Things You Need to Know About Credit Cards
Most people make at least one financial mistake in life, whether it’s buying a brand-new car just out of their budget without comparing prices or over-using that first credit card. One thing parents should make sure they do is teach their kids responsible money habits since this is not something taught in schools. Unfortunately, many kids grow into adults who never learned much about finances. They know to get a job to earn money, they’ve heard of a budget, but they’re not entirely certain how to live life with financial freedom. They’re taught credit cards are dangerous, but no one tells them it’s not credit cards that rack up debt. It’s the people who use them. Before you know it, you’re in debt and learning the hard way how credit cards work. Here’s a list of things you should know about credit cards before you begin using them.
14 Things You Might Not Know About Credit Cards
1. No credit is almost as bad as bad credit.
If you have no credit card or other financing to your name, you might have no credit. No credit history is just as dangerous as bad credit history because creditors can’t tell if you’re a responsible borrower or not. You might find your first credit card is a secured card, and there is nothing wrong with that. A secured card is one you get from a bank by putting money down as a deposit. They keep your money and send you a card with a credit line equal to your deposit. You spend money, pay it off each month, and the lender eventually sends you your deposit back and changes your card over to an unsecured card. It’s a great way to develop a positive credit history.
2. Not all credit cards are the same.
Not all cards are the same. Some offer cash back, some offer airline rewards, some are for good credit, and some are for bad credit. Not all cards are the same, and not all cards work the same. There are charge cards and credit cards. If you have a charge card you can charge what you want to it each month, but you must pay the balance in full each month. If you have a credit card, you’re only required to pay the minimum balance due.
3. Never cancel your first card.
Many people have no idea the most important aspect of their credit is that very first credit card. It’s usually the first thing people have to establish credit, and you must keep it. When you go canceling old cards, you limit your credit history. This makes it appear you have a much shorter credit history, which can make your credit score drop. Age of accounts makes up 15% of your overall credit score.
4. You shouldn’t open credit cards everywhere you go.
It’s so tempting to walk into a store on Black Friday and open a store credit card account at each one. They’re all offering such good deals already, and now you can save an additional 10% or 30% on your entire purchase by opening a card. It’s tempting, but it’s dangerous. It won’t hurt to do this once in a while, but several inquiries on your credit report in one day or within a few weeks makes it look like you’re searching for credit, and your score drops a few points each time you apply for a new card.
5. You should pay your credit cards in full each month.
Many people are taught they can buy things they can’t afford with a credit card and make small payments to their creditor each month until it’s paid off, but it’s a mistake. There are so many reasons why you shouldn’t do this. This is a bad credit card habit because if you leave anything on your card, you pay interest. It’s not cheap with a credit card, either. There is no collateral for companies to use to feel confident you’ll pay them back, so they raise rates much higher. It can cost you thousands of extra dollars to pay off a card if you only pay the minimum payment.
6. Your credit utilization matters most.
Nothing else matters as much as your credit utilization. You can have two people with two cards. One has a credit card with a $1,000 limit and $800 in revolving balances. The other has a credit card with a $10,000 limit and $1,000 in revolving credit. It seems that the person with the bigger balance is less responsible, but it’s the person with the higher utilization. The first person is utilizing 80% of his available credit, and the other is only utilizing 10% of his available credit. Your credit score is determined largely on the amount of available credit versus the amount you utilize. Having a lot of credit isn’t a bad thing if it’s not being utilized.
7. Cash advances are expensive.
If you don’t need cash from your credit card, don’t get it. It’s expensive to take credit card advances at the ATM. Use your debit card for this job, and don’t take out cash if you can help it. The rates are so high you’ll pay them off for years sending only the minimum payment.
8. Get a cash back card.
If you apply for a credit card, make it a cash back card. You earn money for every dollar you spend, and that’s a nice payday for those spending a lot of money. If you pay your mortgage, your utilities, and your other expenses, you earn much more cash back on the things you buy regularly. It’s getting paid to live your life the way you always live it, which is a nice feeling.
9. Don’t forget about your credit report.
Now that you have a credit card, you must make it a priority to check your Credit Reports. This is a report showing all the money you borrow from lenders, where it’s going, how much you use, and how much you owe. It shows all your payments and whether they’re on time or late, and it shows creditors how trustworthy you are with a credit card and other forms of lending. If you are good with your money, you can buy a house or finance a card. If you’re not good with your money, you won’t find a bank that’s willing to offer you any money or a credit card.
10. Some things matter more than others on your credit report.
If there is one thing you should know about your credit cards and your report, it’s that not everything matters as much as other things. For instance, you will find that making one late payment probably isn’t even going to show up on your credit report or affect your score. You’ll also find that using all your available credit on one card has a significant negative impact on your score. Get to know what’s important and what’s not, and then figure out how you want to proceed with your credit.
11. Credit score ranges from 300 to 800.
There is no right or wrong credit score, but there is a range in which you want to be. Scores range from 300 to 850 with credit bureaus, but that doesn’t mean your score is the same across the board. One credit bureau might have your score listed as 689, which is good with one bureau and only fair with another. The ranges and the differences with each bureau sometimes make it difficult to understand where your score actually falls.
12. All credit bureaus give you a different score.
No two scores are the same, as mentioned above. You have a different credit score with each bureau, and each one means something entirely different. Your FICO score might change from company to company, and you never know which company a creditor uses to find your score.
13. You should always check your credit.
Never forgo checking your credit. Just because you make on-time payments and you’ve never been late or missed a bill payment in your life doesn’t mean you get to forgo checking your report. In fact, you should check it regardless. There could be mistakes on your report, there could be an account that’s too old to be on your report, or one with an incorrect credit utilization rate listed. Always check your report. CreditScore360 is one company that offers this service.
14. You get free credit reports every year.
You might think you need to pay for your credit report, but you don’t. There are three reports available to you each year from the three major bureaus. If you want to make a habit of checking your report for mistakes and inaccurate reporting, make a schedule. Get one free report from one credit bureau every four months. It’s just enough time to see if there are additional mistakes anywhere on your credit report before too much time passes.
These 14 things is all you need to know about credit cards. Your credit card is a useful tool, and it’s nowhere near as dangerous as many people believe. It’s only dangerous if you don’t use your card wisely. The best way to build a healthy credit card relationship is through respect. You use it when you need it, pay it off when your bill is due, and continue to do this for the rest of your life. If you live within your means and forgo carrying balances, you live financially free. Don’t let credit cards own you when you clearly own them. Use it right, and you will spend the rest of your life enjoying yourself with a healthy financial relationship and a good credit report.
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