Despite what you've likely heard growing up, credit cards are not only a good thing, but they're virtually a necessity in today's world. If for nothing else, to build credit. Credit continues to be one of the biggest Catch-22s people experience.
On one end, you need credit lines to begin establishing credit, but on the other end, it's hard to get credit lines without having established credit. That's where credit cards come into play. The problem is that people are often confused when they go to get their first credit card.
Importance of Credit
The importance of having good credit—or any at all—can't be understated. As an adult, you need credit like White folks need sunscreen at the beach, and Black folks need lotion after a shower; it's virtually mandatory.
Nowadays, you can't even type out the word "loan" without somebody checking your credit report. It's wild, dawg. To begin, having good credit is important because it determines the interest rates you receive on credit cards, mortgages, auto loans, and any other type of loan.
Most utility companies also run credit reports before offering services. This can include electricity, cell phone services, internet, cable, and even water. Hell, even landlords run credit reports nowadays. Your credit report is your face card; you don't want to mess it up.
Secured Credit Cards
The easiest way to begin building credit is to apply for a secured credit card. Secured credit cards are an excellent tool for building and improving credit. They're also likely one of the few credit cards you'll get approved for without having a previous credit history.
They're called secured because a security deposit is required, which serves as collateral in case you can't make your payments. Credit card companies are much more willing to take a risk on someone with no or bad credit if they know they will at least receive some money back if you run off.
Secured credit cards work the same way as any other credit card and come with the same perks and benefits. You're still responsible for anything you spend, and interest is calculated the same. The only difference is the security deposit.
Using Your First Credit Card
I'm sure this goes without saying, but just in case it doesn't, I'll say it: Your credit card isn't free money. Don't let your credit limit be a test to see if you can reach it. You can, and you will undoubtedly regret it. Just ask anybody who has ever done it.
If one of your main goals of getting a credit card is to build credit—which it should be—then you should focus on your credit utilization. Credit utilization is the percentage of your total credit limit that you spend. For example, if your credit limit is $1,000 and you spend $250, your credit utilization would be 25%.
Your credit utilization accounts for 30% of your total credit score (just behind payment history at 35%), and you should always aim to keep it below 30%. If your credit limit is $1,000, try to never spend more than $300 on your card. If you do, plan to pay it off almost immediately.
One of the first mistakes new credit cardholders make is only paying the minimum payment due each month. When you receive your monthly statements, you'll see the total amount due and the minimum payment due (usually $25–$35).
If you pay your statement in full each month, you won't have to pay interest on any purchases you made. If you only pay the minimum due, or any amount that's not the full amount, you'll pay interest based on the balance you carried during that cycle.
Other than overspending, only making the minimum payments is the easiest way to get into credit card debt. Interest adds up faster than items at Target, and before you know it, you're owing credit card companies more than you can reasonably pay.
Other than emergencies, treat your credit card as a tool and only spend on it what you would've spent from your debit card. If your card offers cash back—say, 1%—try putting your bills on autopay with your credit and then pay off the balance as soon as the payments post.
If you were going to spend $500 on bills anyway, you might as well use your credit card and get $5 ($500 * 1%) for paying those same bills. It doesn't seem like much until you realize you can buy a pack of chicken legs and a box of brown rice and get two meals for that same $5. Real ones feel me.