What Should I Know Before Getting a Credit Card?
Credit cards can be useful tools that make your shopping experience more secure and convenient, especially when you are shopping online. However, this convenience comes with a high risk of overspending. Recent studies show that the average American household has more than $7,000.00 in credit card debt. Although some households are doing slightly better with their finances since the onset of COVID-19, others are struggling. On average, 42% of Americans struggle with their finances, in particular, managing their debt properly. Families with credit card debt will pay an average of $1155.00 in interest this year alone, so it's easy to see how quickly things can spiral out of control if you're not careful.
The key to preventing your credit card debt from getting out of control is to avoid impulsive spending as much as possible. Before running out and accepting that fantastic credit card offer you received in the mail, do your research to ensure it's the best option for you. Knowing the risks and practicing a little self-discipline will end up helping you in the long run.
Here are five things to be aware of before signing up for a credit card:
- Avoid Racking Up Debt You Can't Afford – People are more successful at managing their debt when they treat their credit cards as a tool to help establish and maintain their credit. Using your credit card to purchase things you really can't afford or for emergencies may put you in a situation where you're carrying a large balance with high interest that seems impossible to pay off.
- Don’t Treat Your Credit Cards Like Free Money – You may not realize it at the time, but every dollar you spend comes with a fee that you will have to pay at some point. Credit cards often come with monthly and sometimes annual charges depending on the type of credit card you choose. It's crucial that you understand what fees your credit card charges, what they are for, and when they are due to manage your debt and spending effectively.
- Making Only the Minimum Payment Will Keep You in Debt Longer – Paying only the minimum due on your credit card each month means you will pay more in interest over time. Only a portion of your payment will be applied toward the principal balance on your card. The rest of your payment will be used for interest and fees. On top of that, having a higher interest rate credit card means even less of your payment is applied to your card's principal balance. You may feel like you are keeping more of your hard-earned money by only paying the minimum due; however, not only will it only take you longer to pay off your balance, but you will also continue to accrue interest, causing you to pay more over time. This cycle of payments will keep you in debt for months or years longer than you anticipated, especially if you continue to use the card and accrue more debt.
- Avoid Missing Payments – Being late on your credit card payments or missing a payment altogether, negatively impacts your credit score. Your payment history is one of the most essential elements making up your credit score. It shows creditors and sometimes employers how responsible you are with your debt. Not having a consistent history of debt repayments can hurt you when making a big purchase like getting a new car or buying a house. So it's crucial that you responsibly manage your finances to ensure all debt payments are made on time. In addition to the hit on your credit report, making late payments or missing a payment almost always results in late fees, interest penalties, and it can sometimes lead to the cancellation of a 0% introductory interest rate.
- Don't Ignore your Billing statements – Keeping up with your credit card spending and transactions may feel like a chore, but consistently reviewing your statements will help you in the long run. Always having conscious awareness of your spending habits and your credit card balance only helps you properly maintain your account. Reviewing your statements each month ensures you are only paying for purchases you've made and helps keep your budget and your credit score in good standing. Checking your statement each month will also help you recognize any signs of credit card fraud or identity theft.
Keeping these things in mind when researching or applying for a credit card will help prevent you from carrying substantial amounts of debt that will take a toll on your finances. Remember to use your credit card responsibly and practice restraint when considering making that impulse buy.