Handle your new credit like a boss.
Credit cards provide a great way to build a credit history while learning to manage your money, They can also be lifesavers in an emergency. At the same time, credit cards can be risky and cause years of trouble if you don’t take some precautions when using them. So, before you get your first credit card, let’s cover some information and tips that’ll help turn you into a credit card champ.
What’s a credit card?
A credit card is a loan, or more technically, it’s a line of credit. When a credit card issuer (usually a bank or credit union) approves your application, they agree to loan you up to a certain amount, which is your credit limit.
When you agree to the card issuer’s terms (we’ll talk more about that below), you agree to pay back the money you borrow every time you use your card, which is called charging.
One benefit to using a credit card is that you can choose to pay back the loan all at once or a little at a time. That can give you some flexibility in your budgeting and spending, but that flexibility can also prove risky if you charge more than you’re able to pay back.
Choosing a credit card
If you’re like a lot of people, you may be getting all kinds of unsolicited offers for credit cards in the mail. These are called prescreened offers, and you can stop them if you don’t want to receive them anymore. (Look for the opt-out contact information on the piece of mail.)
Before you opt out, though, you may want to gather a few together and compare them to one another. (Of course, you can do all of this online, too!) Check out the terms of the credit card offers, such as:
- Interest rates – What APRs do they have? Are they variable or fixed? Do they differ by transaction?
- Promotional or introductory APR – The card might offer you a tempting 0% APR for the first year, but then it jumps to the regular interest rate. So, look beyond the promo rate: How high is that regular APR? (You might be better off starting with a card that offers a consistently low interest rate, rather than a promotional rate.)
- Fees – Look for and compare their late payment, ATM, cash advance, and balance transfer fees. The lower, the better. (No surprise there!)
- Grace periods – How much time do they give you to pay the debt before you owe interest?
You’ll probably find that the interest rates and other things are all over the place. Some could be as high as 29.99%. (Youch, that’s super high!) So, be sure to include our Linn Area credit cards in your comparisons, because we’ve got great cards with really low interest rates and other favorable terms.
Now that you’re done with all those prescreened offers, here’s another tip: Never just throw away a credit card offer you receive in the mail, because someone could find it and fraudulently apply for the card in your name. (Shredding these mailed offers is your best strategy to avoid that!)
Before you use your credit card
So, you’ve applied for the card you want, and you’ve got it in your hot little hands! Now what? Well, there’ll be a sticker on the front of the card with directions on how to activate the card. Follow those instructions, remove the sticker, and sign the back of the card.
Before you actually go forth and use the card, there are a few things you should know.
When you’ve been approved for a card, you get a letter telling you your credit limit. Since this is your first card, you’ll probably have a pretty low credit limit. (Some cards will start you as low as $500.) Your credit limit is the maximum amount of money you can borrow using a particular card. If you’ve “maxed out” your card, you can’t charge anything else until you pay some of it off. A maxed-out credit card will be declined the next time you try to use it for a purchase.
It’s better for your long-term credit history to avoid maxing out your credit card. There’s a little something called a credit utilization ratio, which is just a fancy term that describes how much you owe on your credit card in comparison to your credit limit.
To keep your credit score shiny, you should charge no more than 30% of your card limit. So when you find out your credit limit, simply calculate 30% of that amount and then try to keep your balance lower than that. For example, if your credit limit is $1,000, 30% is only $300, so you want to avoid having a balance higher than $300.
If you decide you need a higher credit limit, contact the credit card issuer and ask if it’s possible to raise it. If you have a co-signer, his or her written approval will be necessary.
Making payments and managing your balance
Owing money on your credit card is called carrying a balance. If you carry a balance on your credit card, you’ll receive a statement every month. The monthly statement will list any new charges you made that month along with your current balance and the interest you’ve been charged, if any. Always read your statements to make sure there aren’t any mistakes.
You must pay at least the minimum amount due by the payment due date. These are both specified on the statement. You can pay any amount above the minimum, including the entire balance. The amount you pay doesn’t change the due date, though, and you’ll still have to pay at least the minimum payment next month.
If your payment is late, you’ll be charged a fee. Beyond the pain of paying the fee, late payments also damage your credit score, which may affect your ability to get loans or credit in the future. Too many late payments might also cause your card to be shut off. If you know your payment is going to be late, contact the card issuer and let them know what’s going on.
To access your credit card information online and receive electronic statements, be sure to enroll in online and/or mobile banking. With online and mobile banking, you can see your credit card listed as an account, see your balance, make a payment using transfers, and see additional details about your card.
