep that money in your checking account and just pay the minimum, doing this will sneak up on you quickly. Always pay your card in full.
Set up automatic payments
It is too easy to forget to pay your credit card bill. One of the first things you should do when you get it is to set up automatic payments. This will also encourage you to not spend more than you have, because you know your card will try to pull that money from your account one way or another at the end of the month. If the money isn’t there, you’ll be charged an overdraft fee.
Get cash back on your rewards
When your reward points start to stack up, your credit card company will start to hammer you with those offers. It will show you which flight you can buy with your rewards or which concert tickets you can get with those points. Ignore these. Just get cash back.
Store credit card perks
Store credit cards can be a blessing and a curse. You’ve likely had your local department store offer you one. And, people with no or low credit can usually be approved for these more than they would be for traditional cards. If you are struggling to get approved for a regular card, look into a store one. But read on…
Store credit card downfalls
The store credit card downfall is the disgustingly high-interest rate. Some have rates as high as 23 percent. If you get a store credit card, it is imperative that you pay it off in full, and on time, every month. Don’t mess around with these.
Start with one
Just start with one credit card and use it for at least a year so you can learn your own habits before opening a second one. And remember, that 20 percent of your limit spending applies to all of your cards, combined.