What Is a Credit Card?
A credit card is a great tool to have at your disposal if you ever find yourself needing to purchase something you don’t have enough cash for or something devastating happens.
But if you’re not responsible, it will quickly become a mass of unpaid bills that keep you tied down for your financial future.
Using a credit card is essentially receiving a limited personal loan on demand, you’re able to purchase just about anything without necessarily having the cash on hand. When you receive a bill, the bank wants you to repay the money you were loaned. If you pay in full, you merely pay the exact amount you owe.
If you leave anything unpaid the card company is going to hit you with the interest rate, generally between 12-29% depending on your credit score, and adds that on to your total bill. Not paying in full is the main reason the average American has more than $15,000 in credit card debt.
Credit Cards vs Debit Cards
The difference between credit and debit cards can be confusing, but it’s extremely simple. With a credit card you are taking out a loan on that purchase, not in fact using your own money. With a debit card, the money is coming directly out of your account. Credit companies lend with the thought that you’re going to repay at the end of the cycle. If you don’t, interest is charged.
Credit card companies charge the store you make the purchase a fee between 1-2%. This is how they really make money. With a debit card if you don’t have the funds you need in your account, you simply can’t make the purchase. The advantage of a debit card comes down to budgeting. It’s easy to spend money that’s not coming directly out of your account.
One big advantage of credit cards is that they offer you more security and usually have rewards programs. If a credit card is stolen you aren’t responsible for charges if you report it. Also, some of the rewards you accumulate can really add up. With a debit card, a thief can spend whatever is in your account before you may realize it, and even then you need to dispute the charges and you could still be liable for at least $50.
Why Students Should Think about Getting a Credit Card
There’s always been a debate to whether a student needs to have a credit card, and the answer should be yes if parents are sure to add on lots of conditions.
Often, most banks are going to prefer the student be added to the parent’s card in case trouble arises. The main reason students do need to have a card is to start building their credit and get a credit history established. There are a number of positives beyond that, it teaches financial responsibility and makes it easier to track spending.
On the negative side, it can be tempting to overspend and damage your credit score. It may be hard but it’s worth the work to start getting that credit score as it will help you out down the road. Be smart and keep it paid off, and you’re golden
How Credit Card Debt Starts
Roughly half of all card holders pay the full balance every month.
The rest pay the minimum or do other actions that will eventually hurt their credit. There are a number of reasons debt can become bad, such as impulse buying or not tracking spending, but the big one is only making the minimum payment. That’s the best way to turn a small hill of debt into a massive mountain quickly.
There are some emergencies that trap people with debt — especially from outstanding medical bills. Sudden expenses come up and credit cards seem to be the solution. Unfortunately, using credit cards is only a temporary solution. Using a credit card to cover one emergency or pay one extra bill still leaves a hefty debt that is not easy to erase. Interest charges build on the owed balance and getting back in control can seem impossible.
Managing Credit Card Debt
Don’t put off credit debt long term.
If you have credit card debt now, it’s already past due for you to start working on that.
- Set a budget
- Set a time frame to pay it all off
- Set reasonable goals
Sometimes you just have to be willing to sacrifice some of the spending that got you in that position in the first place.
Holding yourself accountable and just making smart purchases could turn your finances all around and make your life that much easier.