Let’s define some common terms
Credit cards come with a ton of fine print. Each company sets its own rules, rates, and fees, and they can be tricky to understand. Pay attention to things like late fees and how late payments might affect your interest rate. Watch out for cards that have a low introductory interest rate that changes to a high rate later. And notice whether the card has an annual fee.
You can find Linn Area Credit Union’s terms on our Credit Card Disclosure page. Here’s what it all means:
Annual Percentage Rate (APR) for Purchases: If you decide to buy something and make payments over several months rather than paying the entire amount at once, this is the interest rate applied to the balance you carry over.
Annual Percentage Rate (APR) for Balance Transfers and Cash Advances: Like many card issuers, we allow cardholders to transfer balances from other cards and withdraw cash (similar to using an ATM). This can be a great resource in an emergency, but it’s important to understand that withdrawing cash against your credit card has the same effect on your balance as making a purchase. While some card issuers apply different interest rates to these balances, we charge the same low rates no matter how you use your card.
Non-Variable or Variable: Some credit cards have a set, or non-variable, interest rate that remains the same from month to month. Others have a variable rate that changes periodically. Generally, it’s better to have a non-variable rate, but it’s important to note that even non-variable rates can be changed as long as the card issuer gives you sufficient notice.
How to Avoid Paying Interest on Purchases: This is also known as a grace period, and is the amount of time you have to pay your credit card balance without accruing interest. If you pay off your entire balance every month, you won’t be charged any interest at all.
Annual Fee: Some cards charge annual fees, which you have to pay even if you aren’t carrying a balance on your card. Linn Area doesn’t charge an annual fee for any of our cards.
Transaction Fees: These fees typically apply only to certain kinds of transactions that might cost more to process or carry more risk to the card issuer. At Linn Area, we don’t charge a transaction fee for balance transfers, but we do charge a fee for cash advances and foreign transactions. (We don’t want these fees to be a surprise, so call us ahead of time to find out more if you plan to do one of these kinds of transactions.)
Penalty Fees: Most cards will penalize you if don’t fulfill your end of the bargain. Late payment fees and returned payment fees are typical. The first time you slip up, it can cost you up to $25. If you do it again, the card issuer can charge you up to $39. (Hoo-boy! Our credit card fees are waaaaaay less than that!)
Safeguard your credit score
Now that you’ve gotten the basics, here are some tips that will help you avoid some common credit card pitfalls.
- Pay off your card every month. This is the number one way to keep your credit card debt under control. Unfortunately, it’s also the easiest thing to let slide. (That interest rate isn’t very high, right? If you just let the balance go this one time, it’ll be okay, right?) Maybe once or twice, yes, but letting that balance slide is a super-iffy habit to get into. (Besides, if you pay your balance off every month, you avoid interest!)
- Keep track of your balance. It’s easy to go on a quick weekend trip or shopping spree and lose track of how much you’ve charged on your card. Next thing you know, you need to make a huge payment or — worse yet — you max out your card and get declined at the register. The best way to avoid this is to check your balance often with online or mobile banking and keep track of your personal spending limit. Then stick to it.
- Make your payments on time. It can be hard to remember to make payments if you’re just starting out and haven’t really had to pay bills very much (or at all). But late payments rack up fees and damage your credit, so it’s important to stay on top of this. Credit card statements always come out at about the same time every month, so just put a reminder in your calendar to check a few days later. You can also sign up for email or text notifications to keep you on track.
- Pay more than the minimum amount due. If you can’t pay off your card during the grace period, at least try to pay more than the minimum. By law, card issuers have to include information on their statements that explain how long it would take to pay off the balance if you only pay the minimum every month. Usually it takes years, and the amount of interest you pay over time is astronomical. Instead, use our credit card payoff calculator to help you get your balance back to zero as quickly as possible.
- Don’t overspend. This is the Big One — the thing that gets people in trouble every day. It’s tempting to think you can just make that one big purchase or go on that trip and pay it off later, and it’ll all be just fine. But it’s far better to save up in advance rather than put it on your credit card for several reasons. Any time you carry a balance on your card, you run the risk of forgetting to make the payment, which incurs a late fee and damages credit. It also leaves you less credit available for a true emergency. (Plus, you’ll be paying interest on a very large balance, and that can really add up over time!)
The short of it
If you always make your payments by the due date and charge less than 30% of the limit on your card, you’ll be well on your way to establishing a good credit history. And that will help you in the future when you want to apply for things like car loans and mortgages.