Have you ever thought about owning a credit card, but couldn’t pinpoint why you need one? Spending on your lifestyle and purchasing habits, a credit card can bring you either many benefits or headaches. Before you get one, it’s important to understand its basics and evaluate whether you’re ready for the financial responsibility or not.
Owning a credit card provides many advantages and convenience to users when it comes to purchasing products or services, both in-store and online. This post should answer any of your questions about this financial tool, together with tips on using your card wisely. Let's get started!
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What is a Credit Card?
A credit card is a thin rectangular card that serves as a “plastic money” in a sense that you can use it to purchase items, pay tabs, pay for gas, and more, without lugging slabs of cash in your pocket. It’s a financial product that allows users to shop now and pay later—sometimes in smaller amounts for several months.
Beyond giving cardholders this kind of purchasing power, credit cards provide exciting perks like rewards and air miles or points. Owning a credit card is a privilege since not everyone who signs up for one gets their application approved.
So, why do you need a credit card? You may need it to pay for big-ticket items that you can’t afford in one payment. Apart from being a convenient and secure way to pay, owning one can also help you build your credit score, which determines how reliable you are expected to pay the money you borrowed.
Note that credit cards aren’t synonymous with free money. There’s a maximum amount that you can only borrow, and you must pay it back over time.
Types of Credit Cards
There are different types of credit cards offered by different banks. You must do serious research and compare credit cards to find the best one that suits your needs and supports your spending habits.
- Cashback Credit Card. This is perfect for those who prefer to redeem their points for cash, which they can use for other purchases. The cashback reward will be kept in the account until the owner decides to use it. Some cashback credit cards require a minimum spending amount to gain higher cashback and offer rebates on gas, dining, groceries, and shopping.
- Rewards Credit Card. As the name suggests, this card provides rewards points every time it is used. The points earned can then be used to redeem products from affiliated merchants. Some rewards cards require a particular spending amount to earn higher rewards.
- Secured Credit Card. This type of card is an excellent choice for those who don't have a credit history or have impaired their credit status. It requires a security deposit to be stored on the card. Usually, the credit limit of the card matches the security deposit. Note that monthly payments are still required for secured credit cards.
- Air Miles Credit Card. This credit card lets users earn air miles for every dollar they spend or pay for annual fees. This type often doesn't have a minimum spending requirement or cap on miles, making it the perfect choice for those who travel frequently and want to optimize their mileage points for better airline seats.
Reasons Why You Should Get a Credit Card
People don't just sign up for a credit card for the sole purpose of making large purchases. Here are the other advantages of credit card.
- To build your credit score. When you use the credit card responsibly and consistently pay the bills on time, your credit score will increase. The higher your score, the easier it is to apply for loans in the future. When you’re ready to build your credit, owning a credit card is a great place to start.
- To pay conveniently. With a credit card, you don't have to carry loads of cash in your wallet. You can simply swipe the card to pick up the tab, gas, or when shopping.
- To buy big-ticket items. If you’re eyeing an item that you can’t afford in cash for now, but you really need to get (e.g., laptop for work), a credit card allows you to purchase one and pay for it later in installments over several months.
- To maximize your spending. Using your credit card for your purchases allows you to gain from every purchase through points or other forms of rewards that you wouldn’t otherwise earn from cash transactions.
- To earn rewards. The more you use your credit card, the more rewards you can earn that you can use for your future purchases. You can choose to redeem them for bank deposits, credit statements, or annual fees, as well.
Reasons Why You Shouldn't Get a Credit Card
If you still have yet to manage your finances, think about holding off on applying for a credit card.
- You find it difficult to control your spending habits. It takes a lot of self-control and financial discipline to use a credit card. Without these, you can quickly and easily rack up balances and get yourself in debt, piling interest, and poor credit score.
- You don’t have enough money to cover monthly balances. You may get approved for a credit card if you make enough money to qualify for one. However, if you already have enough bills to pay and there’s barely any room left for a credit card, then getting one might not be the best idea. The longer you carry a balance in your card, the higher the interest you will collect, and that can be costly.
- You already have enough debt. If you still have enough debt that you have yet to pay, forgo signing up for a credit card for the meantime until you’ve reduced your existing debt obligations.
Things to Consider When Choosing a Credit Card
When it comes to selecting which credit card is right for you, you need to go through these considerations first to help you pick the best one that suits your needs.
- Lifestyle and spending habits. Are you the appointed grocer in the family? Do you dine-in often? Do you travel frequently? Taking a good look at your lifestyle and evaluating your spending habits can help you determine the perks you'll most likely benefit from.
- Annual fee. There are credit cards that require annual membership fees, while there are a few ones that don't. Often, those that require an annual fee comes with exciting perks.
- Credit card perks. As mentioned above, there are different types of credit cards, each offering different benefits. You can find credit cards that provide fixed percentages for their rewards program. Some offer higher rewards for specific categories, such as 5% cashback for purchases made at the credit card bank's affiliated merchant.
- Sign-up bonus. Many credit card companies offer a special signing bonus to new users when they meet a specific requirement, such as spending $500 within three or six months upon their credit card receipt. See if the sign-up bonus is worth it when selecting a credit card.
- Annual Percentage Rate (APR). This pertains to the interest rate you need to pay if you have an outstanding balance. Some credit cards provide low APR at first, but they eventually increase after you've had the card for a year or more.
- Minimum balance. This is a small consideration that you have to think about. Determine the minimum balance you’ll have to cover monthly to avoid accumulating interest. See if your credit card options’ minimum payment requirement meets your budget.
Tips for First-Time Credit Card Owners
Make sure to observe good credit card practices to keep away from debt and maximize your credit card’s benefits.
- Use your rewards. Check your credit card’s requirements to claim your earned rewards or cashback. Some reward points have expiry dates, so make sure to use them before it renders worthless. Pro tip: be updated with your bank’s promos to maximize your credit card’s perks.
- Pay your dues on time. Make it a habit to pay your credit card bills on or before the due date. This not only prevents you from racking up in late fees but also helps increase your credit rating.
- Pay your monthly bill in full. In the same vein, make sure to pay off your monthly bills in full. It is better to pay off the minimum monthly due than skipping it, but only meeting the minimum can lead to higher interest rates that can discredit your earned points or cashbacks earned.
- Use your card for your needs. As much as possible, only use your credit card for emergencies and needs. For instance, to pay off your internet bill that’s due before your payday. Think of credit cards as a temporary loan to yourself that you need to repay as soon as you have the means to avoid hefty interest rates.
- Spend what you can afford to pay off. Before you use your credit card to purchase something, make sure that you have the financial capability to pay off the monthly fee. Use your credit card wisely.
Wrapping It Up
Owning a credit card is a privilege. Before you sign up for one, make sure that you have your finances sorted out, and you have the discipline and control to handle one. If not, you can look into credit card alternatives for the meantime. Practice healthy financial habits first, and when you feel ready for the ultimate test - owning a credit card - try your luck in applying for one.