Okay, to start things off honestly, I am clueless about how the whole “credit” system works. I have never owned a credit card, never taken out a loan.
However, I’m considering getting a credit card from my credit union soon. I’ve been avoiding it so far because I haven’t felt much need for it; everything I wanted I could pay for with my debit card. (And to be honest, the idea of paying for something with money I may not have just creeps me out.) But obviously, credit cards are not only useful, but rather indispensable in modern society, and it would be good for me to cover all options.
This is making me curious as to what exactly “credit” is and how it’s built, how credit cards factor into the system, etc. Also, I’d like to know what some intelligent practices are using credit cards would be; I’m a pretty financially cautious person, and don’t like to start off with something new without knowing how it works and having some idea of what using it responsibly would entail.
So tell me what you know! How does the system work? What sorts of practices should I try to keep up or avoid? Or is the system really not as confusing as I think it is? (Keep in mind, I am completely clueless.) Thanks for your help!
(Mods, I’m a little tossed about which forum this should be in; if it belongs somewhere else, thanks for moving.)
How it works: The CU gives you a credit card. You take said card to a store, pick out items you want, show the cashier the card, sign the receipt, take said items home with you. Then each month you get a bill from the CC company showing how much you owe, plus interest. You then pay off a bit each month, or all at once, until the balance is zero. Repeat as needed.
Two things associated with credit are your credit history and your credit score, higher scores are better. As you would guess credit history is literally the history of any credit you have had or currently have, be it credit cards, student loans, auto loans, home loans, etc. The history consists of what your limit is, what you currently owe, how timely you have been with your payments, defaults etc. Your credit score is generally just a numerical representation of your credit history, but it is is not some known formula, different credit reporting agencies use different formulas. But there are some general rules, like making timely payments keeping low balances (but contrary to popular belief keeping no balances does not necessarily give you a better score). Better credit scores and better credit histories make someone eligible for better credit terms, meaning lower interest rates.
You have an ideal mindset. I’ve had a credit card since I was 18 and I’ve never had to use it for credit. I’ve essentially used it as a debit card.
Some of us originally got them for “convenience” but now that debit cards do the same thing, that argument is gone.
The whole idea of “credit” is to allow you to buy something you can’t afford, and then pay it back in installments with interest. It’s a good idea for houses and college, and to a lesser extent cars, but in my opinion, nothing else.
One way of using a credit card is essentially the same as a debit card. That is, only buy something with it when you have enough money in your checking account to cover it. The difference is, instead of the money getting deducted immediately, it’s there until you write your monthly check to the credit card company (or make your online payment, or whatever). But if you’re smart, you’ll think of the money as being gone immediately, just as it would be with a debit card, so that you can’t spend that same money on something else.
One big advantage to having a credit card is that, even if you normally use it the way I’ve described, you have a very easy way of covering unexpected expenses in the case of emergencies. (Of course, having an easy way to borrow money can be bad if you have no financial self-discipline, but, used responsibly, it’s handy to have, and a heck of a lot better than those Payday Loan places.)
There are also some cards out there with cool benefits. I rarely carry a balance on mine (when I do, it is usually unexpected car repairs), but I use it regularly (sometimes CC companies are better than debit cards when dealing with false charges, refunds, etc.) and everyone once in a while, I get a $25 for Amazon.com - cool! Like a little windfall! (Od course, I always spend more then $25 at Amazon, but still…)
This is not entirely true. If you want to rent a car for instance, it may not be possible with a debit card. Same with settling a hotel bill. My bank had a promotion several years ago to get business travelers to use their debit card while traveling. I tried to settle a $518 hotel bill with my debit card. Nope, sorry you have a $500 / day limit. Declined. I called the bank. Oops, OK you now have a $750/ day limit. Back to the front desk. Declined. :mad: :eek: That was the very last time I ever tried to use a debit card while traveling other than to draw money at an ATM.
I agree. I don’t charge more than I can pay off in a month, or two at the most.
My advice - It is a good idea to have a credit card as a backup in case of financial emergencies. The practice of always saving your money for what you want and then paying with cash is the optimum to me, however, something could come up that you just don’t have the cash for at the moment.
It is a good idea to use the credit card occassionally in order to build up your credit history / score. This will pay off in the future when you get a home loan, etc.
It is a good idea to always pay off your credit card in full, don’t carry a balance unpaid. Never pay just the minimum payment, you could end up taking years to pay off a pair of shoes and dinner out.
Get a card with the lowest possible interest rate. Make sure there is a grace period on charges, which means they do not charge you interest from the date of purchase.
Credit cards can also offer some protection to you on your purchases. Some offer refunds if the item is lost, stolen, or broken within 90 days of purchase. You also have the dispute mechanism in case you have a problem with the merchant or merchandise.
