My best friend has two kids at university, and another heading there next year. While on speakerphone in his car, he shared with me that the elder two just received their first credit cards. I’m not quite sure what he said next, as it was a bit muffled by the “woo-hoo” coming from his youngest in the passenger seat.
You may laugh, but for me – with three of my own eventually heading to post-secondary – that’s a bit of a nervous prospect. So while I’ll resist going daddy-knows-best on you here, allow me to share some lessons I’ve learned that can help keep that credit comfort from becoming a debt dilemma.
Necessary access to money, but not necessarily more money
There is no point in pretending that having a credit card is a luxury. For many young adults like you, it is a necessity in order to manage out there on your own. You can’t rent a car, book accommodation or secure an increasing range of services without one, even if you have the money ready to pay right away.
Of course it’s not open-ended. You will have a credit limit, and it’s important to keep that in perspective. It’s tempting to start believing you have more money, but you don’t.
In fact, if you spend more than the money you have available to pay off the card balance, you will have less money. By that I mean that you must pay interest if you don’t pay off your balance at the end of the month.
Minimum payment. Maximum cost?
The minimum payment shown on your credit card will be much less than the amount you spent with it in the month. Too often it is (mis)understood to be the suggested amount for you to pay. It is not. It is the amount you are required to pay in order to remain in good standing with the card issuer.
If you pay anything less than the full balance then you will pay interest on that full balance, not just on the unpaid amount you leave behind.
That also means that your next statement will include both that unpaid balance and your continuing spending. That can put you on a treadmill that is harder and harder to get off as the months roll on.
Simple rules to follow
A good practice is to only use the credit card as long as you have the money available to pay it off. That may not sound like much fun, but this is not a game. It’s your financial future.
Start by checking your money balance at the start of the month. Each time you use your card, be sure to get a receipt so you can keep running track of what’s available. In fact, your mobile app or online site may have a function to alert and track that for you automatically.
Beyond the mental note, you could make payments during the month, or set aside the funds in a side account if you prefer. Whichever approach you take, you put yourself in a better position to zero out that balance when the statement arrives.
By being conscientious, you will be able to enjoy the freedom and flexibility a credit card offers, while gaining understanding and control over your finances.