There are some very important facts about credit cards that we need to go over before you apply for a new card or ever use your card again. This information will save you a boatload of money in your lifetime (especially the next few years).
What’s the life saving info that you need to know about credit cards as a young person?
A credit card is essentially a free short-term loan for those that pay off their monthly balance on time.
Whether you don’t have the money at the time or you just don’t want to pay for it for whatever reason, a credit card can relieve you as a short-term loan. If you pay off your balance on time every single month, you’ll be receiving a free short-term loan from the credit card company. This is how smart people (YOU) do it and see it.
Quick thought: Unfortunately, this is usually not the case. A credit card ends up being viewed as a source of “free money.” This inevitably gets many 20-somethings into major debt. Yikes. We’ll get into this later on. How do you view your credit card right now?
You can’t stress about the credit card horror stories.
There are many horror stories out there about credit cards causing massive debt and headaches. We all know about how someone got a credit card at 18 and then claimed bankruptcy at 22 because they racked up so much debt and couldn’t pay it off. We also all know someone that owes $20,000 or some absurd number on their credit card balance. This doesn’t have to happen to you.
There will be many negative stories about credit cards. You can’t let them discourage you. You especially can’t let these stories scare you. There’s no guarantee that holding a credit card in your wallet will put you into debt. You have the knowledge and ability to implement systems to be much smarter than that. You can do great things for your financial future with that piece of plastic.
You don’t have to pay interest all of the time with a credit card.
I’m not sure how this myth got started. You only pay interest when you miss a payment or don’t pay off your balance in full. You usually get about a month from the time of purchase until you have to pay the money back. The payment period all depends on your credit card cycle and when your balance comes due.
The reason that I even brought this up is because I’ve heard first hand from college students that are worried about getting a credit card because they feel that they have to automatically pay interest on all purchases. This is not true.
As long as you make your payments on time, everything will be cool. The key is obviously to ALWAYS pay off your balance.
You’ll get your short-term interest free loan from the credit card company as long as you pay it off when the bill shows up in the mail. I do this all the time. I put my major purchases (my flat screen—oh yaa) on my credit card. I even do this when I have the money in my checking account. When the bill comes, I transfer the money over from my checking account. I slowly improve my credit score and I get into the habit of being a savvy credit card user (take that credit card companies!).
Quick thought: Do you know how you can build your credit score with your card? We’ll get into this soon so don’t go running away.
Credit cards are a great way to track your spending.
If you have the money waiting on standby in your checking out to transfer over, you can use your credit card for your purchases. Then at the end of the month, you can check your balance online or the one you receive in the mail to see where your money went.
When I wasn’t sure where my money was going, I used this strategy for a month to see exactly how I spent my money and where it went. Most places accept credit cards (well most legit places). You can use your credit card to pay for everything. Then when you check your statement you might be surprised to see how much money you spent on something like food or new clothes that were “on sale.”
Tracking your spending with your credit card will help you identify your problem areas. Once you find out what your financial leaks are you can begin working on improving them. It’s easier to start saving money on your main problem areas then it is to decide to save money on everything. Saving on every area at the same time just doesn’t work. It’s the equivalent of beginning a new workout program and trying to cut out all junk food at once. Not going to happen.
Finding your problem areas is a great way for how a credit card can be used to your advantage if you’re looking to tighten up your finances. For more on saving money you know where to go (Studenomics.com).
Credit cards offer much more protection.
Credit cards offer extra protection for your purchases that you simply won’t get with cash. You can either get an automatic extended warranty for up to a year or automatic insurance coverage on a car rental. This means that you don’t have to buy any of the BS plans that some sales person on commission is trying to sell you on at the electronics store.
There’s even more protection from credit cards. When you go away for a trip and your credit cards gets stolen or used by someone else, you’ll be protected. You have to call your credit card company and put the claim in. Your money will be returned once the investigation concludes.
If you have any money stolen from you out of your pocket, you’re usually out of luck. You’ll never see this money again, unless you have the best insurance provider in the world. If someone falsely uses your credit card, you can have your money returned. Hopefully this never happens to you. It’s just good to know that you won’t be totally screwed if it does happen.
I also took some time to look around for other hidden credit card perks that we may not know about. I was able to find an interesting list of some additional credit card benefits on Forbes:
1. Car Rental Loss/Damage Insurance
2. Extended Warranties
3. Purchase Protection
4. Security from Unauthorized Purchases
5. Travel Accident Insurance
6. Trip Cancellation Insurance
7. Lost Luggage Insurance
8. Travel Emergency Assistance
9. Emergency Assistance
10. Roadside Assistance
My only suggestion for using the protection that comes with credit cards is that you ask in advance to be totally positive what your specific credit card offers.
Credit cards can help you build your credit score.
I obtained a mortgage in my early-20s because I was able to build my credit score over the years by using a credit card. A credit card is the fastest way to use credit. It’s also the quickest way to get access to credit. If you pay off your balance every month, use your card for large purchases, increase your limit, and repeat this process for an extended period of time, you’ll build a solid credit score when the time comes to go shopping for a home mortgage.
How does a credit card help you build your credit score? First we need to see what makes up your credit score:
- Payment History – 35%
- Total Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Type of Credit in Use – 10%
If you take a quick look at this breakdown you’ll understand how important it is to make your payments on time for an extended period of time. You’ll also see how a credit card can affect literally every area of your credit score.
Quick thought: Do you believe that the piece of plastic in your wallet can affect the interest rate that you pay for your home mortgage in the future?