Last time on the blog we took a look at a common question we saw pop up: ‘how long does it take to get a credit card, and that got us thinking. If folks are gunning to get a credit card as soon as possible, they might not be taking the necessary time they need to know exactly what it is they are getting into before taking on that line of credit. So, that leads us to the topic of this blog, credit card considerations We are going to take a look at some of the things you should know before getting your first credit card!
What Is a Credit Card and Why You Should Get One
While it may look just like a standard bank/debit card, a credit card has a different function. When you swipe a debit card at a store, the funds are pulled from your checking account immediately. If you have $100, swipe a debit card for $10, you are left with $90 afterwards.
A credit card however instead acts like an immediate loan. Instead of pulling the funds from your checking account, the total is paid from your card issuer with the understanding that you will then pay back the value, including any interest that may have accrued. To demonstrate again: you have $100 in your checking account, you swipe your credit card from Discover for $10, you still have your $100 but you now owe Discover that $10.
Why should you get a card if you are just going to have to pay it back? Because it allows you to build credit! The more you stay on top of paying of that ‘loan,’ the better loans you can get in the future to get approved for cars, apartments, or even a loan to buy a house! They also let you have more options with how you control your finances, and many cards come with great rewards or cash back offers to entice you.
Credit cards can be an incredible tool, we are not arguing that, but there are more thing to consider before you get one.
Understand How Interest Works
Interest is a huge factor in how a credit card can work for you! The finance wizards over at Nerdwallet have an excellent write up on how interest works so we’ll point you that direction for now. To keep it short and sweet, understand that interest is calculated daily, not annualy, and that a higher annual percentage rate (APR) means the more interest you will have to pay off if you aren’t keeping your card balanced at 0.
How a Credit Card Affects Your Credit Score
We mentioned getting a credit card as a means to help you build your credit score earlier, well here’s exactly how that works! We have talked about what makes a perfect credit score before, but to put it simply here, there are five major components of a credit score: payment history, debt burden, time in file, kinds of credit, and searches for new credit. Having a credit card can boost or hit each of these five factors. When you first apply for the card it will lower yours core slightly for a short length of time, but once you are using it the history of your payments, the amount of debt you keep on your card month to month, and the longer you have it open all increase your credit score over time.
Understand how that credit card interacts with your credit score is crucial in building better credit!
What Sort of Fees to Expect
Credit cards and fees go together like peanut butter and jelly unfortunately. However, if you’re smart about it, you can frequently avoid most of them! Here are some of the more common fees out there:
Annual Fee – Some cards will charge an annual fee to high-risk customers or on cards that have high-value rewards. If you have good credit, you can avoid an annual fee by making sure you get a card without one!
Late Payment Fee – Paying your credit card late is never where you want to be! If you don’t make a minimum payment on your card by its due date you can get hit with a late fee. Avoid this by always paying on time!
Over-the-limit Fee – Anyone who has overdrafted their bank account knows the sting of this! If your card balance exceeds your credit limit you may get slammed with a fee. The Credit CARD Act of 2009 makes it so you have to opt in for this kind of service so if you want to avoid ever having that hit, you can make sure you don’t opt-in.
So long as you play it smart, having a credit card can be an incredibly useful tool to managing and securing your financial wellbeing. Another great tool is Credit Rent Boost! With us you can get your monthly, on time rent payments reported to the major credit bureaus to reflect on your credit report! Want to see how it works and how Credit Rent Boost can help you? Give us a call, or enroll now and see your score start rising today!