Matt’s Note: Like Tim, I’m a proponent of saving money and delaying purchases… but I also believe credit cards can and should be avoided altogether.
It is no secret that all credit card companies just love new customers. Why? People love to spend money that they don’t own…so plastic cards fill that need!
Card companies like MasterCard and Visa are in the business of making money and who better to fleece than the unsuspecting novice. They know that once you’ve accepted their offer, you most likely will spend more than you originally thought…and those that get approved for higher credit limits than they applied for will, sooner or later, use that higher credit limit option.
This article will focus on the areas you should learn about when get your first credit card.
Know Your Purpose For Using Your New Credit Card
First-time users must know the three uses of credit, listed here from worst to best.
- Worst – to purchase perishables, such as meals, gas, groceries, airline tickets
- Better – to purchase depreciable assets, such as automobiles, furniture, clothes
- Best – to purchase appreciable assets, such as mutual funds, a home, or other investments
The Best Uses of Your New Credit Card
Charging perishables to your credit card is the least desirable and most misused form of credit. Payments linger long after the food, goods or services are used. If you must use your credit card for this purpose, always try to pay off these credit card perishable purchases at the end of every month and not incur any interest charges at all.
Depreciable purchases include goods and services that will never again be worth what you paid for them. A better use of your credit card, yes, but stacking up long term payments will eventually bury you. If possible, pay off at the end of the month or make the maximum possible dollar payments within a minimum amount of time.
Thirdly, the best use of credit cards is taking out a line of credit at a low rate of interest and investing that money in an appreciable asset with a higher rate of return. Ironically, most do not use their credit card limit for this purpose, thinking they need to apply for a bank loan. Smart first time credit card users do learn this strategy as it will reap lifelong financial rewards.
Where to Get Your First Credit Card
Instead of a traditional credit card, it might be best for a first time credit card owner to obtain a bank-issued credit card. This not only further establishes a relationship with your present banking institution, but these cards tend to be more reputable. In addition, the banks may also give you the option of linking your savings and checking account with your credit card account.
You may then use your bank credit card for automatic monthly utility and other bill payments.
You may also apply for a bank debit card. This really forces self-discipline because in essence you are in reality debiting your bank account balance every time you incur a charge, so there is never a question of being charged interest nor any danger of you exceeding your cash balance.
Know How Your Credit Card Company Charges You Interest
Since first-time credit card users tend to be young and inexperienced in financial matters, it is crucial to know the different methods that credit card companies charge you interest.
Interest, after all, is usually the biggest cost associated with the repayment amount. Your priority and major goal should be to wisely reduce or eliminate interest expense.
One of the biggest deceptions for 50 years has been the misquoting of interest rates. This has led to recent legislation to protect consumers in light of easy lending practices by credit card companies. This, in turn, led to the ultimate detriment / financial incapability of consumers to honor their repayment obligations and subsequent monetary, health and family hardship situations.
Credit card companies had developed slick formulas that allowed them to legally quote a low or reasonable interest rate, yet the fine print would contain terms and conditions to permit them to charge much higher rates under certain circumstances, usually unknown to the newbie.
The government stepped in to make appropriate disclosures openly revealed to the consumer as credit card delinquencies have skyrocketed in the past two to three years in the global economic depression. Therefore, you should read everything and understand clearly the terms of your first credit card.
The Six Basic Types of Interest Rates
There are six basic types of interest rates and methods of charging interest, and an understanding of each will give you the ability to compare the true charges of different credit cards fees and costs. They are:
- Simple interest
- Effective interest
- Compound or nominal interest
- Add-on interest
- Discounted interest
- APR ( annual percentage rate of interest )
It is beyond the scope of this article to go into detail on each of these.
Suffice to state here, that it is important for the new credit card user to know that they exist…and also to know that most likely you will be exposed first hand to some or all of these interest charges in your lifetime. So know how these can potentially affect your decision-making process.
Managing Your Credit Card Accounts
Your main objective should be to cut the total costs of your cards to an absolute minimum.
Here is how to do it:
- Choose the credit card with the lowest possible interest rate.
- Take advantage of genuine no-fee introductory rates.
- Beware of 0 percent teaser rates that have unrealistic terms and conditions.
- Avoid those credit cards that have an annual fee (unless you must).
- Set a budget and stick to it!
- Establish a track record of always paying on time.
- To avoid unnecessary interest charges, always pay in full or the maximum you are able to.
- To avoid the over-the-limit charge, make sure you know your ceiling limit and don’t exceed it.
- To avoid returned check fees on your credit card payment, always balance your check book.
- To avoid cash advance fees, discipline yourself to not buy things you can’t yet afford.
This article was written by Timothy Ng from Sydney, Australia who writes about personal finance for Credit Card Finder. He is genuinely passionate in educating people on financial management and encouraging them to save to help improve lives.