The Basics: A credit card is issued by a financial company that gives the holder an option to borrow funds, usually at the point of purchase. Credit cards charge interest and are used primarily for short-term financing. Interest typically begins to be charged one month after a purchase is made, and borrowing limits are pre-set according to an individual’s credit rating.
If you're like me, you probably receive multiple offers weekly from credit card companies seeking new customers with easy to complete applications. In fact, I'd be willing to bet you have one or two sitting in your mailbox right now! These of course are almost always unsolicited. Before you sign on the dotted line and mail in one of those application, you need to know more. Here are some dos and don’ts regarding credit cards.
"Do not save what is left after spending, but spend what is left after saving."
- Warren Buffett
Shop around. The credit card industry is very competitive, so compare interest rates, credit limits, grace periods, annual fees, terms, and conditions.
Read the fine print. The application is a contract, so read it thoroughly before you sign it. Watch for terms such as “introductory rate,” and be sure you know when that introductory rate of interest expires.
Pay your bill in full each month. Pay off your statement each month in full and on time; otherwise, you will begin paying interest charges and may be charged late fees. Paying off your bill each month can also help ensure that you stay out of debt.
Track your spending. Look closely at your credit card statements each month to be sure that you actually approved the charges that appear. Mistakes can happen, and you don’t want to pay more than you agreed to.
Pay attention to changes in your credit agreement. Occasionally, the credit card company will send you updates on the contract you have with it. If you don’t pay attention, you could miss something important.
Don’t spend money you don’t have. Buying things without the money in your savings account can lead you down a dangerous path. Before you know it, you could be in a lot of debt with no way to pay it off.
Stay below your maximum credit limit. Creditors want to see that you know how to use your card wisely. Keeping your balance low and making payments in full are good ways to do that. Just because the option to spend more is there doesn’t mean that you should take advantage of it.
Don’t sign up for store credit cards just to receive a discount. Opening a credit line at a store to obtain a discount on a purchase then and there may not be a good idea. Remember that credit cards affect your credit score and that opening too many can actually hurt it. Plus, store credit cards tend to have much higher interest rates than those offered by financial institutions.
Don’t apply for additional credit cards if you have balances on others. Pay your balances on existing cards before you open new accounts. Getting in this habit will make you less likely to open too many accounts.
Don’t give your credit card to someone else. Whether you authorize it or not, giving your credit card to someone else to use is against the law.
Although having a credit card is important in helping you to establish a credit history, they are often misused. A credit card can be a powerful tool in the hands of a responsible individual, but it can be even more powerful in a destructive way in the hands of someone who is unaware of its pitfalls. Keep these tips in mind before obtaining and using a credit card.