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As part of my Beginner Financial Guide Series (I’m working on the name), getting your first credit card is the quintessential step to building your credit score. While I think I did a fairly solid job in explaining how your credit score is created and why it matters, I wanted to create the groundwork on getting familiar with your first credit card.
Chances are you are using a student credit card or a retail credit card. Both types of cards are credit cards. It doesn’t matter where you get your card from, sometimes people say yes to getting a “store card” for store points but accidentally sign up for a credit card.
And no, don’t feel stupid if that has happened to you. In the world of finance, usually, it takes years of being an adult to start getting a solid grasp of financial consequences.
All credit cards have your name and card number on the card. In the example above, this is a Target credit card. If you see numbers and your name, it’s a credit card and not a store card.
Eazy Peasy. Now it’s time to get familiar with your credit card.
Understanding the Purpose of a Credit Card
While some people might laugh at a person who has a credit card “because you will get in debt”, it doesn’t mean that you will pay hundreds of dollars in interest.
As a matter of fact, when credit cards are used correctly, they are incredibly powerful to help establish a strong reputation for you as a financially stable person to institutions.
The biggest reason why credit cards are used was that they were a way to stop carrying cash. These credit card institutions charge a fee to the business when a credit card is used in exchange for instant payment.
Now, on top of that. Another reason why credit cards exist is that liquidity (the ability to turn stocks/credit/assets/etc into usable tender) used to be set based on the cash you carry. With credit cards, you technically have the ability to spend more than what you currently have in the bank.
However, if you ever wanted to spend more than what you have in the bank, you’ll be given time to pay the card back, but at the cost of interest.
Interest Owed = #1 Cause of Credit Cards Bad Reputation
Unlike personal loans from the bank where you get charged a modest interest with good credit. Credit cards will often charge 3-5 times more compared to a loan. While your interest rates might be much higher compared to a loan, the amount of time it takes for you to spend money on a credit card is instant compared to a loan.
The problem with interest is that when you hear that when people are in debt for thousands of dollars, the interest starts adding up.
Now you might be asking, “well, why are people getting thousands of dollars in debt?”
The ACTUAL Biggest Problem of Credit Cards
When you spend money on a debit card, the money in your bank instantly gets pulled. You see your money directly get spent from your bank account.
Debit cards automatically wire people to associate that “Debit cards are equal to cash”.
And while I love credit cards. I will have to admit that it’s a valid reason to use a debit card. It doesn’t matter if you are terrible with money or have no financial knowledge. If you have cash you can buy things. No cash means you can’t purchase things.
The problem with credit cards is that when you spend money with a credit card, you don’t see it show up on your bank account. This leads to the following:
- A false sense of understanding of credit cards.
- Lack of paying attention to funds.
- The thought process of “eh, it’s only a few dollars extra in interest I’ll pay it off eventually”.
- Thinking, “I totally can afford it if I make smaller payments”.
- Lack of urgency in paying off bills knowing you have “a way to pay it back”.
While some of these thoughts aren’t inherently bad. The actions will end up costing you hundreds/thousands of dollars in interest.
Now that I’m done spooking you into doubting your decision of getting a credit card. All of what I talked about above can be 100% avoided!
The major X-factor in why people end up in debt is that most people in debt don’t have a basic understanding of finances and they don’t budget accordingly.
When you don’t budget, you stop paying attention to how much you spend. This means that people in debt are living beyond their means (not all cases).
Using Your First Credit Card The Right Way
When you get your first credit card I recommend that you take the time to get familiar with it. Chances are you will have a low credit limit of a couple hundred dollars. Don’t be upset, in time your limits will increase as you show that you have a good history in paying your bills on time.
Ween Into Credit Card Use
Even some of the student cards and beginner credit cards might offer cash back on spend or maybe even a bonus for signing up. Ignore that for now. You want to use your credit card a few times to start establishing use, but to mainly get familiar with payments.
My main recommendation is to only use your credit card for Netflix or a subscription service that you use (anything under $20).
You’ll only use that card once a month and you’ll see that on your statement.
Sign Up Your Credit Card Account Online
When you first get a new credit card, you have the option to activate it online or on the phone. Activate your card online.
When you activate your card online, you can sign up for an online account. Usually, there is a website URL for you to type out and you can sign up there. When you create the account, it will automatically connect you to your card.
That means whenever you feel like it, hop on your account and view your spend and how much you owe.
Sign Up For Mint
You can create a Mint account. After creating an account, you can connect your bank account and credit card accounts to track all ad spend. That means you can monitor how much you are spending.
