We've all seen that one TV episode that appeared on countless shows when we were kids: the protagonists receive credit cards from their parents and are told to only use it in emergencies. Lo and behold, the main characters overspend and have to learn the dangers of credit card debt. Yet every adult I know owns at least one credit card. So if credit cards are really so dangerous, why does everyone own one?
I have one phrase for you: with great power comes great responsibility. Here are a few warnings and suggestions on how to handle your first credit card.
1. Pitfall: It's super easy to overspend.
Hence all the TV shows warning you about credit card debt. If you think that you're broke now, wait until you get *negative* money. All credit gains something called "interest," which means that the longer you take to pay the money back, the more money you owe! When choosing credit card providers, you'll have your choice of interest rates, but right now interest rates are going up, with many hovering at over 16%, even for the most responsible credit card owners — more on that in the credit score section.
Who determines interest rates? Well, mostly the free market and your bank, but the Federal Reserve Bank can artificially raise or lower interest rates depending on whether the U.S. private sector should be growing or shrinking. And before you ask — no — the president and Congress have no direct authority over interest rates. But that being said, neither do you: this is why you should never buy anything that you won't be able to pay off at the end of the month.
2. Perk: You don't have to carry around a bunch of cash/checks.
Even if you have plenty of money in the bank with no need for credit, credit cards are still very useful. First of all, you don't have to carry around hundreds worth of $1 bills in order to ride public transportation or have $100 bills to pay off rent or tuition. Normally, a check would replace those, since you can enter any value, but just try to imagine writing a check every single time you went to the grocery store. Credit cards are simply more convenient.
3. Pitfall: Many credit card companies prey on college students
Credit card debt is bad, right? Wrong. Well, it's bad if you have it, but it's great for your bank. Huge interest rates mean that your bank gets more money. Knowing that many college students have never owned credit cards before and might not handle money responsibly, many credit card companies will intentionally target college students. But never fear, for if you ARE a responsible college student who pays off bills every month, having a credit card can only work in your favor.
Also, before you go signing up for one: make sure it's an actual credit card company. There are scammers out there who will go fishing for your bank information under the guise of being a credit card provider.
4. Perk: You can pay online and automatically pay bills.
You can't buy things on Amazon with cash unless you go out and buy a gift card, and mailing a check to someone can take days while also risking the check getting lost in the mail. So if you're going to shop online, credit cards or debit cards are the way to go. Additionally, if you have to pay rent or utility bills, you can automatically link those bills to your credit card or bank account, and you never have to worry about your wifi being shut off because you forgot to pay the bills!
Your bank will probably let you hook your credit card up to your bank account so that your bills are automatically paid every month (sometimes with a small fee), but that means that you have to keep track of how much money is going into or out of the bank! I personally keep an Excel spreadsheet so I can easily follow and add up the totals of every receipt I get. Just writing down the fact that you spent the money makes you less eager to buy.
5. The Ultimate Perk: You can build up your credit score early!
Your credit score can be the difference between a 16% interest rate and a 10% interest rate, and that goes for your credit card, home mortgage, car lease and any other bank loans you ever take out. You see, banks like to know the reputation of whom they're loaning to, and so every customer receives a credit score. Your credit score goes up if you're diligent in paying the bills every month. Never missed a payment in your life? Then you may have the highest score possible: 850. That score means that banks are more willing to loan to you, and loan to you at lower interest rates. Haven't paid your credit card bills in 10 years? Your score will get incredibly low, and if any banks are still willing to loan to you at all, they'll charge you a lot more. So having a credit card early is a perk because then you can spend these next four years buying little trinkets and easily paying them off every month. Then, by the time you graduate, you'll have a high enough credit score to get a better deal on a lease, mortgage, or car!
6. Perk: Your parents can't see what you buy.
I like this because it means my parents can't see what presents I've bought them for their birthdays. If you're over 18, YOU are the one who gets the credit card bills, and your parents never have to know about it.
7. Pitfall: Credit card theft.
Credit card theft can happen anywhere, from people physically stealing your credit card to online hackers gaining access to thousands of peoples' information at once. This is where security websites and apps like Paypal and Venmo come in, and why there's so much information you have to type in whenever paying for something online — and why you should NEVER have Google save your credit card information. I know these security measures can be inconvenient, but if your credit card information gets stolen, the thief can drain you of thousands of dollars. You should be fine as long as you use safe websites, never save your credit card number and never lose your credit card! Additionally, my bank automatically locks my credit card if a large amount of money is spent in a town I don't live in. A charge for three plane tickets out of NYC? Yeah, that looks super suspicious, so your company may freeze your card and contact you just to make sure it's really you who is suddenly spending thousands in New York.
If you already use a credit card, you may have noticed that many stores are now asking you to use your card's "chip" instead of swiping it: this is yet another measure to prevent credit card theft.
8. Perk: If there's a false charge, your company may compensate you.
Remember those three plane tickets out of New York City? Well, that one actually did happen to my parents. The credit card company called my parents, and they immediately informed the company that it was a thief. The company couldn't take the money back from the airlines, but it did pay back my parents every cent that had been stolen. On the other hand, there have been false charges that their company didn't detect — they had to scan their monthly bills to find those.
As you can see, the dangers of credit cards evaporate when you actually handle your money responsibly. That being said, if you get into credit card debt, you can really get deep before declaring bankruptcy — and even that will destroy your credit score, which follows you everywhere. So in the end, it's up to you and your parents to decide whether you're ready for your first credit card.
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