What To Know Before Getting That First Credit Card
Before signing up for your first credit card, you should take the time to educate yourself on the basics. Understanding the terms and conditions of your credit card, how debt and credit usage affects your financial security, and the overall pros and cons will help you make wiser decisions when it comes to swiping that plastic.
To help you steer clear of unmanageable credit card debt, here are 8 things to know before opening your first credit card:
- Your credit card is like a short-term loan. When you get your first credit card, temptations abound. Suddenly, you can afford all those luxuries that once seemed out of reach. Don’t fall into this trap. To avoid spending beyond your means, think of your credit card as a loan you must pay back every month.
- Credit utilization. Credit cards may come with a limit, but that doesn’t mean you should max-out your balance. That’s because the closer you are to your limit, the more likely your credit score will drop. Credit utilization, or the ratio of the balance to the credit maximum, composes about 30 percent of your credit score. For better credit scores, the rule of thumb is to use no more than 30 percent of the available balance.
- How credit cards impact your overall credit score. Credit utilization determines only a portion of your credit score. The other factors include: payment history (35 percent), length of credit history (15 percent), types of accounts in use (10 percent), and new credit (10 percent). The single best way you can build good credit or significantly improve your credit score is simply by making your monthly payments on time.
- How monthly interest charges are calculated. At the end of each billing cycle, credit card companies will tack on an interest charge based on your average daily balance, not the balance at the time your bill is due, and your periodic interest rate. The periodic interest rate can be calculated by dividing the annual percentage rate (APR) in decimal form by 365 and multiplying that number by the days in that month. To calculate a given month’s interest charge, multiply the periodic interest rate by your average daily balance.
- Credit cards have a grace period. You can avoid interest charges altogether if you pay your balance in full before the due date. The grace period for all credit cards spans from the end of the billing cycle to the statement due date and must be at least 21 days long according to the Federal CARD Act.
- There are other potential fees. Always read the fine print before signing up for a new credit card as there are plenty of fees companies are allowed to charge, including an annual service fee, a balance transfer fee, an overseas purchase fee, as well as late payment and overage charges.
- How the minimum monthly is determined. There are a few ways credit card companies may decide to calculate your minimum monthly payment. Your minimum monthly may be calculated as a flat percentage, usually 1 to 3 percent, of your balance or as a percentage of your balance plus interest charges and fees. In other cases, companies may require you to pay a flat monthly payment, on average $30, if your balance or limit is quite low.
- There are pros and cons. Used responsibly, credit cards may allow you to earn rewards on purchases or help you establish good credit to gain access to low interest mortgage and auto loans. Credit cards can also provide instant access to funds in case of emergency. On the other hand, credit cards can quickly become a burden if you regularly spend more than your budget can accommodate or rack up a high balance that makes your minimum monthly dues impossible to pay. In extreme circumstances, creditors may decide to sue you to reclaim what they are owed.
Not so credit savvy when you opened your first card? That’s okay. If you racked up more unsecured credit card debt than you can handle, New Era Debt Solutions may be able to offer you a way out. New Era is a debt settlement company that helps people dramatically reduce their debt obligation to secure their financial independence. Since 1999, we have settled over $200 million in debt for our clients.
To see if debt settlement is right for you, contact us or fill out the form on this page for your free debt analysis.