and Using Your First Credit Card
credit card can be exciting, tempting and intimidating. Credit cards are
a great convenience, but they are also borrowing money that must be repaid.
Here are some ideas to keep in mind as you get your credit card and use
Choosing a credit
card - fees, interest rates and benefits
Ideally, the credit card you choose should have the lowest fees, the lowest
interest rate and provide the most benefits when you use it. Unfortunately,
there is probably no card that has the best of all three. Choosing the
card that is best for you involves weighing these factors and considering
how you will use it.
Annual fees can vary
from zero to $75 per year. Ideally, you would want to choose a card with
no annual fee. There are also fees that companies charge for late payments.
Be sure to check the terms of the credit card agreement, especially if
you are occasionally late with a monthly payment.
Interest rates can
also vary greatly and can exceed 20%. You should also be very careful
of low "teaser" rates, or special rates for a limited time if
you transfer balances from another card. Another way issuing companies
increase the amount you pay is by how they calculate the interest. Be
sure to read the details of the agreement.
Many cards offer benefits
for using the card. Using a credit card can bring the rewards of airline
mileage, discounts on travel, electronic gifts, discounts on cars and
other benefits. A rule of thumb is that the benefits are usually worth
about 1% of the charges. If a card with these types of benefits is important,
make sure the benefits are those you will use and that the other aspects
of the card do not offset the benefits.
Assume that Bill Smith is evaluating three cards with the characteristics
listed below. Also assume that Bill has an average balance of $3000 on
which he pays interest and that he charges $2000 per month.
Card A - No annual
fee, 18% interest, no benefits for using it.
Card B - No annual fee, 12% interest, mileage benefits for using it.
Card C - Annual fee of $50, 10% interest, discounts on electronics for
As you can see, the
differences are substantial. The differences become even more pronounced
if the unpaid balance or amount of usage is higher. The example above
is quite simple and the cards are not meant to represent those offered
by any institution. Be sure to read and understand the terms of any credit
card before accepting it.
Be sure your credit
card provides the right combination of fees, rates and benefits. If you
do not carry over balances and pay finance charges, you might be willing
to accept a card that has high rates and maybe even an annual fee if the
benefits were your main focus. However, if you normally pay finance charges
or interest, pay extra attention to the interest rate.
using your credit card
- A credit card
is serious business. The issuing company is lending you money and you
have responsibilities to pay it back.
- One card is probably
enough. Avoid temptation by only having one card.
- Keep the credit
limit low. Depending on how you are going to use it, $500 or $1000 is
high enough for most first-time credit card users.
- Pay off the entire
balance each month. Avoid charges and build a good credit record.
- Make the payments
on time. This helps build a good record and avoids late payment charges.
- Use the card for
emergencies. Start off slowly with this new convenience. Keep using
cash and checks for most purchases, especially until you get comfortable
with the card.
- Never let others
use your card. You are responsible for all charges on your card. Do
not let others borrow it or give out the number.
- Keep track of
your use of the card and compare your records to what shows up on the
- Keep the card
active. Even if you are only using the card for emergencies, use it
for small purchases every three or four months just to keep it active.
Then be sure to pay off the balance before any interest is due.
- Avoid using the
card for cash advances. The interest rate charged for advances is usually
high and interest is charged immediately.
- Create a spending
and budget plan. Do not let your credit card payments exceed 20% of
your monthly income.
- If having a credit
card turns out to be a problem, get rid of it or stop using it for a