Having your own credit card may seem like a passport to adulthood, but it can also be a one-way ticket to a life of debt. Using credit as a tool instead of a crutch is not as simple as plopping your plastic down on the counter when making a purchase. It's critical to have a thorough understanding of the complexities of using credit cards so you can make smart decisions that will save you from painful mistakes and protect you from becoming a victim of identity theft. Like anything else, the best way to gain that understanding is to research, read, and educate yourself.
Understand How Credit Works
- It's important to understand credit reports, which contain information about where you work and live, whether you pay your bills on time, and whether you've been sued, arrested, or have filed for bankruptcy. The three major credit bureaus--Equifax, Experian, and TransUnion--gather this information from your creditors and sell it to lenders, employers, insurers, and other businesses. Develop an understanding of how credit scores work by reading the explanation at www.myfico.com.
- Every financial transaction you make could potentially be reported to a credit bureau and find its way onto your credit report. Do everything in your power to prevent black marks that will cost you money. Insurance companies use your credit report to price your insurance premiums; credit card companies, mortgage companies, and other lenders use your credit report to decide whether to lend you money and at what interest rate; landlords use your credit report to decide whether to rent to you; utilities and others use your credit report to decide whether to require a large deposit; and employers use your credit report to decide whether to offer you a job. You get the idea.
- The Fair Isaac Corporation (FICO) develops your credit, or FICO score, a computer-generated number that is based on all the information in your credit report. This score will determine how much of a credit risk you are. Developing and maintaining a healthy credit score should be one of your top priorities because it will affect every aspect of your financial life.
- The most important feature of a credit card is the Annual Percentage Rate (APR), which is the interest rate you'd pay on your balance in a twelve-month period. This rate is actually divided by twelve and the resulting rate is applied to your balance each month. If you carry a balance on your card, it's much more important to shop for the card with the best APR than to get perks like frequent flyer miles.
- Don't fall for the common misconception that you always have a twenty-five-day grace period before you incur interest on your credit card balance. The grace period applies only when you pay your bill off totally and have a zero balance. When you don't pay off the balance every month, you incur interest starting on the day you charge the item to your credit card. Some cards have no grace period even if you pay the balance in full each month.
- Research the best credit card deals online at a site like www.bankrate.com. You can compare interest rates, grace periods, perks, and annual fees and find the best credit card deals in the country with a few clicks of your mouse. Getting a good credit card deal could save you lots of money over the years.