Choosing Your First Credit Card
Choosing your first credit card shows you are on the road to financial maturity. However, choosing your first credit card is not a licence to print money and consequently spend all your available credit. Developing the right habits now (and avoiding the wrong ones) when using your credit card can save you from the consequences of poor credit down the road. Okay now that we’ve said that, it’s time to understand how a credit card works.
A credit card is exactly like paying cash, except of course you pull out this rectangle piece of plastic and have it swiped at the store counter. You also have to approve or endorse the transaction, usually by providing your signature. Because credit cards allow you to pay later for your purchases, many people, way too many people, use their credit card like one unlimited bank account. Some people even think that when they get a credit limit of say $1,000 they have just been giving $1,000. Even though this may seem true, this is all an illusion.
You see when you are given a credit limit it simply means how much you may spend on your card, not how much you should spend. A credit card is not a gift card from your grandma on your birthday. Why? Because a credit card requires you to pay it back at some point in life (or death). And that payment comes with an interest rate and in most cases you are looking at an annual interest rate (commonly abbreviated as APR) of over 15% (and that’s on the low end). Now if you don’t know what an interest rate is, you probably shouldn’t be getting a credit card in the first place. To get a better understanding of how an interest rate works, see our guide How Credit Card Interest Rates Work.
So now that you know how the interest rate works against you, you can see that your credit card is not a gift card but a type of loan. Now you are probably asking so if credit cards are so evil, why do we have them? Well, companies still sell “evil things”. Credit cards do have a valuable purpose and that is helping you establish a credit history so that you can get approved for a mortgage to buy a house or even get a loan for that new car. They also help you delay payment on a large purchase for a month (interest free) to help you get the sufficient funds to pay for that 50 inch flat screen. We cannot stress enough that you should always try to pay your credit card bill in full every month and only if you have to leave a balance on your credit card as this is what will accumulate interest, increasing what you already owe. Also not paying your credit card on time has a negative effect on your credit rating as it will lower your credit score.
Okay you’ve got the run down of how credit cards work. Scared? Are you still sure you want a credit card? Of course you still do. Remember when getting your first credit card it may be difficult to be approved for the more fancier ones but you should be able to get approved for the average consumer cards, you just won’t have a very high limit. Don’t fret, pay your credit card on time every month and your credit card company will be calling you in time informing you they have just increased your limit.
