Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

What to Know Before Getting a Credit Card

In the realm of personal finance, credit cards carry a whole lot of negative associations -- unrestrained spending, high interest rates, costly fees, and problematic levels of debt, just to name a few.

But the truth is that if you use credit cards correctly, you stand to benefit in the long run. If you're new to the revolving debt game, there are certain things you should know before applying for a card. For one thing, you'll need to decide whether you're willing to pay an annual fee, and see what interest rates you qualify for. You'll also want to commit to keeping the balance you carry from month to month to a minimum, and pledge to yourself that you're going to pay your bill on time every month. Here's some more information you'll need prior to obtaining your first credit card.

1. The secondary advantages of credit cards

We tend to associate credit cards with convenience: You swipe your card, and you get what you need. But beyond that, they offer numerous benefits, some of which are less obvious than others.

First of all, credit cards can be a powerful tool for building your credit. That's because they offer a good opportunity to establish a payment history, which is the single most important factor in determining your FICO score.

IMAGE SOURCE: GETTY IMAGES.

Credit cards also make shopping more secure. Most offer purchase protection on the items you buy so that if something is stolen or damaged, you're covered. Many also come with price protection, which -- if you use it -- means you'll always get the best deal available. Finally, many of cards offer rewards for the things you buy, which means you'll get cash back, points, or "miles" (or other perks) for spending money.

2. Credit cards are easy to abuse

Though credit cards offer many benefits, they can also lead to trouble. Since it's easier to swipe a credit card than to hand over physical cash, many people fail to be frugal with them, or to keep track of their spending, leading them to rack up balances beyond what they can pay when the bill arrives. The problem has gotten so bad that U.S. credit card debt has reached an all-time high: $1.0217 trillion.

If you're going to use a credit card regularly, keep tabs on your spending by logging onto your account during the month and tracking your balance. More important, unless its an emergency, only charge what you can afford to pay at month's end. Otherwise, you can easily kick-start a debt cycle that could damage your finances and wreck your credit.

3. Credit card interest can be hefty

Though interest rates vary widely among credit cards -- and even between different people using the same brand of card -- they tend to be significantly higher than the rates you'll pay on a mortgage or student loan. It's not unheard of for a credit card to charge 20% interest or higher, even if your credit is decent. And that interest can compound daily, so from the moment you fail to pay your bill in full, you'll start racking up additional charges. Ouch!

4. You must make your minimum payment each month

If you do end up charging too much in a given month, you may have no choice but to not pay that credit card bill in full. And while that's a bad thing from an interest perspective, the good news is that if you're careful, it won't end up damaging your credit score.

There are several factors that go into calculating a credit score, the most important of which is your payment history. If you always make a point to pay your bills on time, your payment history will be strong. Therefore, if you make at least your minimum payment (as shown on your credit card statement) even it you don't pay the bill in full, it won't count against you in that part of the FICO equation. Fail to come up with even the minimum, however, and your credit score could take a serious dive.

5. You might face a host of fees

There are numerous fees associated with having a credit card, and it's crucial to review them and understand what you're signing up for. One of the most common fees you'll encounter is the annual fee, which you'll pay just to have your card in the first place. Not all credit cards charge an annual fee, so if you shop around, you can possibly avoid it. (Pro tip: Many times, banks will waive or reduce the annual fee if you just call up and ask.)

There's also the late payment fee, which is what you'll be slapped with if you fail to make your minimum payment. (Note that this is not the same as interest, which gets charged separately.) And don't forget foreign transaction fees, which may apply if you use your card outside the U.S.

Getting a credit card can be an exciting financial milestone. The more you know going into the process, the better equipped you'll be to choose the right one.

5 Simple Tips to Skyrocket Your Credit Score Over 800!
Increasing your credit score above 800 will put you in rare company. So rare that only 1 in 9 Americans can claim they're members of this elite club. But contrary to popular belief, racking up a high credit score is a lot easier than you may have imagined following 5 simple, disciplined strategies. You'll find a full rundown of each inside our FREE credit score guide. It's time to put your financial future first and secure a lifetime of savings by increasing your credit score. Simply click here to claim a copy 5 Simple Tips to Skyrocket Your Credit Score over 800.

The Motley Fool has a disclosure policy.