However, because you would be new to it, be very very careful using your credit card. It is so easy to buy this or that, take a small trip there, eat at that place you always wanted to go, buy someone that special gift, etc. And that’s just the first month you have the card, next thing you know the bill comes and you owe $3,000. :eek:
Actually, if you faithfully pay off your credit card every month (as I do), the interest rate becomes irrelevant. Try to always have enough cash available to cover anything you buy, and then you can use your credit card simply for its convenience value.
I have an American Express card and a Mastercard, both with no annual fees. The Amex gives me twice as many Air Miles as the Mastercard does, so I only use the Mastercard at places that don’t take Amex. I don’t know which has the lower interest rate, and I don’t care.
The other benefit that I haven’t seen mentioned here is online shopping.
I just bought concert tickets for a show in New York today. Without a credit card, I couldn’t do it. You can’t buy tickets at an American concert from Canadian Ticketmaster outlets. And even if I could, I don’t feel like walking around with $400 in my pocket…Ticketmaster doesn’t take debit.
But like others have said, you can use it sparingly. I pretty much only use mine for gas (makes it easier to keep track of monthly spending) and concert tickets (as previously mentioned).
You are better off building credit through things like car loans, student loans, cell phone bills, etc. and paying them off consistently and on time.
Or if you need to make a one-time large purchase like a mattress, appliance, HDTV, get a store credit card that has 1-year no interest financing and use it to make that purchase and don’t ever use it again (cut it up). Divide the total by 11 payments, make them, and be done with it.
I’m almost tempted to say “avoid credit cards at all costs” however they do come in handy for a few things like buying on-line, holding hotel rooms, renting cars, etc.
You can bypass this though with a checking account debit card THAT HAS A VISA LOGO. They are accepted everywhere visa is accepted yet link directly to your checking account.
Plus almost all hotels ask for a credit card to hold your reservation. Even if you pay in cash, it is nice to keep your room if you get there late.
Never use credit cards to borrow money. They have the worst interest rates outside of loan sharks and the places that advance you money on your paycheck. If you are planning to buy something you can’t pay off - don’t. Save the money first, and then buy it.
Some cards give you cash back, like Discover (no annual fee also.) I have a Visa which gives points to things like gift cards. There are also card that allow you to accumulate airline miles and the like, but a lot of them have fees and limit you to one airline. I’d compare them to the cash you’d get from the other cards.
I don’t know why anyone has not mentioned it yet. I am not sure about the US but here in Canada we get credit cards that actually give reward you to use them and the higher the use the higher the reward. Plus these cards come without any fee.
As an example, my American Express card gives me 1 ‘Air Mile’ for every 20 dollars charged to the card. Using the card with merchants that offer ‘Air Miles’ on their products makes the miles add up faster. In the last 10 years that I have had this card, I have clocked up enough Air Miles to have got 2 digital still cameras and one video camera, a total of almost $600 worth, just for charging most of my expenses to the card.
Similarly, my Master Card rewards me with one percent of my purchases on the card.
As long as you are careful to pay off the balance in time without incurring interest and use the card without exceeding your payback limits, a credit card can be rewarding too.
One more thing. By law your exposure from a lost or stolen credit card is $50 by law. I don’t believe that is true for debit cards. I do believe that some banks extend this limit to their customers, but it is not legally required.
I have never paid one cent of credit card interest!
I pay off in full every month, & sacrifice if necessary to do so.
And the card I pick gives me points towards gift certificates on a certain on-line bookstore.
I use it to buy gas.
Ergo, I get free books with my credit card.
Other cards give cash back, discounts, or deposit sums into a savings account.
That’s sort of like saying “avoid alcohol at all costs.” For some people, that’s good advice, but for others who have never had a problem with them, it’s needlessly alarmist.
Oh I guess I must mention the one time when my credit card saved me big time.
I had purchased a return air ticket ($1200) and had flown AirCanada3000. One way into the trip the airline went bankrupt with its aircraft grounded overnight, leaving me stranded. I had to purchase a one way ticket on another airline to get back.
My credit card refunded me the cost of the return ticket, with no hassle at all, since one of the clauses of the credit card insures you for purchases made and goods not received.
I’m confused as to how credit scores are assigned in some cases. At my current job, I have to review credit reports and I’ll sometimes see a borrower who has had a bankruptcy 3 years ago, but because they’ve paid all their obligations on time since, the fico score may be in the upper 600s.
But when I checked my own credit report, I’ve had no late payments of any kind in the past three years, although I have an unpaid cell phone bill for $20 from 2001 (actually my ex-wife’s but my name was on the account too). I have a fairly solid and long credit history, but my score has gone from 715 to 585 since the cell phone account was reported (they only started reporrting it last year for some reason). Is a $20 unpaid cell phone account really worse than bankruptcy?
I think it’s the age of the debt that’s the factor, berff. Paying something late has an immediate impact that gradually drops off after time.
Your 2001 cell phone bill is getting ready to expire this year (I think it’s seven years) so this may be a last ditch effort to get the money, by reporting it now.
:eek: That was the very last time I ever tried to use a debit card while traveling other than to draw money at an ATM.