The responsible use of credit is something that few people truly understand. Getting your first credit card is an amazing experience. It means you are now responsible for your own finances and that you are building credit you can use someday for a larger purchase, like a house or a car.
How Credit Works
The basic use of credit is simple. You present the card as payment when making a purchase. The amount is deducted from your available credit. You will receive a statement to tell you how much you have used and how much is left. You will also receive a monthly bill for the credit you have used.
It is your responsibility to pay the bill when you receive it. If the payment is late it could affect your ability to borrow in the future. It is also a black mark on your credit record.
To use credit wisely means to use the card in moderation, to pay the bill on time, and to keep only one or two cards at a time. There are a number of cards for business, students, and cards to help qualify you for initial credit. Below is an overview of each.
Types of Cards
Rewards Cards: A rewards credit card earns you rewards on your purchases. It pays out sometimes in a percentage for cashback around 1-2% and may also pay in travel points.
Low-Interest Cards: Low interest (or low APR) credit cards are good to start with because you can carry a balance for a short time while you build up your payment history.
Balance Transfer Cards: These card types are for people who have multiple cards and want to combine the debt into one payment per month. They transfer the balances of their other cards to it and make one monthly payment.
Secured Cards: This type of card is good for those who don’t have good credit because it can help them build it over time by making purchases and paying on-time. It requires a payment upfront that will determine their credit limit. It is based on your credit score and typically set at $200 – $250. After proving you are good at handling your finances you can trade up to an unsecured card.
Having a credit card can raise your credit score, but it can also lower it, depending on how you use it. It is good to have an understanding of how credit cards work and how they can affect your score to avoid the mistakes that many young adults make when trying to establish credit. They make too many purchases, pay late, or sometimes miss payments, which can make it hard to obtain credit for other things because it looks to creditors like you are not able to handle your finances.
No matter which card you choose, now that you understand credit cards and how they affect your credit score, you can use credit wisely and build up your score to allow you to qualify for those bigger purchases in the future. like a home for yourself and your family.