The Ultimate Guide to Credit Cards

Credit Cards

I’ll be honest with you, I’m not a fan of credit cards.  But, they are a great way to increase your credit score and get you out of a sticky situation when your cash is lacking.  The key to credit cards is your ability to be responsible with them.

It’s unfortunate, but, your credit score is such an important number that it almost defines your ability to live comfortably as you start your life as an adult.  Purchasing cars and houses becomes much easier and will cost you much less with a higher credit score.  But, without proper self control, credit cards can become a financial death trap!

The Mission:

My mission is to share with you the best strategies to reduce your reliance on credit cards, help you understand how lenders make money, and how you can use your credit cards to your advantage.

Credit Cards

Your First Credit Card

There are plenty of credit cards out there and most lenders have a plethora of different style cards to fit your life.  But, as a college student with little to no credit, your choices are much more limited.

Student Cards

When you first start out you’ll be limited to high interest rate cards.  My suggestion is to look specifically for cards that are built around students.  Companies like Capital One, Discover, and Citi all have great student cards that offer rewards for every dollar you spend.

Secured Cards

If you’re looking for a safer option, you can sign up for a secured card.  With a secured card, you put a certain amount of money down as collateral and the lender offers you a credit line in exchange for your cash.  These secured cards are built for individuals with little to no credit and could be great for you if you don’t trust yourself with your spending habits!

NerdWallet: Best College Student Credit Cards of 2017

Beginner Spending Strategies

When you first start out with your credit card, it’s best to limit your spending to the bare essentials.  Groceries, gas, and emergency situations should be the only things purchased on your card.  This is extremely important.  Credit cards were never meant to be used as a way to live.  They were meant for emergencies and small purchases!

#1: Establish a Spending Cap

Set yourself a cap on the amount of spending you can put on your credit card in one month.  A hundred dollars is a good ballpark number.  Building the self control to not spend on your credit card after you reach your personal, self imposed limit will help you control your spending in the future.  As you start to master your spending habits you can slowly raise your cap.  Just remember to keep it at a comfortable level that you can easily pay off!

#2: Pay Your Balance in Full

After you’ve reached your limit, cut yourself off.  At the end of the month, pay your credit card balance in full.  This will prevent you from paying any interest on your purchases and it will increase your credit score quickly!

#3: Set up Automatic Payments

If your credit card lender offers an app or has online banking, set up an automated payment system.  This will make sure you pay your bill on time and it removes the possibility of you forgetting to pay your balance!  You have enough things to remember, let technology make your life easier!

Credit Cards

Interest: The Basics

Before we delve into the more advanced strategies concerning credit cards and debt, we need to talk about interest and how credit card interest works.  Understanding interest and how lenders make money off of the interest they charge you is the difference between mastering your credit cards and becoming a slave to your debt!

There are essentially 5 different kinds of credit card interest:

  • Purchase Interest
  • Fee Interest
  • Introductory Interest
  • Balance Transfer Interest
  • Cash Advance Interest

Purchase Interest

This is the most common interest type people run across.  Purchase Interest refers to the interest charges on any balance that is left over after a billing cycle.  The way that purchase interest is calculated is quite complicated, so, we’ve included a credit card interest calculator so you don’t have to do the math manually!

ConsumerCredit.com: Interest Calculator

What you need to understand about purchase interest is that it’s based around the balance you carry over from month to month.  Carrying large balances from month to month and only making the minimum payment is a surefire way of falling into the continuous credit card debt loop that you may never get out of!

Essentially banks charge you a small percentage every single day that your balance is carried over from the previous month.  So if you have a $1000 balance on your account and you don’t pay it off completely, you will be charged a small amount of interest every single day that it isn’t paid off in full after that billing cycle has ended.

Note: Most banks have a 15-30 day grace period after the billing cycle has ended for you to pay your balance off before they start charging interest!

Fee Interest

Fee interest is extremely simple.  There are lots of different kinds of fees that your lender can charge you.

  • Annual Fee
  • Late Payment Fee
  • Over-the-limit Fee
  • Balance Transfer Fee
  • Cash Advance Fee

These are just a couple of the fees you might find on your account, but there are many, many more.  These small fees add to your balance just like purchases do and will also cause you to pay more in interest.  Simple as that.

NerdWallet: 8 Credit Card Fees and How to Avoid Them

Credit Cards

Introductory Interest

These are special interest rates (normally right after you sign up for a credit card with a lender) that are significantly lower than the standard Annual Percentage Rate (APR).  Many cards start out at 0% APR for 6 months to a year and then switch over to an elevated APR.

Balance Transfer Interest

If you’re not aware, a balance transfer in the credit world is when you take some or all of a balance from one credit card and transfer it to another credit company/card.  Lot’s of people do this to consolidate debt and also to pay less in interest by transferring to a lower interest card.

