So you think you need a credit card? You’ve seen those great offers such as “Get our card and enjoy 2x cash back” or “Apply for our card today and earn 1,000 bonus points.” These offers sound oh, so appealing. Plus, having a credit card means a new freedom. You see something you would like such as a new tablet computer or an HDTV and you could buy it instantly instead of having to spend months saving for it. But before you fill out that application, there are some things that you need to think about.
How good are you about self-discipline?
Millions of Americans have gotten seriously into credit card debt because they lacked the self-discipline necessary to use their cards wisely and sensibly. No matter how much fun having a credit card might seem, it’s important to understand that the credit card companies are not your friends. They’re there for one purpose and one purpose only and that’s to make money. And there’s no way they can make money off you unless you go into debt. If you charge a few things on a credit card and then pay off your balance at the end of every month, the credit card company earns nothing. What it wants you to do is carry a balance forward so that it can charge you interest and then compound the interest. If you’re not familiar with compounding it’s where you end up paying interest on interest.
An example of how compounding works
Just as credit card companies are not your friends either is compounding. Suppose you owe $5000 and make just the required minimum payment each month. If that card has an interest rate of 19% it would take you 41 years to pay off that $5000 and cost you $16,198 in interest charges alone.
Perks are a lame excuse
If you decide to sign up for a credit card because of all those mouthwatering perks such as cash back or airline miles, you’re just making up excuses. You should sign up for a credit card only because you need it. Credit cards can be great for emergencies or to buy something on a sort of installment plan basis but as noted above if you’re not careful your debt could get totally out of control.
Will it fit your lifestyle?
If you decide you do need a credit card, it’s important to make sure that it fits your lifestyle. When you take that card to a mall will you have the self-discipline necessary to buy only the things you need or would you be buying stuff to fit a lifestyle you think is necessary or to impress your friends. If the answer is the latter and you don’t have much self-discipline, this will have a huge impact on your psychological and financial well being.
Are you ready to handle a debt?
Are you fully aware of what will happen if you don’t pay off your balance at the end of that first month? When you carry a balance forward – as illustrated in the example given above – you can fall into the trap of compounding interest. The smaller amount you charge, the smaller amount you will have to repay and the easier it will be for you to pay off your balance at the end of that month. However, if you fall into the trap of paying just the required minimum payment each month it will take you much longer to pay everything off and you will be charged that nasty 19% or 20% interest fee.
Do you have a stable income?
It’s just not a good idea to get a credit card unless you have a stable income. You need to be a full-time employee and not a contractor or a part-time worker. You need to know you will have money at the end of your billing cycle to pay off your balance without fail. If you work on a contract, it could be ended with little or no warning and there you’d be stuck for a credit card payment and without enough money to make even the minimum payment. If you’re a part time worker you could see your hours cut back with little or no warning and find yourself in the same fix.
If you haven’t gone through the exercise of developing a budget, you need to do so. It’s not all that complicated. Just add up all of your fixed monthly expenses, then your variable expenses such as food and clothing and subtract this total amount from your monthly income. If you want to have a credit card you need to have enough money left over after all your expenses to pay your credit card bill and not just the minimum monthly payment.
How do you plan on using a credit card?
Is it your intention to buy new appliances on an installment basis? Is your goal to accumulate points for an airline flight or for your shopping? Or maybe you want a credit card to help you establish a good credit history? What you need to do is compare the cards available and then sign up for the one that best fits your needs. That way you would be able to maximize your benefits.
Consider a debit card instead
If you’re at all concerned about your ability to handle credit and debt you might consider getting a debit card instead. Debit cards give you all the same benefits as a credit card. However, they’re linked to your checking or savings account so that you can’t spend any more money than you have in that account. And a debit card does offer several benefits:
- Debit cards have no interest charges. You’re using your own money and so long as you use the card sensibly it won’t cost you anything.
- Carrying a debit card is easier and better than carrying cash. Cash can be lost or stolen and if so, there’s no way to replace it. On the other hand, if you lose your debit card all you have to do is notify your financial institution. It will cancel the card and send you a new one. And if there are illegal charges made on the card, you should be able to get your money back — though it may take as long as 60 days.
- When you use a debit card, you have the option of getting cash back. I use my debit card at the grocery store and almost always get $20 or $40 cash back. That’s easier than going to my bank and, unlike ATM machines this costs nothing.
- Debit cards are more secure than credit cards. When you use a credit card all you’re required to do is sign a receipt. But when you use a debit card you must type in your four-digit pin number to validate the purchase. Many stores prefer this because it reduces their risk. Plus, it’s much easier for a thief to use a credit card than a debit card because he or she has no way of knowing your pin number.
Keep all your receipts
Whether you get a credit or debit card, make sure you keep all of your receipts. This is an easy way to track your spending so that you will know where your money’s going. You would be able to sit down at the end of a month, take out all of those receipts and see exactly where your money went. When you add this to your fixed expenses, you’ll know if you’re spending exceeded your income or not. If so, you will need to make some adjustments in your spending.