So, you recently got your first credit card. Sure, you read the fine print before signing up, but you probably still have questions about how to successfully navigate this brave new world. And there are likely a few gray areas your lender didn’t fully disclose. Here, we’ll investigate just a few of the potential surprises, so you can avoid making financial missteps with your new credit card.
The minimum payment is not the total amount you owe
Your credit card statement will show you both the minimum payment amount and your total balance. The lender only requires you to remit the minimum amount to keep your card active. This can be confusing because, while you might think that all you need to pay is the minimum, it is typically just a small percentage of your total balance.
Sure, there might be times when you can’t quite swing the entire outstanding amount, but even in those situations, you should make more than the minimum payment. The more you can pay off, the better. And here’s why: If you make just the minimum payments, your account will accrue interest. This is how credit card companies make their money. And credit card interest rates can be 15%, 20%, even 25%.
Let’s say that you have a $5,000 balance on a credit card that carries a 15% interest rate. If you only make the minimum payment, you will end up paying more than $2,895.61 in interest – on top of the $5,000 you owe – and it will take more than six years to pay off.
Bottom line: Make every effort to pay off your total balance each month. This is the most important “rule” about having a credit card. Don’t view your credit card as “free money” – this will land you in serious debt trouble. If you can’t afford to pay off your total statement balance every month, you are overspending!
Don’t cancel your credit card
This is something your lender won’t tell you, and it comes as a surprise even to seasoned cardholders. Credit cards (especially your first one) play a big role in your credit history over the long term. If you remain a responsible credit card user – by making your full payments every month on time – it will have a positive effect on your credit history. But down the road, maybe you decide that you no longer want to use your first card.
If you close the account, you will instantly reduce your overall available credit. (Let’s say your spending limit on that card was $5,000 – you now have $5,000 less available to you.) And this can have a negative impact on your credit score and your overall credit history, especially if it’s your oldest card. Canceling your first credit card brings down the average age of your accounts, which makes it appear like you’ve held your accounts for a shorter time.
If you opted for a card with a high annual fee, this might be one reason to justify canceling a card you don’t use anymore. Another might be if you have a card with a super-high interest rate. (But remember, if you don’t use the card anyway, or you pay it off in full each month, you won’t have to pay the interest.)
Bottom line: Keep your credit card open, even if you don’t use it anymore. Keep the account active, but don’t use it. Check your account periodically to make sure there are no illicit transactions posted to it. Keep it in your financial arsenal – for posterity and the sake of your credit score.
Always review your monthly statement
Near the end of your billing cycle, you’ll receive your monthly statement. This might be a hard copy in your mailbox or an emailed link to an electronic version. (It usually depends on whether you’ve selected a paperless option or not. You typically need to opt-in because the default is a hard copy, but you can usually change your preferences at any time.) You might think that the only important information on your statement is the amount due, but that’s only part of the story.
Spend time reviewing the charges posted to your account. With the rampant credit card fraud and identity theft we see these days, you need to be extra vigilant. If there’s a charge that looks suspicious, it’s highly possible that an unauthorized user has accessed your account. Contact your credit card company immediately to discuss any activity you don’t recognize. If it turns out to be something you bought, no harm done. If it’s a fraud, you’ve likely stopped a thief. And most credit card companies have fraud liability policies that protect you from paying for something you didn’t buy.
Remember that the card itself didn’t need to be stolen for your information to be compromised because sophisticated hacking systems can get just about any data these days. And keep in mind that credit card thieves don’t just make huge purchases. One trick to defraud credit card holders is for the thief to use your account for smaller, recurring purchases. These often escape notice for months because your eye is more likely drawn to the larger purchases posted to your bill. Another known strategy is for the thief to “test charge” a few cents on many different credit card numbers to see which pass unnoticed before going on a big spending spree.
Bottom line: It’s your credit card account, so you’re responsible to manage it wisely. Never assume “everything’s fine” – always verify that it is. Credit thieves are successful because they are banking on the fact that not everyone reads their statement. And unfortunately, they’re right in that assumption.
As a first-time credit cardholder, you might have many questions and concerns when it comes to savvy credit usage. Remember, the above points are only a few of the many common credit card scenarios where we’ve seen people fall. At DebtGuru.com, we’ve helped people struggling with debt – and if you ever need financial advice, we’re here to help you.