For anyone who has just gotten their first credit card, that little piece of plastic can feel like a taste of freedom which makes your life much more convenient. In today’s digital world, credit cards make online purchases a breeze. It’s important that you are careful not to get carried away though – credit cards are a big responsibility that can have a huge impact on your financial future.
By paying attention to these four things that all new credit card users need to know, you can avoid making mistakes that your credit report will pay for years down the road.
Your Credit Score
Around the world, there are countless different companies which track and report credit scores. In the United States, there are three main agencies which are widely regarded as the leaders for consumer credit reports.
The three largest credit reporting bureaus in the United States are
- Equifax
- Experian
- TransUnion
Nearly any company that provides you financing or a line of credit will report to these companies. They keep track of on-time payments, late payments, credit balances and a number of the different dynamics of your financial history. When you go to apply for a new loan or credit card, the company will look at these reports to judge if you’re financially responsible enough to lend money to. In order to keep your score high, pay off your credit card in full each payment period or maintain the lowest balance possible from month to month if you absolutely must.
Credit Card Fees
Before you apply for any type of credit card, you need to take a look at their fees. Oftentimes, companies put all of their marketing focus on their rewards programs or low interest rates, but are less upfront about any monthly or yearly charges. While many credit cards do not have any annual fees, most rewards and higher-end cards will charge amounts that can be well over $100 per year. Watch out, because many offers for people with bad or limited credit history may also have a yearly charge.
If you shop around to find out your different credit card options, you can likely avoid a card that has an annual fee. As your credit history improves and you begin going after credit cards that offer rewards or cashback, you will often fine that the annual charge is off-set by bonus in miles or cashback points.
How Interest Rates Affect You
The world of finance revolves around interest rates, and they can have a dangerous impact on your personal finances if you don’t understand how fast they can compound on you. Be careful of credit cards that have high interest rates and use these only for purchases that you can pay off at the end of the month. Credit cards provide a grace period after your purchase before interest begins being charged. Pay paying your balance in full before that period is over, you can still take advantage of the convenience of a credit card without having to pay any fees for it.
For someone who carries a $1,000 balance on their credit card, a currently common interest rate of 24.99% would equate to almost $250 in interest costs paid each year. As the amount of a consumer’s debt increases, so do their easily avoidable interest payments.
Using Your Credit Cards Effectively
Using your credit cards effectively is the key to starting off your financial portfolio on the right foot. Although if used inappropriately they can create a downward spiral of debt, proper credit card use can be the foundation to building solid wealth.
Here are a few ways to use your credit cards effectively:
- Pay off your debt each month – this avoids you being charged interest.
- Find cards which offer cashback or rewards. If you pay off your balance monthly to avoid interest, this is like getting free stuff for expenditures you would make anyways.
- Always be careful when providing your credit card information online or to vendors. While most lenders provide protection from identity fraud, it is a long and stressful process.
If you’re just getting started in the world of credit cards, it is important to understand a little bit about personal finance and how they affect you. By using your cards responsibly and smart, you can enjoy their convenience while obtaining free rewards from your spending. At the same time, making on-time regular payments will grow your credit score and allow you to take advantage of better offers and lower financing rates in the future.
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