Balance transfer interest rates can sometimes be different than normal purchase interest rates and that’s why we included it on the list.  Many lenders have special offers for balance transfers.  They’re normally lower than regular APRs found around the industry.

Credit Karma: 10 Best Balance Transfer Cards

Cash Advance Interest

Think of a cash advance as using a credit card as your personal debit card and withdrawing cash against your account.  You’re just withdrawing cash from the lender, and they add that cash withdrawal to your balance.

Most lenders charge fees on cash advances which is less than ideal.  On that same note, most lenders also charge higher interest rates on the balance of the cash advance.

The Simple Dollar: These Credit Cards Offer No-Fee Cash Advance

We’re done with the boring crap!  Let’s get into the more advanced strategies that will turn the relationship with your credit card company around.  No longer will you be paying them, but they’ll be paying you to use their card!

Credit Cards

Use Credit Cards to Your Advantage

After you’ve been in the credit card game for awhile, you can become a little more adventurous with your credit card spending and usage.  Here are a couple strategies to get more out of your cards, but not get wrapped up in more debt than you can handle!

Choose the Right Card

After your credit score increases you’ll have more choices when it comes to cards.  Before you start applying for other cards you need to first ask yourself what you want out of a credit card.  Most students will be looking for low interest rates and ease of accessibility.

While you’re choosing a new card, make sure you read the fine print and understand the interest rates.  If something goes wrong and you can’t pay your credit card bill, you need to know how to handle that situation and what rights you have as a cardholder!

Rewards Cards

We talked earlier about paying your balance in full every single month.  This can come in extremely handy when you have a card that offers a rewards program.  Many lenders offer points for every dollar that you spend and these points can add up quickly if you’re using your card weekly for gas and groceries.

Many cards are tailor-made for certain hobbies.  For instance, some credit cards have rewards programs that offer points that you can exchange for airline miles or other travel expenses.  Other cards give you cold hard cash for spending money!

Related Post: The Ultimate Guide to Traveling in Your Twenties
CompareCards: 10 Best Rewards Credit Cards

Check Your Balance

This is a tip that I personally use on an almost daily basis.  I check the balance on my credit and debit card before I make any purchase.  This prevents me from overspending and also reminds me where I’m at financially for the month!  Having the peace of mind of knowing how much money you have is a great feeling.

This principle is especially important if you’re running low on available credit or cash.  Don’t get yourself into a hole you can’t get out of!

Budgeting your credit card spending is another great way to keep yourself out of trouble!  This ties right back into setting a cap on your credit card spending, which we talked about earlier!

Related Post: Money Management – What You Need to Know!

Credit Cards

Always Look for Deals

The best thing about credit cards is that there are thousands of them.  As your credit score increases, look for better cards with better terms and interest rates.  You worked long and hard to increase your credit score, you deserve to reap the benefits!

As a side note, remember to pay off your higher interest cards before you start using another card, or transfer the balance onto your newer, more economical card!  This is a situation where you could benefit greatly from doing your research.  If you can find a great card with a lower APR than your current card and they offer a limited time, low APR balance transfer special offer, you could find yourself in a great situation!  Always do your research and see if you can find something better.

Once again, remember to pay the balance off on your old card and cancel it!

Minimum Payments

If you do carry a balance from month to month on your credit cards, (try to prevent this at all costs) pay more than the minimum payment!  Lenders make a ridiculous amount of money off of cardholders who only pay the minimum payment.  Only paying the minimum payment extends the life of your loan and will cost you in the end.

Take any extra cash you have and throw it at any remaining balances at the end of the month.  Getting these paid off will prevent you from falling into a credit card debt hole that you just can’t get out of!

NerdWallet: What Happens If I Make Only the Minimum Payment on My Credit Card?

It’s really important to remember that all of these tips will set you up with a great credit card situation, but it can all come tumbling down if you can’t control your spending habits.  Following these tips and continuing to do your research will ensure that your credit score grows and you stay out of the red.  Like we talked about earlier, having a healthy credit score will open up more attractive loans for you future home and cars.  Take the time, do your research, put in the work, and you’ll be all set after graduation!

Credit Cards

I hope you enjoyed this guide as much as I enjoyed writing it.  If you have any questions, comments, or have other tips for mastering credit cards send me an email or leave them in the comments below!

David.Coleman@CollegeInvestr.com

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About David Coleman 17 Articles
David is the founder of CollegeInvestr.com. His goal is to bring personal finance education to the millennial population. His passion for financial literacy, coupled with a background in investing and tax, gives him a unique insight into the world of millennial finance. He wants to help young adults pay off student loan debt and increase wealth without giving up their lifestyles.

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