Do you remember when you got your first credit card? Mine was a Capital One card offered to me when I was in high school because my parents were long-time Capital One customers. It had an annual fee of $39, a whopping $250 credit card limit and was supposed to be used for emergencies only.
Fast forward 10 (yikes) years and I’m an avid credit card user – paid in full each month and to take advantage of the rewards of course! But some of you out there might be dealing with your very first credit card. Since stricter rules went into effect on who credit companies could market to and what age students could get cards, the age of first-time credit card users is surely creeping up. And while I mostly agree with the regulations as a consumer protection, I also fear that they’ll have a bit of an adverse effect on first-time credit users who no longer have mom and dad around to teach them the ropes of responsible credit use. So if you are tasting that sweet feel of plastic in your hand for this first time (or know someone who is), read on.
7 Tips for New Credit Card Users
- Learn the lingo: You have a credit limit, which is the amount you can spend. Your interest rate is the amount you pay (expressed as an annual percentage) to borrow that money. You get a statement every month which shows you what you spent and how much you owe. The minimum payment is the amount you must pay to avoid late fees or other penalties. The statement balance is the total amount you must pay to avoid paying interest on those purchases.
- Pay attention to fees: Used the right way, credit cards provide loads of benefits. But they also come with a number of fees. Be aware of your interest rate, but also of your card’s annual fee, late payment fee, over-the-limit fee and cash advance/balance transfer fee. Know that if you’re nice, and do it rarely, you can often get late payment or over-limit fees reversed if you have a very good reason for messing up on your payment. Also know that in general, annual fees can be avoided – even on cards that give great rewards and other benefits.
- Know your terms: Most credit cards offer a grace period where you don’t pay interest on purchases as long as you pay off the entire balance by the payment due date. But if you fail to pay off the entire amount during one billing cycle, the grace period goes away for all future billing cycles where you carry a balance. In addition, transactions like balance transfers and cash advances often have no grace period – they begin earning interest the day the transaction is processed. Different card issuers may have slightly different terms, so make sure to read the disclosures that come with the card.
- Try to maximize benefits: One of the best reasons for using credit cards is to earn cash back or other rewards for making purchases you would make anyway. If you’re not earning rewards, you’re not making the best use of your card. Some of the best cards for this are the Chase Freedom and Discover More cards, but there are plenty of great cash-back programs. In addition to cash-back programs you can take advantage of credit card benefits like extended warranties, supplemental rental car insurance and even concierge services.
- Don’t buy what you can’t afford: Credit cards should be an extension of your bank account, not an addition to your bank account. They should be used to buy things you would buy anyway, for prices you would be comfortable paying. They should not be used to finance that dream vacation that costs 6 months’ pay.
- Pay off the balance monthly: This goes hand-in-hand with the above, but is worth stating on its own. Credit cards should be used to gain rewards, enjoy benefits like extended warranties or extra car insurance, and generally keep you from worrying about the exact dollar amount of your checking account balance. They should not be used to ignore your bank account balance altogether. The only responsible way to use credit cards is to pay off the balance in full every single month. One caveat is that if you have a 0% offer for either balance transfers or purchases you can use the opportunity to earn a few extra dollars’ (cents?) interest until the offer expires. It’s called arbitrage and someone around here is VERY good at it – but it might be a little advanced for someone on their first credit card!
- Know your rights: Each merchant that accepts credit cards is bound by a merchant agreement they sign with the card issuer. These agreements stipulate when minimum purchase amounts are allowable, or when credit card users can be charged a higher price than cash users. In addition, the credit card issuers have to follow consumer protection laws such as the Fair Debt Collection Act and the CARD act. For instance – your lender can’t hike up your interest rate for no reason, and your payment must be due on the same date each month. If you carry a balance and miss a payment debt collectors can only call you during certain hours and on certain phone numbers. Educate yourself on the rights afforded to you by the various laws as well as your particular card. You have a responsibility to use your credit wisely and pay on-time – but the card companies also have a responsibility to treat you right.
Fans of Dave Ramsey and many others would argue that you should stay away from credit cards altogether. I think that they’re a perfectly good financial tool when used responsibly. If you’ve used credit cards before and gotten in over your head, I respect your decision to stay away from them going forward. But if you’ve never had one, or any other kind of debt, you probably need one in order to establish a credit history and be able to eventually finance things like a house or car. Simply put, credit cards are a part of the American financial landscape, like it or not. What DOESN’T need to be a part of the landscape is unnecessary debt – and credit card debt definitely falls into that category.
In short, congratulations on your new card – now go use it responsibly!