Why is Using a Credit Card Like Taking Out a Loan?
The credit card company pays the merchant for the amount of your purchase, and then you pay the credit card company. If you don't pay your bill in full, the credit card company charges you interest, which is the cost of taking out a loan. A good rule of thumb: Think twice before you swipe and ask yourself "Do I really need that right now?"
- Using a credit card is a convenient way to spend money. You don't have to carry a lot of cash to make a purchase. Using a credit card allows you to stretch out your payment over time if you need to. However, to avoid additional cost, it is always recommended to pay off your credit card bill every month. At the very least, you want to make more than the minimum payment to pay it off as quickly as possible.
- If you have an emergency, such as a car repair or a medical bill, using a credit card may help you get past the crisis.
- Responsible use helps build a good credit history, which is important to future credit. When a creditor or lender can see that you have been responsible with your money, they are less likely to be concerned about risk if they grant you more credit, which will result in better terms.
- The biggest mistake people make with a credit card is thinking they can make a purchase without having any money. Having a $1,000 credit limit doesn't mean $1,000 in additional income. Since using a credit card is like taking out a loan, you must have a way to pay the loan back. It's natural to want to buy things, but it's important to be aware of the mounting debt and long-term cost.
- While it's good to have a credit card in case of an emergency, emergencies don't happen at the mall! If you find a great sale and charge the item on your credit card, but don't pay off the bill right away, you might end up paying more than the non-sale price because of the interest you're paying.
- The best advice is: If you don't have the money, don't buy on credit.
I Don't Have a Credit Card and I Want to Start Building a Credit History. Where Do I Start?
New credit card rules require students under age 21 to use a co-signer. Talk to your parents or others who may allow you to become an authorized user on their account. As an authorized user, a credit card is issued in your name but attached to their account to help you start building a history. Another option may be to open a secured credit card by opening a separate savings account to be used as collateral. Check with your personal bank to see if there are student credit card options. Another option is in-store financing, such as "90 days same as cash" where no interest is charged.
It's great to plan ahead. A credit card payment calculator shows the monthly payments you would make over a period of time and the amount of interest you will pay over the payment period. Then, you can determine if you can really afford the purchase or if you need to look at other options.
For example, how about a spring break trip to a Florida beach? You do your homework and come up with a cost of $1,500 for airfare, hotel, meals and entertainment. By using the credit card calculator, you'll see the minimum payment is $30 per month and may think that sounds pretty good. Wait! At 18% interest, it will take 15 years to pay off the trip with a total of $2,363 in interest. The total cost of the trip is $3,863. Will you need to do more homework before you make a final decision?
A debit card looks like a credit card and is accepted almost everywhere, but it does not build a credit history because it's a cash transaction linked to your checking or savings account. It's very important to have sufficient funds in the bank or risk the transaction being denied and the possibility of expensive overdraft fees being assessed to you.
Tips to Help You Be Successful:
- Shop around for the best credit card terms. Read and understand the terms of the agreement. There are many fees to be aware of such as an annual fee, late payment fee, over-the-limit fee, balance transfer fee and cash transaction fee. Be aware of the introductory interest rate and the purchase interest rate after the introductory period.
- Set a limit in your monthly budget for what you can pay off every month. If you carry a balance, the credit card company will set a low minimum payment (so they can charge you interest), but pay as much as you can to pay it off as quickly as you can.
- Always pay your credit card bill promptly. Not only will a late payment be a negative hit on your credit report, you will incur expensive late fees.
- Keep copies of your receipts to compare charges on your statement. If they are not correct, contact the credit card company immediately.
- Order copies of your credit reports to ensure accuracy of information.
- Be accountable for your actions. If you are an impulsive shopper, take someone with you to help you stay in line.