Credit Cards: What You Need to Know

You know you've reached adulthood when your mail suddenly starts filling with offers from credit card companies telling you all about "introductory rates," "low APR" and "waived annual fees." And, despite the fact that you've probably just graduated high school, "YOU'RE APPROVED!"

Now, before you get too excited, let's break down the information being presented in this offer so you can make a decision about getting a card that best reflects your needs.

What are credit cards anyway?

In the simplest manner of explaining, a credit card is a way of buying something at one point and paying it down over time, kind of like a loan.

But, let's be clear: this isn't free money! The credit that you have on your card can be used to purchase what you want, but you still need to pay it back. It's extremely important to stay on top of the credit that you use, as it's also relevant to your credit score, and can impact you further down the line if not managed properly.

When you don't pay the balance off your card at the end of every 30-day billing cycle, but instead opt to pay the minimum payment only, the remaining balance will incur interest at the APR rate established when you first open the card.

So, how does it work?

If you're approved for a credit card, the company will review your credit and financial history in order to assign you a specified credit limit. You can then use this amount to make your purchases, in stores or online as you normally would.

The difference is that the money won't come directly out of your checking account at the point of sale, like what happens when you use a debit card.

Why should you get a credit card?

Well, maybe you don't need one, but let's go through some of the benefits and disadvantages.

What are the perks of having a credit card?

For starters, the main benefit is that you're building your credit score (if you're using your card wisely). But here are some other advantages to having a credit card:

• Emergency access to money between paychecks - if you're in a tight financial situation, a credit card can help in the clutch.  For emergencies only, this can be really helpful, however it's important not to rely on your credit card if you don't have the cash to back up your purchases.
• Airline miles, cashback bonus, credit rewards etc. - some credit cards offer really great deals where, for every certain amount of money you spend, you can get some sort of reward in return. If you like to travel, like I do, you can get a card that awards you with airline miles in exchange for your purchases.
• Bolstering your credit score - by managing your credit card(s) and spending carefully, having them can actually bolster your credit score, as it shows potential lenders that you are responsible when it comes to lending.
• Budgeting - this may seem like a strange perk, but having a credit card has made me a really great budgeter. By seeing how much credit I have and then checking my account balances, keeping an eye on my expenses became a habit.

We've heard now all about the reasons credit cards are useful, so let's go over some of the issues we should be wary of when using them.

Any disadvantages I should know about?

Generally speaking, the disadvantages to owning a credit card apply to anyone who has one, but they can all be mitigated as long as you're careful and don't get too spend-happy.

• Fees - there are so many fees that are involved with owning a credit card, and a lot of them are only explained in that tiny print on the super thin and tiny paper you get with your application. I advise that you check online or speak with a company's customer service before getting any card to discuss any/all fees relevant to the card that you want.
• Some examples include an: annual fee, balance transfer fee, foreign transaction fee, late payment fee, or over-the-limit fee.
• Debt - it's very easy to see a credit card as a way to buy everything that your heart desires, from that luxury bag you've always lusted over or the Target spree you've worked hard to earn. But getting caught in that trap of using your credit card whenever you don't have the cash to back it up is dangerous and could lead you down a long road of debt.
• Remember, you will have to pay interest on your monthly balance. So if you get spendy and can't pay off your total at the end of your billing cycle, you will be charged extra money on the money that you've already spent!
• Some interest rates are insanely high so you could end up paying up to 25% of your balance for every billing cycle that you don't pay it down completely.

Be sure to weigh the pros of cons of getting a card before you dive right in!

Final Notes

Overall, credit cards are really practical and can come in handy when spending and for earning rewards. However, there is a cost to everything and you have to be careful with all that newfound power (you know, the whole "with great power, comes great responsibility" deal).

If you are interested in getting a card, I suggest popping over to the comparison tool at Nerdwallet, which actually helped me to narrow down to the card that I currently use.

My best advice? Take your time, do your research and think like an adult.

Important Terms

1. minimum payment - this is the smallest amount of money, determined by your card company, that you must pay at the end of each billing cycle in order to remain in good standing.
2. annual percentage rate (APR) - your yearly interest rate, or the cost of having credit with that card company.
3. credit limit - the maximum amount of credit that you are provided by the card company to spend, based on your income and other financial information.
4. point of sale - this is the place where a purchase occurs, whether it's at the mall or an online store.
5. annual fee - a standard, yearly charge, for use of a credit card. You can choose to get a card without this fee, or, if you spend enough, a card that will waive the fee after you've reached a certain spending limit.
6. balance transfer fee - this is an amount of money charged when you are transferring the balance of one credit card to another.
7. foreign transaction fee - applies to any purchase made abroad while using the card. There are cards, especially travel cards, that will waive this fee (which is a huge benefit for travelers).
8. late payment fee - a fee that is charged if you don't make at least your minimum payment by the due date for that billing cycle.
9. over-the-limit fee - this is charged when you overspend past your credit limit.

References

Nerdwallet

Investopedia

U.S. Federal Trade Commission 1 | 2