In this column, we talk all things young credit and personal finance for young people. I’ve told you about credit card basics and boosting your credit, about getting your first credit card and the worst credit card mistakes to avoid. Fun stuff!
But before we move any further, let’s back up a little.
Let’s talk about what a credit card actually is. I know that you know it’s a piece of plastic that allows you to buy things, but there’s so much more to the concept. Understanding it will help you use your card right.
What a credit card is
Strictly speaking, a credit card is a payment card issued by a financial institution that allows you to borrow money, usually up to a set credit limit. This money needs to be repaid each billing cycle, otherwise you’ll have to pay interest (unless it’s a 0 percent credit card during its promotional period). If you choose to only pay a portion of the money you’ve borrowed, you’ll “revolve” a balance, and the interest will usually compound daily.
You might’ve already known that without me.
But did you know a credit card also is:
- A credit-building tool—responsible credit card usage can do wonders to your credit as it can positively impact each credit score factor. It’s the most universal tool to work on your credit.
- A saving tool—a well-matched cash back or travel credit card can bring about savings on your regular spending through rewards and limited-time promotions.
- A budgeting tool—a credit card can add flexibility to your budget. For example, a 0 percent APR card is a perfect choice for big purchases.
- A debt consolidation tool—if you’ve found yourself in credit card debt, a balance transfer card can get you out of it if you use it right.
What a credit card is not
Knowing all the things your credit card can be can help you get the most out of it. However, it’s also important to know what your credit card isn’t.
A credit card isn’t:
- An excuse to overspend—it’s easy to slip into overspending with a credit card since you can pay it off later. Don’t do it. That can lead to debt and damaged credit.
- An emergency fund—your rainy-day fund should live in a high-yield savings account. If you don’t have one yet, I recommend getting on it as soon as possible. While covering urgent expenses with a credit card when it’s the only option is understandable, it’s also how many people end up in debt.
- A debit card—but it’s safer to treat your credit card as such. If you can’t pay off an item on a credit card without incurring interest, you should probably reconsider the purchase.
As you can see, credit cards can be beneficial for your financial well-being, but they also come with certain risks when misused. There are significant perks to using a credit card. And as long as you use it wisely, you’ll be able to avoid damaging your credit.
Let’s summarize and take a look at other advantages and weak points of credit cards.
Pros and cons of credit cards
|Can build credit when used responsibly.||Can damage credit if you miss payments or use too much of your credit line.|
|Can offer rewards, cash back, attractive perks and special deals.||Can lead to debt accumulation.|
|Can be used to pay purchases over time.||Comes with high interest that compounds daily.|
|Offers better security features than debit cards.||Puts you at risk of credit card fraud.|
|Can come with credit monitoring and budget tracking tools.||Can come with terms and conditions written in a complicated language.|
|Easy to use and widely accepted.||Certain cards (i.e., Discover or American Express) might not be accepted by every merchant.|
Should you get a credit card?
Credit cards have many benefits. But make sure you’re getting a credit card for the right reasons, like building your credit or earning rewards. Be honest with yourself about whether you have the financial discipline to add a credit card to your wallet and pay it off on time and in full.
If the thought of misusing a credit card makes you anxious, consider what I like to call a “training” credit card, like the Petal® 2 “Cash Back, No Fees” Visa® Credit Card. It rewards you for on-time payments: You get 1 percent cash back on purchases, which turns into 1.25 percent after six on-time monthly payments and then to 1.5 percent after 12 on-time monthly payments.
If you’re ready for a credit card, check CardMatch which matches you with offers tailored to your credit profile. Checking your offers won’t impact your credit, and the service is completely free.