Poor Frank. It was the end of a wonderful dinner with his clients. Frank X. McNamara declared dinner was on him and strode over to the register. It felt good to be a man in the 1950’s. Especially a man with clients whom he could treat to dinner.
As he reached into his coat pocket, his heart stopped. (Not literally.) He didn’t die. But oh man did he ever wanna! WHERE WAS HIS WALLET!?
His plan to impress his clients was starting to backfire. His wallet was in the pocket of another coat. Frank whispered his apologies to the cashier, and made a beeline for the door. He called his wife to bring him some cash, and she did. Frank X. McNamara’s little experience led him to start The Diner's club which issued cards accepted by 27 restaurants across New York. The Diner's club had 1.3 million cardholders by the mid-1960s.
Back then, credit cards were meant to be more like the loyalty cards we see today. Things got bigger when Bank of America introduced the BankAmericard. It was later named the Visa card that we know today.
Fast forwarding to today, credit cards have become a norm. Some view credit cards as a life saver while others view them as the devil incarnate. But a credit card is more like a tool.
Like any tool, if you use it properly it will help you get the job done. But if you use it recklessly you might end up losing a finger or two. So how do you know when you’re ready to handle this tool?
Knowledge is Power
Whether you’ve received formal schooling or not, the more you know about something before using it, the better it will serve you. That’s common sense right? Getting a credit card is not rocket science. But for you to trust that you’ll use it responsibly, it’s important for you to make sure you at least know the basics.
Whether you’re using a credit card to buy some groceries, or treat yourself to a nice meal, there are five parties involved .
The Cardholder (that’s you!)
As long as your name is on the card you are the cardholder.
This is any store that accepts a credit card as a method of payment.
The Acquiring Bank
This bank processes the card for the merchant by collecting the transaction details and sending them to the card schemes.
The Card Scheme
The biggest card schemes are Visa, MasterCard, American Express, and DiscoverCard. These guys set the rules for the payment. They make sure the transaction is legit before sending details over to the issuer bank.
The Issuer Bank
This is the bank that provided you with the credit card. It makes sure your account has sufficient funds to complete the transaction without going over the limit.
As an aspiring cardholder, you start with choosing your issuer bank. Ideally, this would be wherever you currently do your banking because you’ve got history there. That should make applying easier. (Unless you’ve got a bad history there that is. Let’s hope not though!)
Before diving in head first you’ll want to do your homework. You’ll need to know your bank’s: annual percentage rate, minimum payment, annual fee, introductory interest rates, loyalty points, rewards, cashback, etc.You can request all this from your bank. If anything doesn’t sit well with you, it wouldn’t hurt to look into what other banks have to offer. What, though, about what you have to offer?
The Elephant in The Room
His name is CREDIT SCORE, and you want him to be nice and round. Your credit score is determined by a variety of factors like payment history, amounts owed, credit history length, credit mix, new credit, etc. A very popular credit score used by banks is FICO .
In a nutshell your credit score shows whether you can be trusted with borrowing money.It is your credit reputation. Paying your credit card bill on time helps with building your credit score. But you don’t have one yet, so why is this relevant? Well, would you trust someone with a tarnished reputation? Your bank will want to know you can be trusted to pay your credit card bill. A general rule of thumb is pay your utilities and rent in full and on time. You can also look into having these payments reported to credit bureaus. This may very well improve your credit score.
If you haven’t been paying your bills on time recently, it won’t hurt to see what you can do about it even before applying for a credit card.
Whatever credit history you currently have, you want it looking like a good recommendation, and not a rap sheet. Let’s have a look at what else you can keep in mind to achieve this.
[Check out Financial Planning for Peace of Mind for some tips to get your finances in order.]
The Good, The Bad, and The Ugly
Hope you’re the type that prefers to hear bad news before good news. We’ll consider the above subheading in reverse, starting with The Ugly.
Swiping that card can feel euphoric. Swipe and worry about it later! Woohoo! This can then lead to more reckless swiping. The result? A huge bill you may very well be unable to pay. This bill will keep getting bigger as time passes by due to late fees,interest, and other possible penalties. If you’d pinch yourself you would find that you aren’t dreaming. Like an animal caught in a snare, you will be trapped in debt. Your card could then be frozen. Your debt could be sold to a collection agency, and the collector of your debt could sue you. Your salary will take a hit. Ouch!
Some interest rates will have you paying through the nose. Be sure to read all the terms your bank provides you with carefully. You CANNOT forget to pay your credit card bill. You will be charged a late fee, and you might end up paying higher interest rates.
You can pay a minimum amount toward your credit card bill if you're unable to pay it in full. You will not be charged a late fee if you do so. But there's a catch. You will be charged interest on the remainder of your bill. The longer you take to pay it off, the more you'll end up paying.
The less you use the credit on your card, the better. But you’re not thinking of getting a card to NOT use it. Experts recommend not using over 30% of your card limit. If your card limit is $500, you will use only $150. This might feel a bit stifling. However, it will make paying your credit card bill in full and on time feel like a piece of cake. Your credit score will thank you. Enough with the icky stuff, let’s move on to The Good.
Not sure about you, but a lot of us HATE walking around with wads of cash in our wallet. You won't need to worry about that if you’ve got a credit card instead. It’s so convenient.
Yes, the same can be said of a debit card, but credit cards offer more security. If your credit card or credit card information happens to get stolen the Fair Credit Billing Act (FCBA) ensures that you won't be responsible for whatever some scum buys under your name. Cool right? The same cannot be said of debit cards.
It’s also cool that you can use a credit card for emergencies without being limited to what’s in your bank account.Credit card issuers also provide you with occasional rewards. They really don’t want you to take your business elsewhere. Paying your credit card bill in full and on time is also great for your credit score.
Timing is Everything
So when are you really ready to have a credit card? It is suggested that you get a credit card as soon as you’re 18 years old. There are plenty of beginner credit cards that can help you ease into the world of credit. The sooner you start building a solid credit history the better. Especially if you plan on getting a loan in the future.
But, like that slightly cheesy, but very true quote says, “ With great power comes great responsibility.” You are ready to have a credit card as soon as you are responsible enough to be in control of the good, the bad, and the ugly. Life happens, but being in control depends a lot on you.
So ask yourself:
- Do I tend to unnecessarily spend money I had planned to save?
- Do I pay my bills on time?
- Do I often borrow money from people and take forever to pay them back?
- Do I have self control?
Questions like these can help you reflect on yourself, and make adjustments where necessary. Be true to yourself, and remember, timing is everything.
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