Published in: Credit Cards | Nov. 20, 2018
10 Things First-Time Credit Card Users Need to Know
By: The Ascent Staff
Procrastination is like a credit card: it's a lot of fun until you get the bill.
Credit cards can be fun. They can be extremely convenient, too. Almost anywhere and at any time, you can buy things you want -- whether you can afford them or not. They're a double-edged sword, though; use them irresponsibly, and you could end up swimming in debt that carries an astronomical interest rate. Fortunately, savvy credit card users can enjoy the upside and avoid the downside.
Here are 10 things first-time credit card users need to know if they want to keep their finances from going up in flames.
1. Choose your card(s) carefully
Credit cards are not all alike, and you should choose the card(s) that best fit your needs and spending habits. For example, if you tend to use credit cards at a wide variety of places, you might opt for a general-use cash-back card. If you do most of your shopping on Amazon.com, you might want a card that gives you a generous percent of cash back at Amazon. Anyone who struggles with credit card debt could be well-served by a card with low interest rates. Those who travel a lot might want to rack up points or miles that can be applied toward travel.
2. Only charge what you can afford
It might seem like an obvious piece of advice, but enough people ignore it to make it worth stressing: If you charge things you can't afford, you'll be living beyond your means, and that's never a recipe for success. If you have any sort of financial goals -- maybe even retiring early -- you should aim to live below your means. Credit cards can make temptations hard to resist, as all you have to do is whip out the plastic for instant gratification. If your self-control needs improvement, work on developing more discipline and restraint in yourself. And the next tip will help you keep your spending under control.
3. Pay off your bills in full each month -- and on time
If you only charge what you can afford, you'll be able to pay your credit card bills off in full each month -- and you should absolutely do so. Be sure to pay your bills on time, too. If you're late with a single payment, some cards will immediately and automatically hike your interest rate into the stratosphere -- often to between 25% and 30%! (That's called a "penalty APR." When you're card-shopping, it's smart to watch out for this feature and avoid it.) A late fee is also often levied, and that may be as much as $27 for your first offense and more than that for subsequent offenses. Paying bills late can also shrink your all-important credit score, costing you more whenever you want to borrow money.
4. Understand how dangerous debt can be
If you let any debt accumulate, it can take on a life of its own -- especially when it's high-interest-rate debt. Imagine, for example, owing $10,000 on cards and being unable to pay it all off. If your interest rate is 20% and you just leave the debt there, you'll soon owe $12,000, and a year after that, you could owe $14,400. If you charge anything else to the card, your balance will keep growing. We would all love to earn annual returns of 20% on our investments -- and that's just what the card issuers are doing here. Credit card debt is like investing in reverse: Your net worth is quickly shrinking over time, rather than growing, and the losses you suffer can become catastrophic.
5. Beware of fees
Credit card issuers rake in a lot of money from fees. According to industry research organization R.K. Hammer, credit card fee and interest income topped $163 billion in 2016. $12 billion came from penalty fees -- such as the ones levied when you're late paying a bill. Another $12.5 billion was generated by annual fees, while cash advance fees totaled a hefty $26.6 billion. Be aware of any fees you might incur and avoid them at all costs. For instance, many cards charge annual fees of $75 to $100, and some charge $500 or more. However, annual fees are easily avoided. Most cards don't charge them, and even if your card does, you may be able to have it waived or reduced simply by asking. Also be sure to pay your bills on time and avoid using a card's cash advance feature, which is a costly way to borrow money.
6. Don't just make minimum payments
If you end up with significant credit card debt at some point in your life, pay it off as quickly as you can. Don't just pay the minimum required, as that will benefit the lender, not you. Here's why paying the minimum is so counterproductive: Imagine that you owe $15,000 on your credit card(s) and you're being charged a 20% interest rate. If your minimum payments are 3% of your balance, you'll start out paying a whopping $450 per month. If you can't make that payment, your balance will grow, digging you deeper in debt.
But let's say you do make that 3% minimum payment until you've paid the balance off. How effective will that be? Well, according to a Bankrate.com calculator, it will take more than 25 years to pay the debt off, and your total payments will exceed $33,000 -- all for a $15,000 balance owed.
7. Check your statements for problems
Each month, you'll receive a bill from each credit card you own. Don't just look at the balance owed and chuck your statement in the bin. Take a minute to review all the charges. Are they all yours? If an identity thief has been using your credit card (or just the information on the card) to buy things, let the company know. You probably won't owe more than $50, even if a crook charged a new refrigerator to your card. Some cards even feature zero liability for fraudulent charges.
Fraudulent charges on credit cards are not uncommon, so be on the lookout for them. Even a tiny unauthorized charge of a few cents should be reported, as it might be part of a scam in which the crook is testing lots of card numbers to see which ones work before making big charges on them.
8. Check your credit report and credit score, too
Having a good credit score is important, as it can get you lower rates on auto loans and mortgages, potentially saving you many thousands of dollars. It can also get you approved for top-of-the-line credit cards -- ones with great terms, top-tier benefits, and more. To keep your credit score high, pay off your bills in full and on time, and don't max out your credit limits. To get a good credit score, you need a solid credit report. Your credit report offers lots of details on your debts and repayment history, as well as a look at your current credit accounts, including your credit cards. You're entitled to a free copy of your credit report once a year from each of the three main credit agencies -- visit AnnualCreditReport.com to order yours. Give your report a read to make sure everything is accurate, and if it isn't, call the relevant vendors to clear up any errors.
Your credit report won't include your credit score, but many credit cards these days give you free access to your credit score or include it on each statement.
9. Don't be afraid to ask for breaks
Credit card contracts are full of terms and conditions and fine print, but don't assume they're all set in stone. You might be surprised to learn how easy it is to get a lower interest rate on your debt -- just by asking. It's estimated that roughly 70% of cardholders who ask for lower interest rates get one. It's also much less of a hassle than you'd think to ask for a late fee or two to be waived by your banking institution. Furthermore, if you're interested in having a higher credit limit, it's definitely worth looking into the pros and cons.
10. Keep an eye out for changes
Finally, remember that regulations on credit cards can and do change over time. The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009, for example, ushered in many pro-consumer reforms, reducing the fees cardholders pay by many billions of dollars. It also limited interest rate hikes and required card issuers to disclose how much debtors needed to pay each month to pay off their debt in three years. The Consumer Financial Protection Bureau (CFPB) oversees some CARD Act regulations. The current administration in Washington, though, has expressed some interest in shrinking or eliminating the CFPB, so future changes to credit card laws may be more pro-business than pro-consumer.
A credit card can be a blessing or a curse -- and which one it is depends entirely on you.
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