Credit cards are a fantastic tool for building one’s credit and making shopping — particularly online shopping — more convenient and more secure.
However, credit cards come with significant risks. I should know — during my late college and post-college years, I racked up a lot of credit card debt that haunted me for many years and drained tens of thousands of dollars from my pocket.
Credit cards are like chainsaws; they’re incredibly efficient and useful tools, but they can also be incredibly dangerous.
As my own children approach the age where they may choose to have a credit card of their own, here are 10 key pieces of advice I’ll give them before they get their first credit card.
1. Never put anything on a credit card that you won’t be able to pay in full when the bill arrives.
If you are putting something you can’t actually afford on your credit card, you’re making your first mistake. Eventually, you will have to pay for that item, and when that bill comes around, it’s going to cut into your pool of money for next month. You may be buying something cool now, but you’re making things very tough on yourself next month.
Rather than using your credit card as a tool to buy things you can’t afford, just treat it as a convenience that helps keep your identity and bank account safe and also gives you some rewards.
I’ll repeat it again so that it’s clear: never put anything on a credit card that you won’t be able to pay in full when the bill arrives. If you don’t have that cash sitting in your checking account right now, don’t buy whatever it is you have in mind. Wait.
2. Pay your bill in full every month. If you can’t, stop using the card until the bill is fully paid off.
The consequence of putting too much on your card is that, when the bill comes in, you have to come up with that cash.
The best approach for keeping a credit card under control is to pay off the balance in full each month when the bill arrives. This keeps finance charges from accumulating on your bill, something you really don’t want.
If you’re buying things you can’t really afford, it’s going to be impossible to pay the full bill when it comes in, and that’s when the trouble begins.
If you ever find yourself in a situation where you can’t pay off the full bill, put the credit card down for a month or two and live off of your checking account until you have the card paid off in full. That way, your mistakes don’t compound on themselves.
3. Carrying a balance just means that the credit card companies are taking cash from your pocket and you get nothing in return.
When your bill arrives, the credit card company will certainly allow you to pay less than the full balance. You only have to make a minimum payment, which seems like a good deal at first glance.
Here’s the problem: they’re going to charge you interest on every cent that you don’t pay off, and that interest rate is high.
Let’s say you get an $800 credit card bill in the mail and the minimum payment is $28 (interest plus 1% of the balance). If you just make the minimum payment, that leaves $772 on the card. If you have an APR of 30% on the card, you just got dinged with (roughly) $20 in interest. Your balance just went up to $792. Yep, next month you still owe $792, even though you threw $28 at the card.
Not only that, you now have that $792 debt hanging over your head. Add more to it and the interest will grow, too, month after month. Minimum payments barely even scratch the balance, and that’s by design. Credit card issuers make real money off of you continually paying interest.
You get nothing out of it, too. All you got was the ability to make an impulsive purchase, one that you’re paying off for months or even years, and you’re paying a lot more than that initial cost, too.
How bad is it? If you have $800 on a card with a 30% APR and a minimum payment of the interest plus 1% of the balance, it will take you 113 months to pay it off and you will have paid a total of $1,261.04. Yep, $461 just vanished out of your pocket, for nothing.
4. If you keep the card paid off, the interest rate on a credit card doesn’t matter as much as the rewards.
If it’s not clear yet, the fundamental rule of credit cards is to never put anything on there that you can’t pay off in full when the bill arrives, and pay it off in full when the bill arrives. Doing anything else is a very costly mistake.
Let’s say you do follow that rule, though. If you do, don’t worry about the actual interest rate on the card, because it means little to you. Rather, focus on the rewards offered by using the card.
5. Choose a card that earns useful rewards at a high rate based on how you currently live, because a card should not change your spending habits.
You want a card that will generate rewards based on how you already currently spend. A good rewards card should not alter your spending in any way. Rather, it should reward you for what you already do.
Those rewards should be flexible and useful to you. Even if a card offers a nice rate of rewards, if those are rewards that aren’t convenient and useful for you to spend, they don’t really matter. In general, cards that offer direct cashback or offer direct discounts at the retailers you already use are the best options, particularly for new users who aren’t trying to game the system.
A good place to start is to look for a card that’s affiliated with a retailer you use frequently. Do you always buy gas at the same gas station? Consider its card, which often gives rewards in the form of cheaper gas. Do you always shop at the same grocery store chain? Consider its card. (In all cases, it should be a Visa or Mastercard that offers rewards in the form of reduced prices at that store, credit at that store that’s easy to use, or direct cashback, usually in the form of a lower bill.)
