Credit cards are a good way to build credit history and to give you flexibility with paying your bills, but there are a few things you should know before you take out your first credit card.
- Credit cards are not “free money”.
It will be tempting to spend as much as your card allows, but it’s important to remember that a credit card isn’t free money for you to spend on whatever you like; it is a loan that you need to pay back every month. If you pay it off every month, you will only need to pay back what you have spent; however, if you let any of your balance roll over each month (for example, only paying half of the balance or paying the minimum payment), you will also have to pay back interest on what you spent, and interest can be anywhere from 8-36%.
- You will need to make your minimum payment every month.
Even if you plan to pay it off next month, you still need to make at least the minimum payment this month. If you skip a payment, you could be charged a late fee, and it could even have a negative impact on your credit score.
The minimum payment is usually a percentage of how much of your card is in use or $25, whichever is more. Because of this, you should only get credit cards with limits where you KNOW you will be able to pay the minimum payment every month, even if the card is almost maxed out.
- Your credit score and history will impact whether or not you’re approved for a card and how high of a rate you have.
If you have good credit history and a good score, you could have a rate as low as 8.99% for a credit card with the MTEFCU. If you have poor credit or not much credit history, it could be as much as 14.99%; however, after making your payments on time and keeping your balance low (or paying it off every month), you could refinance with your new, better credit score to get a better rate.
- Having a credit card can help you build credit.
By using your card to make purchases and making payments every month, each of those transactions contributes toward building your credit history. Using a small percentage of your card limit (less than 30%) lowers your credit utilization rate, which can improve your score. Paying off your card every month will also have a positive impact on your score.
Also, even if you do not use it, you may want to keep your oldest credit card open. This is because the “age” of your credit history matters, and your credit is only as old as your oldest open loan; this means that once you close your oldest credit card, your credit history is only as “old” as your next oldest open loan.
- It matters where you get your credit card.
As mentioned above, credit cards can have an interest rate of anywhere from 8-36%, but having a good credit score doesn’t mean you can get an 8.00% interest rate from any lender. Major credit card companies and store credit cards tend to have higher rates than credit unions, so while they may have in-store perks, you end up paying more to them over time. If perks are important to you, balance that with the interest rate to choose the card and lender that is best for you.
Credit cards are handy to have, especially if you want to set up convenient automatic payments for things like bills, but make sure you are ready for the responsibility that comes with having one! If you’re not sure what type of card to get or have questions about credit cards, please contact us at 906-482-5005 or firstname.lastname@example.org and one of our loan officers will get back to you as soon as possible!