You cannot always get what you want. The first person who may have told you this was probably your mother. She was right... Suppose you are envious of the life you do not have or were never given before you hit adulthood. Perhaps you are considering applying for a credit card to go on a shopping spree, travel the world, or handle a serious emergency. However, there is one way to make it happen. Expanding buying power and building your credit score may seem too good to be true. However, there are a few things to consider before taking the next step to better your future.
What Is a Credit Card?
If you do not have enough money to pay for something, you may borrow money to do so. For example, a credit card is a type of unsecured debt. Whereas a loan is backed by a bank or collateral such as a house or vehicle.
A bank card looks similar to a debit card. Nonetheless, it has the power to benefit one's life or destroy one's financial or mental well-being if mismanaged. According to the Federal Deposit Insurance Corporation (FDIC), in its digital form, a credit card represents a payment system that supports both commercial and consumer business transactions. Different types of credit card programs include the following:
- Standard cards
- Premium cards
- Affinity cards
- Co-branded cards
- Corporate cards
- Travel and entertainment (T&E)
- Home equity cards
- Cash-secured cards
What Is the Difference Between APR and Interest Rates?
Before applying for a line of credit, it may be wise to look into the terms and conditions regarding the annual percentage fees (APR) and interest rates. These factors may determine whether you decide to complete the credit application or not. The primary difference between interest rates and annual percentage rates (APRs) is that APRs involve additional fees, while interest rates do not. In other words, the annual percentage rate involves more than the interest rate alone, including fees and additional charges.
The Value of Having a Credit Card
Not everyone has a contingency fund or family to rely on and borrow from in times of crisis. Having credit can feel like a financial safety net. This is true if you are able to purchase what you or your family needs and make your payments on time. Research indicates that possessing a credit card can be a convenient way to build your credit. You can also earn rewards and learn responsible credit practices by doing so. Different ways to manage credit responsibly include the following:
- Making sure to pay your monthly card bill payments
- Paying attention to service agreements
- Budgeting your funds
- Using free resources for support
- Keeping your credit utilization low
When Should You Use a Credit Card?
Although a credit card can be a quick way to please others or get whatever your heart desires, this should never be the only reason you choose to swipe your card. Doing so can quickly backfire. For that reason, it is wise to use your credit account for specific needs, not your wants.
Recklessly swiping your credit card or financing purchases could rapidly run you dry. This can lead to financial distress that can oftentimes overlap with generalized anxiety and poor overall well-being. Therefore, it is essential to save your personal finances for important life assets. For example, you may need to save for a down payment on your next house, car, or child's higher education expenses. You will also need to save for retirement to ensure a positive future for you or your spouse.
What Happens if You Do Not Pay Your Credit Card Back?
Moreover, if you fail to pay your credit account back, the creditor may pursue you through collections. You may start to get one or two calls, and if you ignore them, you may need to clear out your voicemail inbox or begin making payments. Chances are you'll miss out on other important messages, leading to another dumpster fire.
The word "fee" can sound unsettling. Therefore, it is important to break down the terms and conditions you will be responsible for before you get the "This is Tom on a recorded line. This call is from a debt collector in an attempt to collect a debt, and any information obtained or used for that purpose". Trust me, when you get this voicemail, you will probably leave the mall. To prevent this embarrassing day in your future, consider inquiring about the following:
- Higher interest rates
- Late fees
- Account closure
- Lawsuits
- Collection activity
- Wage or bank garnishment, where legally permitted
Damage to your credit score
Difficulty getting future credit
Increased minimum payments
Thinking Carefully Before Making a Decision
Now that you have a general idea of how credit cards work, let's consider a few more things before making the right decision. You may benefit from shopping around for the right card by comparing the best terms, conditions, and incentives. You may benefit from reviewing rates or fees before applying for a line of credit. Additional things to consider before applying for a credit card include the following:
- Paying attention to annual fees
- Understanding the negative impact on your credit score
- Asking about foreign transaction fees
- Reviewing late fees
- Checking your credit score
- Analyzing your current financial state
- Inquiring about minimum payments if needed
- Understanding that your items may be reprocessed if you fail to make payments
- Getting to know the creditor's promotional offers and add-on products
Peer-reviewed by: Ryan VanWyck – Private Client Banker at Chase Bank, licensed with FINRA Series 6 & 63, and 6+ years of experience in credit and consumer banking.
