While I was growing up, I heard it over and over again: be careful with credit cards. Do not get one if you can manage to avoid them. They are dangerous and can lead you into financial ruin.
My parents did their absolute best to impart this message onto me, and it is something I took to heart for a large portion of my life. However, how true were these warnings, and do I feel differently about this topic now? The answer is…complicated, which is how I will put it for now. Obviously, there is plenty of nuance to this topic, and I want to approach it in a measured manner.
If you grew up hearing similar stories or resonate with the questions that I have posed, this article may be helpful for you! I am looking to unmask some of the mystique surrounding these cards. Stick around to learn more about them and how they operate!
What is a Credit Card?
Let us get right into it. A credit card is a credit agreement with a lender that is typically called a “revolving door” in terms of lending. Why is that? Well, when you are approved for one, you are given a certain credit limit.
I will use two-hundred and fifty dollars as an example for this. Let us say that this figure is the limit that you are given. You can spend that much money on the card before you hit the maximum. However, once you pay that amount back to the lender, you are then able to borrow that amount again. Thus: we get the “revolving door” attribution.
Most of the time, you will be charged interest on what you borrow, so in that way they are quite similar to a traditional style of personal loan. However, there are not really restrictions on what you can purchase with them (within the law, obviously). That gives them a significant leg up on other types of credit agreements.
Also Read: How Can You Borrow From A Lån “Cheap”?
Are they a Bad Thing, though?
Shifting gears just a bit, let us dig into the main question that I want to answer today. Unfortunately, I cannot provide you with an easy “yes” or “no.” Instead, as you may have already guessed, the answer is “it depends.” There are circumstances in which they can be a very negative thing, but there are others in which they are quite positive!
I am the type of person who prefers to start with the bad news when asked, so that it is why I am starting here. The biggest thing to remember about a credit card is that it will have a significant impact on your credit score. That little number can influence a lot of things in our lives, including our ability to rent a property, purchase a home, and buy a car.
So, something that can significantly alter that figure is worth keeping an eye on. Where it can have a negative impact is if you borrow out of your means. What does that mean and/or look like, then?
If you consistently max out your card without plans to pay it back in full, that is probably not the best usage of one. In fact, the percentage of our usage versus our limit is factored into our score. So, maxing it out all the time can reflect poorly on your spending habits and your score for future lenders to see.
Of course, if you miss payments, that will also decrease your score. Defaulting on it would be even worse, tanking the number to a huge extent. That is why it is so important to be very careful when we are approved for our first one.
As you can see, there was some merit to those warnings that I heard all the time as a young child and even a teenager. My mother was honestly quite concerned when I told her that I was approved for my first card.
She did not want me to use it at all and balked at the idea of me even getting gas with it!
I think a large part of why she was so worried was that she did not fully understand the positive things that they can do for our overall financial health. Admittedly, it does appear quite counterintuitive at first glance. How does going into debt, even in a small increment, become a good thing to do?
Well, there is some explanation of that on pages like this one if you go to https://www.kredittkortinfo.no/kredittkort-på-dagen/, but I will be doing my best to lay out the details for you as well. Essentially, it comes down to the fact that paying our bills on time is one of the biggest ways that we can improve our credit scores.
You see, to prove that we are a trustworthy borrower, we do indeed need to borrow some money first. Lenders are hesitant to work with people who have zero history and have not proved themselves to be able to handle small debts. There are a few ways that this can be effectively accomplished.
One of the most popular ways is one that I alluded to above. What I do is put all of my gas purchases on my credit card. Since mine offers cash back options, they typically match a small percentage of those expenditures which I can then redeem or put back into my balance.
Often, the amount that I spend on gas is not overly high, so it is a manageable bill to pay off at the end of the month (or whenever it is due – it could be quite different for you).
When I do this, it demonstrates to lenders that I can be trusted to make scheduled repayments in a timely fashion. Thus, my credit score gets a boost every time that I do this successfully! Obviously, it is not the only way to accomplish this, but hopefully that example gives you some idea of what to expect.
Also Read: Where to Get a Loan If You Own a Business?
So – Should You Get One?
At the end of the day, it is difficult to get through life right now without having some sort of credit card at one point or another. Whether we really want to or not, inevitably we will end up with one or two down the line. It is not a bad idea to start applying sooner rather than later, though, so that you have something to fall back on in case you have an emergency crop up.
So long as you are very cautious with your spending and do not splurge irresponsibly when it is not practical, having one is not a bad or dangerous thing. For those still hesitant, you may just not be ready yet. That is totally okay.
Self-reflection is a big part of figuring out if we can handle having one or not. If you are the type who immediately spends all of your paycheck, it could be quite risky to apply for one with a large credit limit.
Get to know yourself and your habits before you decide which kind to apply for and whether you should get one at all. Once you get that sorted, though, you should be good to go!