Credit Cards: A Guide for Beginners

Credit cards are a great tool. They negate the need to carry around a lot of cash, they can earn you rewards (like cash back or airline miles), and they can help build your credit score. I’ve seen lots of people shy away from getting credit cards because they see them as something scary or something that’s been labeled as dangerous. True, credit cards need to be used wisely in order for them to work in your favor, and this guide will hopefully ease some of your uneasiness about credit cards and put you on your way to earning lots of rewards and great credit scores!

Please keep in mind this article is for absolute beginners. I’m going to try to keep this as simple as possible because credit cards can get pretty complicated, but they don’t have to be complicated to the new user who is starting fresh. Also, my strategy focuses on using the credit card like cash, meaning that if you don't have the cash already in your bank account, or if you won't have the money in your account by the end of the credit card cycle, then think again before making the purchase. Follow the steps below to start building credit and earn rewards!:

Step 1: Choose a credit card, preferably one that uses rewards. Usually the better your credit, the better rewards a credit card company will offer you. You want to make sure the credit card has no monthly fee and when you look around for credit cards, you may also want to the compare interest rates they charge. If one has an interest rate that is considerably higher than the others, you may want to rule that one out. I personally don’t really pay attention to interest rates because I pay my credit card in full every month and so don’t pay any interest.

Step 2: After you’ve chosen the credit card you would like, apply for it. Usually you can get an instant decision if you apply over the Internet. Start by applying for your first choice card, and if you’re not accepted for that card, try your second choice card and so on until you are accepted for a card. If you’re not accepted for an awards card, that’s okay. You can start out with a card that doesn’t offer rewards, build up your credit score, and apply for a rewards card later.

Step 3: After you get your card, sign it and activate it by calling the phone number indicated on the credit card or welcome letter.

Step 4: Create a budget if you don’t have one already. This can be done even before you get the credit card. If you need help creating a budget, you can see my advice in the hub called Budgeting for Couples (this article was written for couples, but single people can use it as a guide and tailor it to their needs).

Step 5: Use your credit card, but stick to the budget (and make sure your budget includes a category for savings)! Before you make a purchase, ask yourself, “Is this purchase for something on the budget and will I be staying in budget?” If the answer for both parts of the question is yes, go ahead and make the purchase. If one or both parts to the question is no, ask yourself “Do I have the money in my savings account for it and do I want to pay for the purchase from my savings account?” If either you answer no to either part of this question, don’t make the purchase. Wait to make the purchase until you have the money to pay for it.

If you run into an emergency, like having to get your car fixed, you can still use your credit card (but keep in mind your credit limit). If you’ve accumulated money in your savings account, you can transfer money from your savings account into your checking account, in the amount of however much the emergency cost you. That would be the best case scenario. On the other hand, if you haven’t saved up enough money in your savings account yet to pay the entire balance of the emergency, you can pay with a credit card but just make sure to pay off as much of the credit card as you possibly can so that you don’t rack up too much interest.

Step 6: Know your closing date of your credit card cycle and also know when your credit card bill is due. The closing date is the last day of your credit card’s cycle. Purchases made after this date will show up on the next month’s cycle. For example, if your closing date is the 14^th of the month, a purchase made on the 15^th will show up on the next month’s cycle.

Why is it important to know your closing date? Because not all credit cards have a cycle that goes from the 1^st of the month to the end of the month (although some credit cards to allow you to determine your closing date). Your budget is probably a monthly budget, so you will be tracking the purchases made between your last closing date and your next closing date. The purchases made in that time period will count toward your monthly budget. Once you reach your closing date, you start anew with tracking your budget.

Your due date is the other important date to know because if you don’t pay your bills on time you will accrue interest. You want to do whatever you can to avoid paying interest, so make sure you pay the bills on time.

Key Points

To sum up, credit cards are easy to use, and if you use them wisely you will build credit and you can earn rewards. The keys to using credit cards wisely include:

a) having and sticking to a budget,

b) keeping and growing a savings account for emergency purchases,

c) and paying your credit card on time.