10 Essentials for New Credit Users
The sleek and svelte pieces of plastic that you can swipe anywhere to acquire things you desire have fascinated me since childhood. Waiting to be a legal adult and owning my first credit card was essentially what I looked forward to. One might assume that a person is independent and responsible by the age of eighteen, thus managing credit is not a big deal. Truth be told, I did not entirely grasp the idea of using credit back then. For me, it was a ticket to freedom and uninterrupted shopping sprees. I didn’t have to wait for a paycheck or borrow from my parents when something in a shop window caught my eye. I could go in, grab the item, confidently hand my card to the cashier, and voila!
I realized the liabilities of owning a credit card the hard way, but I hope newbies can learn from my mistakes. Credit cards have their perks and are inarguably convenient; in fact, you can reap a good load of benefits if you understand the game and play your cards right (pun intended). It’s all about how you view and utilize this financial power. If you consider your credit balance as an emergency fund that will only be spent during times of dire need, you are certainly on the right track.
On the contrary, if you perceive it as a liberty to obtain things you cannot otherwise afford, that is an inevitable recipe to disaster. Misuse of credit privilege is among the leading reasons for filing Chapter 7 Bankruptcy. I advise you to contemplate on the following guidelines to save yourself from a treacherous cycle of financial predicaments:
1. Choose your first Card wisely
You need to shop around before applying for your very first golden ticket. There are numerous credit card companies to choose from after all. Visit the website of different credit issuers and discover the details of every card that might interest you. You need to consider your spending habits and preferences before narrowing down the choices.
If there is no particular place you expect to use your credit, you may opt for a general use cash-back card. You need a credit card that best fits your needs; for example, if you mostly shop online from Amazon, you should look for a card that offers the most generous offers on purchase of their merchandise. If your job or lifestyle includes a lot of travelling, you would make the most out of credit cards that provide points or miles for flight discounts. Moreover, look for cards with low interest rates and no (or minimum) annual fees.
2. Train yourself with a Secured Credit Card
Someone who has no credit history has to start with a secured credit card, which requires you to make a deposit. The deposit is your credit limit, and how you utilize it defines your credit score. If you exhibit responsible spending, you can soon qualify for an unsecured credit card and be subject to lower interest rates. A secured credit card is useful to teach oneself to borrow and return money in a way that is void of negative repercussions.
3. Never Max out your Credit
If you aim to readily improve your FICO scores and secure low interest rates for loans in the future, only use a fraction of your credit balance. The rule of thumb is to never cross the 30% threshold, and spending as low as 10% is ideal. The credit card limit for beginners is rather meager, but you can have it increased over time to maintain a feasible utilization rate.
4. Pay your Bills in full on time
The APR (annual percentage rate) on credit cards can be overwhelming for first timers. However, you won’t have to worry about paying them if you make timely payments. Pay your credit bills before the due date to avoid debt at all costs. If you miss a payment, the credit provider will immediately increase the interest rate. Also, the smaller the installment for paying off a debt, the more money you end up forfeiting in the long run.
5. Understand the obligations of interest rates and debt accumulation
The interest rates on credit for newbies can be extensive, ranging between 20 to 30 percent. Let us assume that you are subject to a 25% interest rate and have $2000 in accumulated debt, you owe the creditor $2500. If you do not pay the amount as a whole and opt for the minimum installment, which let us suppose is $100 per month for 3 years, it adds up to a total of $3600. Does that sound like a good bargain? I don’t think so.
6. Get acquainted with Credit Fees
Credit card companies may charge a number of fees, largely depending upon how you manage credit. While a fixed annual fee is unchanging, you can avoid late payment fees and advance cash fees by making better financial decisions. Some creditors also charge a fee over foreign transactions.
7. Use your Card and Redeem Rewards
There is no point in obtaining a credit card if you are never going to use it. If your outstanding balance remains zero, you will never build up a credit score. The purpose of a credit card is to demonstrate that you can borrow money and pay it back dutifully. If your credit card offers special rewards and points over purchases, do not let them go to waste.
8. Always Double Check your Credit Statements
When you receive your credit statement every month, do not merely note what you owe and then toss it into the garbage bin. You need to review all the charges and eliminate the possibility of credit card fraud. Do not just consider hefty charges, but also be suspicious of small transactions, as low as one dollar. Credit card thieves could be robbing you bit by bit before the big final blow. Fraudulent activity must be reported at once in order to receive reimbursement.
9. Analyze your Credit Score
You receive a free credit report once a year, so make sure that it is free of errors. Wrong information on your report could damage your credit score and disturb your finances.
10. Negotiate with Credit Providers
Nobody is perfect, so you might fall behind on bills occasionally. If you do not normally miss on payments, you can request your creditor to waive off the late fee. Moreover, if you feel that the company is charging too must interest or that your credit limit should be increased, simply ask the creditor to make an exception. The creditor is likely deliver the favor if you previously maintained a good credit record.
John Adams is a paralegal who writes about widespread legal and social issues. He helps readers overcome challenges and solve many personal problems the smart way, rather than the hard way. He aims to reach out to individuals who are unaware of their legal rights, and make the world a better place.