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Chapter 3: Credit Cards

Getting your first credit card is an exciting step toward true financial independence. Credit cards can cause major problems if they are not sensibly used, but they have important advantages as well. First, having and responsibly using credit cards allows you to build a positive credit history and score. In the future, having a good credit score can help you to get a car loan or mortgage with a low interest rate, rent an apartment, get a job, and get good insurance rates. Second, having credit allows you to borrow money interest-free for a short period of time. You can buy something, and you do not have to pay the bill until the next month. However, if you charge more than what you can afford to pay back when the bill comes, you will have to pay interest on the portion you do not pay off. When you do not pay off the balance in full each month, you are said to “carry a balance”. Some people wind up paying thousands of dollars in interest on their credit cards because they carry a balance.

What to look for in a credit card
Remember that not all credit cards are created equal. When shopping for a card, pay attention to the features of each one. Look for the following:

  • Low interest rate/annual percentage rate (APR). The lower the APR, the less money you’ll be charged to hold onto the balance. However, if you never carry a balance (the most financially savvy thing to do), the APR won’t matter.

  • Grace period. A grace period is how long you have to pay off the balance before you are charged interest on new purchases. It is best to go with a card that gives you a grace period (although be aware that it only applies if you paid off your balance in full the previous month).

  • No annual fee. Why pay for the privilege of holding a card if you don’t have to? If you are new to credit, you may have to pay an annual fee, but after a year or so of responsible use, you can ask for it to be reduced or eliminated.

  • Low penalty fees. If you make a payment after the due date or go over your credit limit, you could be charged a fee. While you should manage your account so neither of these events occurs, look for a credit card with the lowest penalty fees - just in case.

If you are under 21, you must have an independent means of repaying the balance (such as a job) or a co-signer to get a credit card. Even if the card is for your use, late payments can be reflected on a co-signer’s credit report, and the creditor can engage in collection activity against him or her if you stop making payments. Don’t hurt your co-signer by running away from or forgetting about your obligations. Repairing trust can take longer than repairing credit damage.

How to use credit
Once you have a credit card, use it wisely:

  • Stay out of debt. It doesn’t take long for a few purchases to add up to hundreds, even thousands, of dollars. Never charge more than you can afford to repay by the time the bill comes in.

  • Pay more than minimum payment due. If you absolutely cannot pay the entire balance, at least pay more than the required minimum payment. Because the minimum due is often very low (usually between two to four percent of the balance), you will drag the debt out for many, many years if that is all you pay.

  • Pay on time. If you miss a payment, your credit score can take a quick and hard hit. Furthermore, you may have to pay that late payment fee, typically $25 to $40.

  • Limit the number of cards you have. The more open credit lines you have, the more you’ll be tempted to spend beyond your means. Also, too many applications can hurt a credit score.
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