How do credit cards work?
Credit cards for college students are a popular topic because so many 20-somethings owe money to their plastic. I wanted to look at how credit cards work and how you can use them to your advantage.
No matter what your opinion on credit and credit card companies is, there are certain rules that must be followed as a student /young professional with a credit card. When you understand how credit cards work, your goal should be to follow these rules to own your plastic. You don’t want the plastic to own you.
1. Refrain from a credit card balance.
Even if you have to loan the money from your 10 year old sister, take it, because she’ll only laugh at you but your credit card company will laugh at you while they charge you interest. You may think a day or two is no big deal but it is. The interest on your credit card will add up quicker than you may realize. Pay your balance off always.
If you don’t have the money to pay your balance off, then you shouldn’t have a credit card in the first place.
This ties into…
2. Make sure you have the money available to pay the credit card bill.
I often use my credit card for convenience and because of my credit card rewards program. As soon as I get home I log on to my online banking account and I transfer the money from my everyday account to my credit card.
3. Never EVER go to the mall with your credit card.
I read about personal finance every single day of my life and guess what? If I’m at the mall and I see something I really like I still get impulsed to swipe that plastic.
If you have the self-discipline to only eat 1 pizza slice, drink only 1 beer, or have only 1 piece of cake, then maybe you can bring your credit card with you to the mall because you’re definitely ahead of me.
4. Understand that zero percent credit cards are usually temporary.
This is the oldest trick in the book my friends, the credit provider will offer you a 0% credit card offer that will seem like a once in a lifetime opportunity. A year down the road you will get a nice credit card statement with a balance that includes interest.
The great credit card rate is only temporary, your job is to find out how long the offer will last and then decide what to do when that period is over.
5. Keep your credit card limit as low as possible.
Long story short, an acquaintance from school that is very careless with his money received a credit card. He was an excellent customer (used his credit card all the time) so the credit card company called him and offered to extend his credit card limit to $10,000. I’ll stop the story right there.
6. Avoid an annual fee from your credit card provider.
It’s funny because my old credit card charged me a $35 annual fee, so when I called to cancel the credit card they tried to negotiate with me by reducing the fee. I took my business elsewhere and opened up a rebate rewards credit card where not only do I avoid the annual fee but I earn a little bit of money each year (not a lot but better than losing money). No fee credit cards are extremely popular now so if the company tries to charge an annual fee then it shows how up to speed with the times they are.
Don’t worry I avoided the read the fine print typical credit card advice for a reason I didn’t want to insult your intelligence. If you’re serious enough to want to improve your financial situation by reading personal finance blogs then you’re likely smart enough to read a contract before you sign anything.
That’s how credit cards works to your advantage. At the end of the day, your credit card is another resource that you can use to strive towards financial freedom in your 20s.