A credit card is a financial tool that allows you to borrow money from a financial institution, usually a bank, up to a certain credit limit. It's a form of revolving credit, meaning you can borrow and repay money multiple times as long as you stay within your credit limit.
When you use a credit card to make purchases, you're essentially borrowing money from the credit card issuer. You're expected to repay the borrowed amount by the due date, either in full or by making a minimum payment. If you don't repay the borrowed amount in full, the remaining balance will accrue interest, which is the cost of borrowing.
What are the advantages of credit cards?
Credit cards come with various features and benefits, such as rewards programs, cashback offers, travel benefits and more. They can help you build a credit history, which is important for future financial activities like getting loans or mortgages and give you more consumer protections when making purchases than if you buy with cash or using a debit card (e.g. fraud protection and dispute resolution).
What are the dangers of credit cards?
Misusing a credit card can lead to debt accumulation, high interest charges, and a negative impact on your credit score if you're unable to make timely payments. To stay out of debt and stop interest costs mounting, always pay off the credit card balance in full on the repayment due date.
So, should I get a credit card?
Whether you should get a credit card depends on your personal financial situation, spending habits and level of financial responsibility. Here are some things to consider before getting a credit card:
Financial Responsibility
Do you have a stable income and the discipline to use credit responsibly? It's important to pay off your credit card balance in full each month to avoid interest charges. Consistently only repaying the minimum amount is often how problem debt begins – interest costs mount and become out of control.
Budgeting
Are you able to create and stick to a budget? Having a budget can help you control your spending and ensure you can afford to repay your credit card balance.
Emergency Fund
Do you have an emergency fund? It's wise to have some savings set aside before using credit – typically 3 months expense cover at a minimum. This means you will not have to rely on credit to cover unexpected expenses because you’ll already have the cash set aside to pay for this.
Interest Rates and Fees
Understand the interest rates, annual fees, and any other charges associated with the credit card before you take one out. Compare different cards to find one that suits your needs and has favorable terms.
Credit Score
If you're just starting to build credit, a credit card can be a good tool. If you take out a credit card and repay the balance in full every month, this shows lenders that you’re responsible with credit and can be trusted to borrow money. This can help you establish a positive credit history, which will be useful for future financial endeavors. Credit Limit
Be mindful of your credit limit. Only spend what you can afford to pay back. As a general rule of thumb, you shouldn’t rely on credit to be able to buy something you’re unable to buy outright. If you don’t already have the cash to pay for something, you can’t afford it so don’t use credit to buy it instead.
Rewards and Benefits
Consider the rewards and benefits the credit card offers such as cash back and travel points. If you can take advantage of these without overspending, they can be a valuable perk. Before applying for a credit card, it's a good idea to do your research, compare options, and read the terms and conditions carefully. If you're unsure, you might want to consult with a financial advisor or someone knowledgeable about personal finance to help you make an informed decision based on your individual circumstances.
Instagram: @classhouse_money
Pinterest: @classhouse_money