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Chapter 4: 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
Not all credit cards are created equal. Just as you wouldn’t purchase the first car you saw on the lot without comparing it to other cars, neither should you automatically accept a random credit card offer that comes to you in the mail. When shopping for a credit card, look for the following:

  • Low interest 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, 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.

Are you responsible for payments?
Whether or not you are legally responsible for payments depends on what type of user you are:

  • Authorized user. Authorized users have spending privileges, but the primary cardholder is responsible for the bill.

  • Co-signer/joint account. Both signers are equally responsible for payments, and the payment history will be evident on both signers’ credit reports.

  • Individual. The account holder is solely responsible for the bills, and the activity will be reported on that person’s credit report.

If you are under 18, you are not allowed to have a credit card unless you are emancipated. (However, you can be an authorized user on an adult’s card). If you are under 21, you must have verifiable income or a co-signer to get a credit card. Be especially conscious of making good on your debts if you are an authorized user or a co-signer. Someone trusted you enough to give you access to credit – don’t ruin it by running away from or forgetting about your obligations. Repairing trust can take longer than repairing credit damage.

Stay out of debt
Credit cards allow you to run up huge balances. Starter cards may begin with low limits, but it is not uncommon for creditors to increase the limits after a year or two of use. The increased availability of credit can make it very easy to “go crazy” and spend what you can’t pay back. It does not take long for a few purchases to add up to hundreds of dollars, then thousands. Remember, credit cards should be used to build your credit score, not to supplement your income. Never charge more than you can afford to repay by the time the bill rolls in. To avoid overspending, keep a record of all of the credit card purchases you make during the month. When you reach the limit of what you can afford to pay off, stop using the card until the next month.

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