Credit cards are a good way for young people with few assets to build reasonable credit scores. They have plenty of benefits, but if they are not used responsibly, credit cards can turn ugly.
Credit card bills can be a scary, overwhelming territory at first, and I put off applying for a credit card for a few years. If I remember anything from 10th grade U.S. history, it was my teacher's piece of advice on credit cards. He told the story of when he went on a shopping spree with his girlfriend soon after getting his first credit card. He spent way more than he could afford to pay back and got himself into a financial mess. His advice to us was to only use a credit card for small purchases like gas or a snack at the convenience store.
Was it really that simple? After doing some research, I started to realize that yes, credit cards are easy to use when the benefits and drawbacks are well-understood.
I follow two rules when using a credit card. The first rule: Do not spend more than you can afford (no shopping sprees!). Don’t spend money you don’t have --- that’s how you end up with a mountain of consumer debt with high interest rates. The second rule: Always pay the balance in full and on time.
There are three ways to pay your credit card bill. Let’s dive into each of them.
Paying the Minimum Due:
As you're looking at your online bank account, you might see that there are different charges. It will show an option to pay your full balance, say $43. Another charge, called the minimum payment, will give you the option to pay back a small amount now and the rest later. The minimum payment is between 1% and 3% of the total balance due. To avoid paying interest charges, always pay the full balance. The minimum payment option can seem like the issuer is letting you get off the hook for now, but really, that small amount will build up over time and the total payment of $43 will start to cost into the hundreds, leaving you to pay back that "small" debt for months or even years.
The credit card companies make money off people who pay the minimum payment, because the remaining balance collects interest and the total balance becomes ridiculously expensive. The quickest way to put yourself in debt is to only pay the minimum due. Credit card companies trick you into thinking that minimum payments are acceptable, but they're keeping you just a hair away from missing a payment or not being able to afford your full balance due.
Paying More than the Minimum Due:
If you're having trouble paying the balance in full, then paying more than the minimum due is the next option, but this should not become a habit; like paying only the minimum payment, this is a doorway into financial hardship. Paying less than the full balance should only be considered when this is the only option left to keep your card in good standing.
Paying In Full:
The best way to pay a credit card is also the easiest method to explain. Pay everything back (this will usually take place all right online). By paying your balance in full every month, you will always be safe from credit card debt and high interest charges. You will save lots of money in the long run (no interests, no fees, no debt) while building up a high credit score.
I always create a calendar event on Google Calendar and set up alert notifications in my card’s online account to remind myself of the due date. Alert notifications from your credit card company will also catch scammers because the bank will inform you of every purchase that is made through your card. The first time that I made a purchase with my credit card, I thought that I had to pay it back right away on the same day or within the same week. I later found out that the actual bill statement won't roll in until a few weeks later. You won't have to worry about paying the credit card company back until the monthly statement comes in. This is why it is important to make note of that due date.
Do not make purchases that are over 30% of your credit limit. Keeping yourself to the 30% limit tells the credit card company that you have good self-disciple. This is called a low utilization ratio and will greatly benefit your credit score. Credit card companies may increase your credit limit over time, but don’t be tempted to spend more than you should. I find that allowing myself to use no more than 30% of the credit limit keeps me from going overboard with purchases.
All the worries and fears that I have had about owning a credit card have dissipated with research and experience. If you are feeling anxious and afraid to use a credit card, remember: always pay your balance in full and on time. This will make using a credit card a breeze.
All the best!
Photo credit: Tyrone
Teenagers With Experience is an organisation created to provide teenagers worldwide with an online platform to share their own experiences to be able to help, inform and educate others on a variety of different topics. We aim to provide a safe space to all young people. You can contact us via email, social media or our contact form found on our home page.