Credit Card Basics

So you have a job (or some form of steady income), you’re a legal adult, and you want to start becoming more financially responsible. For many, the next step is getting a credit card (and learning some credit card basics.)

No matter how ready you think you are to take on that responsibility, it’s important to make sure you really know everything there is to know about credit.

What is a Credit Card?

In its most simple form, a credit card allows you to buy items or services with money that does not actually belong to you. This money (or credit) must eventually be repaid.

The agreement between a money borrower and the lender (usually a bank) varies depending on the type of card, but the bare bones of the contract stipulate that the borrower (you) must pay back the lender (the bank) within the already agreed upon timeframe.

Failure to do so results in interest being tacked on to your next bill (meaning you end up paying back more than you actually borrowed to begin with.)

How Does it Work?

As long as you can prove that you’ll be able to pay the money back and that you are financially stable, most banks are willing to approve you for a credit card. Whether you apply online or in-branch, the process is nearly identical. You must show that you are financially responsible, that you do have the means to pay off your debt, and that you do not have any previous strikes against you that would tarnish your record (fraud, bankruptcy, foreclosure, etc).

There are a wide selection of cards available based on your needs, and it is absolutely necessary that you do your research and find the one that suits you best before applying. Some cards come with an annual or monthly fee and some are free (though they tend to have higher interest rates).

Some cards offer perks like travel reward miles or annual cash back savings, and others offer perks like free movies and discounts at the movie theatre.

Regardless of the card you choose, you must pay be able to afford  the minimum payment laid out in your agreement each month and you cannot spend above your credit limit.

So What is Interest?

Interest is a certain percentage of the amount owed on your card that is added on top of your bill and goes directly to the bank.

You always have an interest free grace period between when the bill is issued and when the payment is due. The length of the grace period varies by bank. Do your research and compare rates before committing to a card.

Why Should I Have One?

While credit cards have many perks, they can also be an incredible burden if misused. Only people who feel completely confident in their ability to pay off their bills on time and who know that they will not spend more they can afford (no matter how tempting it may be) should get a credit card.

If it doesn’t feel right, don’t do it. The potential financial devastation that could result from an abused credit card isn’t worth it.

Ultimately, the onus is on you to educate yourself and learn to establish good habits as early on as possible. Never go over 75% of your credit card limit, don’t spend more than you can pay off, and always make sure to pay as much of your bill as you can to avoid increased additional fees due to added Interest.

Remember, having a credit card isn’t a right, it’s a privilege.

If you do decide to move forward with your credit card application, it can be an excellent way to start building towards any future loans or investments you might need. A responsible credit card user will establish a good credit score, meaning you’re more likely to be approved by banks for a mortgage, line of credit, or auto loan down the road.

Think of your credit score like a school transcript; if you get straight A’s during high school, you’re much more likely to be accepted by the university of your choice then if you scraped by for four years doing the bare minimum.

Essentially, the better your credit rating, the better you look to banks and other financial institutions across the board.