I recently had a conversation with someone near and dear to me about credit cards. The conversation started innocently enough when I asked how using her first credit card was going? She flippantly mentioned she’d paid the minimums and I gasped. What? Why?! She seemed flummoxed by my questions. She asked why her lender would put for a minimum payment on her statement if that isn’t what they wanted? I walked her through interest rates, minimum payments and how lenders are essentially trying to put you in debt. Does that sound cynical? It’s true.
In response to her conundrum, I decided to write an extensive guide on how to use a credit card for beginner’s on MagnifyMoney.com, because we make credit card recommendations there and it seems important to have this information available to any credit card rookies (and even some experienced users).
So, you want to open a credit card? It’s a good idea – most of the time.
Opening a credit card provides a simple way to establish and build credit history. Yes, certain credit cards can earn users rewards for cash back, travel miles, and redemption points, but the road to reward chasing is littered with people who slipped into credit card debt. Beware of your budget and your personality if you elect to pursue the path of reward chasing.
If you have trouble paying bills on time, saying no to purchases you can’t afford or just sense a credit card may not be a good idea for you – then trust your gut. While a credit card is a great tool to build financial health, it can also lead to painful consumer debt when used improperly.
Still think you’re ready to take on the responsibility of owning a credit card? Then let’s walk through how to select, understand, apply and manage your credit card.
Step One: Select your type of credit card
Credit cards were not made equal and we’re not just talking in terms of interest rates and rewards. Your unique situation will determine which credit card you should (and could) apply for.
Click on over to MagnifyMoney to read the four steps for credit card rookies.
[Discover it image from Flickr]
Growing up, I never even knew it was an option not to fully pay off a credit card every month! Must have been because my dad worked for FICO… 🙂
Haha, well played to your dad. My dad also told me to always pay my card in full. I used to be so paranoid that I’d just pay it off as soon as I saw a charge come through!
Kids (and adults for that matter) should avoid credit cards like the plague. Why do we need credit cards in this current time? For reward points? Then I ask why exactly credit card companies are so kindly offering reward incentives? Credit cards are unnecessary and dangerous, and I will encourage my young daughter to stay away. Thank you for the thought invoking post.
I understand some people’s issue with them, but I’m curious how you plan to have your daughter build her credit history for when she’s out on her own? I know I deeply appreciate my Dad telling me to open a credit card my freshman year of college (and instructing me how to use it properly). I graduated with no debt, a credit score of 720 and had no problem finding an apartment in New York City thanks in part to my credit report/score.
You certainly make a good point, and as a consumer lawyer my day job is spent helping people improve credit scores. I certainly understand that credit cards are an essential part of the credit scoring equation, and your advice is well-founded for anyone wanting guidance for teaching kids about credit.
Admittedly, my viewpoint is in the minority, but I intend to teach my daughter (3 yrs old at the moment) that credit cards are unnecessary, and folks that worry constantly about their credit scores are folks that tend to borrow money to make consumer purchases. I want to teach my daughter to simply avoid borrowing money to make consumer purchases.
Borrow money to fund business activity, if warranted. Borrow money to fund investment, if warranted. However, my personal belief based on my experience in this field is that borrowing money to purchase non-income producing items is never advisable. It was not that long ago that the majority of Americans lived on a cash basis, and I believe debt alone is the single biggest problem our Nation faces.
Even the most responsible borrowers lose control of their freedom to some degree while in debt. I want my daughter to have as much freedom and independence as possible in her life, and she does not need a credit score to meet those objectives.
Thank you for your thoughts and bringing this very worthwhile topic to the forefront.
I respect your views and agree that debt is a major issue in this country. I hope your daughter will be fortunate enough to get through without ever borrowing money, even for a home.
I’ve been fortunate myself never to be in debt. No student loans, no credit card debt, no car loan or payments and currently no mortgage (not possible for me to buy in NYC).
However, it would’ve been incredibly difficult to get into a safe housing situation (aka not a creep via craigslist) without my credit score (created by my credit card). My nice nest egg wasn’t enough to convince my landlord.
Perhaps I’m just of the view that it makes sense to play the game as long as you understand how to play. It’s never caused me any debt and I’ve never played one penny in interest. I understand it can be hard for millions to do the same though. Part of it has to be with understanding your personality, but it sounds like you’re raising your daughter right — it’s hard to believe she’s ever land herself in debt them.
I think credit cards can be used responsibly. If you can use them that way, then they can actually make you money. I have a few credit cards where I actually get money back because of the cash back rewards. You just have to be careful of carrying a big balance.
I have a few cash back cards myself, but prefer the airline miles to straight cash back.
This is a perfect example of why I’m perplexed when people claim that financial literacy education would not be effective. Maybe they just don’t realize how shockingly little basic understanding the average person has about money, credit, etc.
Who ever claims fin lit wouldn’t be effective?! I’d like to have a nice talking to with him or her.
I am into that idea of getting a credit card. There are lots of cards that is free of annual fee. And it is very enticing to grab. But, the thought of myself being a spender is holding me back from acquiring one. I just need some time to think it over.
Know yourself. If you feel it would cause too much impulse buying, then trust yourself to stay away. You should try out this quiz: http://magnifymoney.com/timeperspective/
It’s surprising how few people actually know enough about the credit card industry and how credit cards work. My husband, a few years ago, thought that if he paid the minimum on his card he wouldn’t incur interest.