6. If you don’t pay your bills, there are real consequences that last.
What happens if you just don’t pay your credit card bill? They can’t simply come and repossess your stuff, but they can do a number of things.
First and foremost, you’ll wind up with some nasty marks on your credit report that will last for years. Not only will that make it much more difficult to get any kind of loan or credit card going forward, but it can also raise your insurance rates, make it harder to get an apartment, and even hurt you in a job search. All of those things are made much easier if you have good credit, and not paying your bill means that you have bad credit.
Not only that, they will hound you for years, and eventually turn the debt over to a collection agency, who will also hound you for years. You’ll get phone calls and letters using all kinds of strategies, some of them really nasty in tone, to get you to pay.
While it seems like an immediate solution to your problem to just throw the credit card bills in the trash, they don’t just disappear. The problem festers, and it builds into other consequences that can really hurt your career and other areas of your life.
Just stick to the advice above: pay off your card in full every month.
7. A credit card is not an emergency fund, and it will fail you in many types of emergencies.
There is a temptation to turn to your credit card when emergency strikes. There are a few problems with doing that.
First of all, if you use a credit card in an emergency, that bill is still going to arrive, and if you’ve paid for something that you can’t actually afford, you’re not going to be able to pay off the card. You’ll be carrying a balance, and the interest will keep devouring your money while you get nothing in return.
Second, there are a lot of emergencies where credit cards don’t help. Theft is one. Identity theft is another. What do you do in those emergencies?
Cash is king. You should strive to have a cash emergency fund sitting in a savings account at a bank where you can access it if you need it. Ideally, it’s at a bank that you can visit locally so that it’s easy to access no matter what happens.
8. Use your credit card bill as a tool to identify your worst spending choices, so you can correct them.
Your credit card bill isn’t just a downer. It’s also a useful tool for figuring out your worst spending decisions and also a way to check for identity theft.
Each month, when your credit card bill comes in, go through it, item by item. Take note of anything that seems wasteful. If you look at a purchase and it didn’t either cover something necessary or fill you with genuine lasting joy, it’s probably a wasteful expense.
Keep those wasteful expenses in mind. Turn them over in your head, again and again. Knowing that those things aren’t good uses of your money will help you cut back on things that don’t really matter.
Also, while you’re looking through your bill, look for expenses you don’t recognize. They can potentially be signs of identity theft, where someone has access to your credit card information and is making charges you didn’t approve of. If you find any, contact your credit card issuer immediately to get it fixed.
9. If you can’t get approved for your first card on your own, ask for a trusted person to co-sign with you, but you will damage their trust if you don’t keep the card paid down.
If you apply for a card and are declined, it’s not the end of the world. There are other routes to take that will help you get a card.
The first option is to look for someone who will co-sign on a card with you, probably a parent or another very close friend or relative. Their willingness to do that is a major extension of trust because by co-signing, they’re saying that they will pay for the balance on the card if you fail to or unable to do so, and you are hanging debt on them if you don’t take care of things yourself.
Another approach is to ask if they will add you to their current card as an authorized user. In that situation, they’ll likely just cut up the card that comes in your name, but it can provide a starting point and a small boost to your credit that will help down the road when you get your own card.
What if those aren’t options?
10. If you can’t get someone to co-sign, visit a credit union and look into a secured credit card.
Many financial institutions offer another option for people who really need to build credit in the form of a secured credit card.
A secured credit card is one in which you pay a certain amount upfront as a “deposit” of sorts on the card. As long as you use the card normally, it’s fine, and if you cancel the card after normal usage, you get that deposit back. However, if you stop paying the bill, they’ll use the deposit to pay it for you.
Because of that deposit, financial institutions will issue a card to someone who might not otherwise qualify for a card because of their bad or nonexistent credit. After all, they’re at reduced (or zero) risk of someone not paying their bill because of said deposit.
Credit cards are powerful tools if used correctly.
They can build your credit, make shopping easier and more secure, and give you rewards for your normal spending. However, they make it quite easy to start accumulating debt, which can haunt you for years.
Treat credit cards like a sharp knife or a chainsaw. They’re powerful tools, but if you don’t use them well, they can really hurt you.
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