What I Wished I Learned in School: Credit Card Smarts
When it comes to life skills, managing credit cards is one of the most important — and least taught — lessons. The sooner you learn it, though, you’ll find that responsible credit card management can be the key to ongoing financial wellness. Conversely, irresponsible credit card usage can be the first step in a downward spiral toward long-term debt and ineligibility for large loans. Here are the basic credit card smarts to know.
Understand how credit cards work
Credit cards are not free money, but they can often feel like it. A credit card is essentially a short-term loan with the expectation that you’ll pay it back — ideally on time and in full. What many first-time credit card owners don’t realize, though, is that paying only the minimum balance due each month can lead to substantial interest charges, making every purchase much more expensive over time. For those carrying balances, it’s crucial to know the annual percentage rate (APR) on each of your credit cards, and to understand how interest accrues.
Build credit early
Your credit score plays a pivotal role in your financial life. It can impact everything from your ability to rent an apartment to securing a car loan or even landing a job. It’s very important to start building your score as early as possible because the length of your credit history compromises a significant percentage of your credit score. Paying your bill on time and keeping your credit utilization low—which means only using a small percentage of your available credit — are key factors in maintaining a healthy credit score.
Use your credit card like a debit card
Credit cards make it easy to spend money you don’t have. It’s important to remember, though, that every swipe adds up. It’s easy to lose track of your total spending and end up with a balance that’s difficult to pay off. Budgeting and tracking expenses are habits that must be developed to avoid falling deep into credit card debt.
Never miss a payment
Never miss a credit card payment, even if you can only afford to pay the minimum payment. Missing just one payment can have a strong negative impact on your credit score, in addition to the resulting late fees and penalty interest rates.
Understand credit card rewards and perks
Credit cards often come with rewards programs, cash-back options and perks, like travel insurance or purchase protection. While these benefits can be valuable, they shouldn’t drive your spending. Make sure you weigh the potential costs of using your credit card for purchases, like annual fees and high interest rates, before deciding to bring out the plastic. Rewards are only worth it if you’re paying your balance in full every month. Otherwise, the interest charges will likely outweigh the benefits.
Avoid credit card traps
Credit card companies don’t always make their terms crystal clear, and that is no accident. High interest rates, late fees and introductory offers with strings attached can quickly become pitfalls. Before signing up for a new credit card, make sure to read the fine print. For example, an enticing 0% APR offer might revert to a much higher rate after the promotional period.
Learn about credit utilization and its impact
Credit utilization refers to the ratio of your credit card balance to your credit limit. This percentage significantly impacts your credit score. Ideally, you should aim to keep your credit utilization below 30%.
Prepare for emergencies
A surprise car repair or medical bill can derail your finances if you don’t have savings to cover it. It’s best to have an emergency fund with three to six months’ worth of expenses saved up to get you through almost any unexpected cost. It can be tempting to pull out the plastic in emergency situations, but that should only be a backup plan, not the primary solution. Paying for a large unexpected expense with your credit card can mean paying off the interest on the charge for years to come.
Know when to say no
Credit card offers are everywhere, from pre-approved mailers to enticing deals at store checkouts. It’s easy to accumulate more cards than you need, which can make managing them overwhelming. Learn to evaluate offers critically and resist the urge to sign up for every card that promises a discount or bonus. Fewer cards, used wisely, are better than a wallet full of unused plastic.
Understand the long-term impact of debt
Carrying a balance month after month doesn’t just hurt your wallet—it can delay major life goals like buying a home or saving for retirement (which then delays retirement!). Knowing how to balance spending, pay bills on time and avoid unnecessary fees is the key to making credit cards work for you, not against you.
Credit cards can be the gateway to long-term financial wellness, or to ongoing debt. Use these tips to learn how to manage your credit cards responsibly.