I recommend that you stick to using a debit card and credit card while starting out. If you make purchases via cash, it will be a bit harder for you to track payments. I prefer to use my cards to track all payments automatically.
You can also track your spending so you can always pay attention to your budget.
Current Balance? Statement Balance? Minimum Payment? Stahp.
When you log into your screen to check out how much you owe, it can be very easy to get overwhelmed.
I want to prevent any confusion and clear things up.
Last Statement Balance: Whenever you use your credit card, you don’t owe interest. What happens is that over a billing period (about a 30-day cycle once you open your account) of using a credit card. The statement balance is the total amount you need to pay them so you don’t have to pay interest.
- You see that my last statement balance is $197.50. That means I have until July 7 to pay that amount.
Minimum Payment Due: This is the minimum amount of money you will need to pay the credit card company to pay off your debt. I don’t recommend the minimum, always pay the statement balance amount to avoid interest.
- Even though my statement balance is $197.50, I can pay $35.00 instead. The good news is that if I make a payment it shows that I paid on time. The bad news is that Discover will start adding interest on the remaining $162.50.
Billing Statement: This is the period where you use the credit card interest-free. Billing statements are in monthly cycles.
- Example: My billing statement starts/ends on the 12th of every month. So from June 12 through July 12, all that I use on my credit card will be set to that statement.
Due Date: After your billing statement is done. You will be assigned a due date for that statement.
- Example: My next due date is July 7. The amount was based on My June Statement (May 12 – June 12).
- You usually get 4 weeks (28 days) from the last day of your billing statement to make payment.
Current Balance: This is the total amount that you have used on the credit card that you haven’t paid yet. It’s June 20 (today) and I owe $197.50 on/before July 7. So the $279 you see is the statement amount I haven’t paid for yet + the amount I’m currently spending.
A Bit Confusing? I Agree
This of it this way. Say you open up a credit card on July 1. Your statement time frame will probably end around the 1st of each month.
So you spend $25 on July 5th and nothing else. On August 1, everything you spent from July 1 through August 1 will be on your next statement.
After checking your account on August 2, it says you need to pay the credit card company $25 by August 28.
You then spend $20 on August 5. You see that your current balance is $45. But your statement balance is the same. Only pay the $25 (statement balance). Your statement balance will never change once set until the newest one is created.
That’s pretty much it.
That’s why I recommend only using it once a month early on (or paying immediately) to get comfortable with paying.
Automatic vs Manual Payments
I pretty much cover this topic in another post. The goal is to set automatic payments so you don’t end up getting a late fee.
But when starting out, I recommend the following:
- I suggest paying manually when you get your first credit card for 3-6 months
- This will help get you into the groove of getting familiar with the credit card’s web platform.
- Specifically, on months 1 and 2, I strongly suggest making payments to your credit card right away after purchase.
- The reason for this that when you use a debit card, you’re decisions are literally tied to the amount of money you have in your account. If you don’t have $10 to your name, then you can’t spend $12 on a new t-shirt.
- By making payments to your credit card the same day (or next day) from your bank account, you are reinforcing the idea that you should only be spending what you can afford.
- Alternatively, this will give you enough time to get comfortable using a credit card and to start building good habits. YES, it might be annoying at first, but so are most things that require discipline.
- For month 3, I recommend paying your credit card every week. You should already have been building good habits of payment. You can start doing manual payments weekly. Month 4 – Pay every 2 weeks.
- Month 5 and month 6 is when you can try paying a few days before the due date or start using automatic payments
Building Good Habits
In all honesty, the first 6 months you should be treating credit cards as if they are cash.
As you get more comfortable with timing and billing cycles, you can start changing your due dates and request higher credit limits. By making on-time payments, you’ll start building a solid credit score.
After 6 months your credit score should be in good shape to where you can start looking at credit cards that offer more incentives such as higher cash back amounts on spend. Or even some “bonus rewards” for initial spend.
Chase Freedom, Bank of Americard, and Discover It are the three “basic every day” spending cards that a number of people have.
As long as you pay on time and treat your credit cards as if it were real cash, you won’t owe interest and you might actually get money back!
Hopefully, I have brought some clarity on getting your first credit card. If you feel like there is something I missed, let me know!
- 5 Reasons Why Credit Cards Get A Bad Reputation
- How To Setup Your First Bank Account
- 6 Stages of Financial Freedom: The Definitive Guide
- Automatic vs Manual Credit Card Payments, Which is Better?