Credit Cards: Some Important Life Advice from an Experienced Card Holder

Hello friends, this is steelmatt6 here with another blog entry. This might seem like a boring topic to most of you, but before I began, I assure you it is very important. We have all heard about credit cards, regardless of what age you might be. Credit Cards are those amazing pieces of plastic you can buy almost anything with, and you just pay it off at the end of the month, right? Well, even to the most financially responsible individual, at some point in our lives the following phrase will apply: "If you use it, you'll abuse it...at some point or another". So I am going to take my own personal experience with credit cards (I am 22, but have owned them since I was 16) and share my experience with you, and hopefully it will give you a good starting foundation if you are not into the credit card game yet!

_________________________________________________________________________________

First lesson: USE CASH! (Also the same as DEBIT). My first impression when I was younger was that in order to build up my credit card history, I needed a credit card as soon as possible. First off, a little background information:

"Building your credit" is another term for building your credit score. Your credit score (based off of your credit history) has a maximum score of 850. There are three companies that monitor and set your credit score. They are: Experian, Trans Union, and Equifax. Basically, a score above 700 is classified as "ok". If you are between 750-800 that is great, and anything above 800 is excellent. The score tells lenders how risky you are in managing your money. For example, if you don't have a good score (lets say it is 650) it doesn't really mean you are going to be denied loans, a mortgage, etc. but you will be subject to paying a higher interest rate. Most companies use APR (Annual Percentage Rate) as their calculation for interest rates. A person with a 650 score may have a 25% APR card (which is outrageous) because they see you as a greater risk, and they charge a higher fee to compensate for that risk. But, a person with a 750 may have a 13% APR on their card. The person with a 750 is seen as less risky, so they charge you lesser fees (interest) for borrowing money. However, if you obtain a credit card and pay off your FULL balance monthly, you will not build up any interest...but I assure you, the temptation to go beyond your financial means gets very high. Even if you tell yourself you will pay off your balance monthly, you need to do everything in your power to uphold that promise to yourself. It is VERY easy to get into a tough situation when you get too close to your credit line (or line of credit). That brings us to some more background information!

Your credit line is the maximum borrowing limit a company sets on your account. For example, lets use a fake company called Quick Bits (see what I did there as our example. Lets say you are a student and you want to apply for your very first credit card. You get an application from Quick Bits. Quick Bits recognizes that you don't have a credit history, so they give you a student account and set your limit to $250 USD. If you make your monthly payments on time (and stay below 50% of your credit usage--so don't let your balance go over $125) they will most likely extend your credit to $500. If you pay off your balance on time the next year, and don't let your balance go over $250, they may extend your credit to $1000 and so on and so forth. So, now you have a basic understanding of a credit line. But please keep the following statement in mind:

YOUR CREDIT SCORE IS THE SAME THING AS A DEBT SCORE

Using credit can tell lenders you have to have some line of credit in order to afford your purchases, and it is essentially a debt score (they use the term "credit" to make it more appealing IMO). My best advice to you would be NOT to get a credit card. Use cash and your debit card, maybe a check every now and then (when are they going to phase those out! lol). But here is the problem:

You can't get an auto loan or a mortgage, or any loan for that matter without a credit score. For the most part, you can't get a credit score without building up your history with a credit card. And believe me, it takes a good while to build up your history. Sooner or later, you need a credit card...it's just how the system works. I wish it were different. So, because most of you will need a credit card someday (even for those who already have one) here is some advice:

1. DO YOUR RESEARCH! Also, ask your parents/co-workers/friends for advice.

Just because a company claims to be the best for what you need, doesn't mean they are. You should do your own research on credit card companies.

2. GET A GOOD APR

Anything above a 15% APR (even for new students/young card holders) is absurd. Don't let them twist your thinking into thinking a 20% APR is normal...its, in fact, almost criminal! There are cards out there where you can get an APR for under 10%. 13.99% is pretty common.

3. PAY OF YOUR FULL BALANCE MONTHLY!

This is an exception to rule 2. If you pay off your balance monthly, you don't need to worry about being charged interest. But still, GET A GOOD APR! Trust me. Sometimes, there are points in life where you will incur some interest.

4. DON'T ACCEPT ANNUAL FEES

ALWAYS avoid companies that may not charge interest, but charge an annual fee. If you are older, then the annual fee (and no interest) will be better because you are constantly making larger purchasers. But no matter what age you are, if you find a company the charges an APR AND an annual fee, fire them or don't even consider it.

5. WATCH OUT FOR THEIR TRICKS

The single best tactic for companies to lure you in is to claim they have a great rewards program. If they do, you still want an APR below 15% (below 12% at best). Sometimes, they will try to "trick" you and tell you "0% introductory APR for 12 months!" That means you don't pay interest for one year, even if you keep a running balance. Most companies that say this have an APR of 20% or higher. (From what I have seen)

6. WATCH FLUCTUATING INTEREST RATES

APR's are variable. You want to make sure that, just because you get a good APR, make sure they don't state in the fine print "variable APR 11.99-23.99% based on your credit worthiness". Most likely, you are new to credit cards, and they may claim your worthiness to be risky, charging you a high interest rate. You want to make sure you get what you want. Not what they tell you you should have.

7. DON'T GO OVER 50% of YOUR CREDIT LINE

Going over 50% of your credit line on your balance tells lenders you are more likely to max out your card. Staying below 50% (ideally, 25% and under) not only protects you from debt, it raises your credit score and tells lenders you can be responsible with your money and discipline yourself financially.

8. USE YOUR DEBIT CARD MOST OFTEN

Use your debit card! You still want to use your credit card to build credit, but use your debit card for the majority of your transactions both in quantity and cash. If you need new tires that are $500, and you want to put it on your credit card...make sure you already have $500 on hand to pay at any time, and don't use if for anything else but to pay that $500 at the end of the month. Basically, anything you put on your credit card, you want to make sure you can already pay with Debit. This makes it kind of like using a hybrid debit card...because technically, you are not using "credit" or debt per-say, but you are still building your credit history by manipulating the system so to speak In conclusion to number 8, work smarter not harder.

9. MAKE FREQUENT MONTHLY PAYMENTS

Instead of paying off a monthly balance (and remember to pay it in full!) you might want to make 2-3 full payments each month. This will protect you from debt, keep your check book balanced, and tell lenders you make frequent payments on time. In the long run, this can raise your credit score.

*****10. ***** The golden rule. DON'T GET ONE IF YOU DON'T NEED ONE!

If you do not plan on getting a loan anytime soon (car loan, personal loan, etc., mortgage) then don't even get a credit card. Use cash and debit. Remember, all your credit score is, is a debt score. Sure, you can't get loans without a credit score...all I am saying is, if you don't need to build up your credit score anytime soon, don't get one.

I hope this advice helps some of you. There is so much more to discuss, but I just wanted to cover the basics. All the information above came from my personal experience. I don't want you to be in debt like I have been!

The Single BEST advice I can give each of you, is to start your 401K early, and keep building up your savings account. When you put money in your savings account, (especially if you start young) avoid the temptation of taking it back out again. Keep growing your savings! You will thank yourself in the future!

**If you need me to elaborate on anything, send me a message!

-Steelmatt6