There are a lot of new and shiny things a person immigrating from a developing country will encounter in the U.S. One of those shiny things is a credit card. When I came to the U.S. I was warned to never use credit cards. Coming from a cash-based society, the fear was I would misuse the credit cards and fall into the credit card debt trap. However, having spent over twelve years in the U.S. at the time of writing, I think when understood and managed well, credit cards can be a great tool to add to your financial arsenal. In this blog, I am going to define credit cards for those who do not know them, outline the main pitfalls they have, provide some guidelines on how you can overcome the pitfalls and use credit cards well, then conclude by giving you tips on how to choose your very first credit card.
So what is a credit card? According to Investopedia, a credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company that allows cardholders to pay for goods and services, with the promise that the cardholder will pay back the money later. If the cardholder pays back the balance before the due date, then there are usually no fees associated with the “borrowed” money. However, as you can imagine, the banks are not your friends here–they are not in the business of giving you free money. They are banking (no pun intended) on you spending more than you can afford to pay back. When you fail to pay the balance in full by the due date, the bank charges interest for any balances that are not paid in full. And this is where they get you. Credit card interest rates are very high–typically over 16% and sometimes even closer to 25%. As you can imagine, once you get into a situation where you overspend and cannot pay the credit card balance in full, you cannot possibly be able to afford the exorbitant additional interest fees. You are essentially trapped. This is a situation you want to avoid at all costs.
So how can you manage your credit card well, and why is it even important to have one? First, they are important because they allow you to build credit history and have a good credit score that then allows you to qualify for loans when you want to make a big purchase like a car or house, and also have lower interest rates on those. A good credit score also allows you to qualify to rent an apartment as well. So as long as you know how to manage them, credit cards can be a powerful tool to use to better your overall financial outlook. So what’re the key guidelines to follow to ensure you manage your credit cards well?
- Never spend more than you can afford. This may seem obvious but you will be surprised how many people put more on their credit card than they can pay off. Do not be this person! Stay disciplined and only pay for what you can afford to pay in full before the due date
- Always pay your card in full every month. Again, this may seem rudimentary, but some people only pay the minimum required amount then keep a balance on their cards. Do not do this because all the balance you carry over will be subject to the interest rates mentioned above. Pay the card in full every month before the due date.
If you are ready to start your credit card journey, make sure you have the discipline to follow the two guidelines above. They will lay a good foundation that will allow you to manage your credit card, build your credit history, improve your credit score and allow you to qualify for car loans and mortgages to buy houses at low interest rates.
So how do you sift through all the noise to pick your first card? Do not overthink it–just get a simple card with no yearly fee and a simple cash back option. For me, that card was the Capital One Quicksilver that Nerdwallet calls the “No-Fuss, No-Gimmicks Card”. If you like it, you can get it from my referral link, but if you don’t feel free to google “best introductory credit card” and you will find plenty of information to help you make an informed decision.
There are more credit card benefits I did not cover in detail in this blog such as purchase protection (in cases of fraud the bank usually seamlessly covers the amounts in question) and car rental insurance coverage. There are also advanced tricks to optimizing your credit card use and maximizing points and cash back options, and some credit cards even offer added benefits for a fee. For example, I now have the Amex Platinum Card, and this card has elevated rewards, but it also comes at a cost of $695 per year, and you will need good credit to get approved for the card. So I suggest you manage one primary introductory credit card for a year or two before exploring ways to optimize credit card usage and venture into paid credit cards.
Let us know if you have any credit card-related questions and we will be happy to help you. Good luck!
