That new financial tool in your wallet has the potential to change your life, but whether that’s for the better or the worse depends on how you use it. Used wisely, a credit card offers a healthy dose of financial liberation, but used recklessly, it can let you fall into debt.
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It’s best to think of your first credit card not as a packet of extra spending power in your pocket, but as a tool to responsibly use in order to build a healthy credit history that will serve you later in life. When it comes time to buy a car or a home, a solid credit history can help you save on interest charges and fees. Here are some valuable credit card tips for beginners:
Credit Cards Are Not Free
Rest assured, the financial industry is not in the business of credit cards to hand out free loans all the time. But if you use credit cards carefully, you can avoid extra costs and enjoy the convenience and benefits credit cards offer.
There are plenty of cards available that come with no annual fee, and if you pay your entire balance on time by the due date every month, you will avoid paying late charges and interest on purchases. This is the single most important thing to remember about your first credit card.
Nevertheless, it may be worthwhile to have a credit card that does carry an annual fee if the card offers rewards you’ll use. As always, the important thing is to be aware of what you’re paying and what you’re getting in return.
What Happens If You Carry a Balance
Credit cards become expensive when you do not pay your balance in full and on time each month. This is where interest rate charges — sometimes exceeding 20% — kick in, and where little debts start to become one big debt.
To build a solid credit history, it’s best to use less than 30% of your available credit at any given time.
It’s important to understand your card terms and Annual Percentage Rate (APR), which decide how much interest you pay. And, if you are late with any payment, you may incur costly fees.
What Happens If You Max Out Your Card
Never use all of your available credit. Credit scoring models may penalize you for this. To build a solid credit history, it’s best to use a much lower amount of your available credit at any given time. Also, if you go over your credit limit, you may incur hefty charges.
How to Build a Healthy Credit Profile
Your goal with your very first credit card should be to build a solid credit history that will serve you for life. To do that, here’s what you need to know:
- Understand all the terms of your card and any new cards for which you may apply. Make sure you know when your payment is due, as well as the interest rates, the fees and the events that may trigger them.
- Expect that terms will vary. Interest rates and fees on cash advances will typically be more than what’s charged on purchases. Also, if you’ve been given a low introductory interest rate, or encouraged to move a balance from another card, know when the time on these introductory periods expire.
- Always, always, pay your bill on time. You’ll incur fees if you don’t, and quite likely damage your credit score.
- Pay your bill in full when you can. You’ll avoid interest charges on purchases if you pay the full balance by the payment due date each month, and you may even help your credit score.
- Have a budget. Know how much you spend each month by creating a budget and getting into the habit of adjusting your spending so your bills do not exceed your income.
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If you are in consideration for a credit card, use these credit card tips for beginners to help determine what card to apply for and how to use it responsibly.