Understanding Credit and Credit Cards

Credit is borrowed money used to purchase goods and services often with a finance charge attached. The most common forms of credit are installment loans (auto, mortgage, personal or home equity) and credit cards. There are pros and cons to using a credit card.  Having a credit card can help build up credit for those who don’t have it or have bad credit but a few extra considerations must be made to ensure the use of it doesn’t turn into a con.

Credit Card Pros

In order to make large purchases such as a car or home, you must have a credit history. Using a credit card can help build that history. Here are other pros of a credit card:

  • Purchasing options – A credit card allows you to make purchases online or over the phone. Cash can only be used to make in-person purchases at retailers, restaurants and other similar establishments.
  • Flexible payment period – While it’s best to pay off your credit card balance each month, you do have the option to pay the balance over time provided you at least pay the minimum amount, determined by the creditor, each month.
  • Emergency fund –  If an unexpected expense arises, and you don’t have the funds on-hand or in a savings account, a credit card is a good option.

Credit Card Cons

Credit card spending can quickly turn into debt if you don’t set limits and manage your behavior. It’s important to understand a few of the downsides of having a credit card including:

  • Overspending – With a credit card, it’s easy to spend more than you can afford since you don’t need the actual money at the time of purchase.
  • Expensive fees and interest – All credit cards have an interest rate and depending on the card, fees. Over the course of a year, you could pay hundreds of dollars in both. Make sure you understand the terms of the card before applying.
  • Potential for fraud – Just having a credit card puts you at risk for fraud. Fraudsters can not only physically steal your card, they can also hack into the stores or the online sites where you used it.

How to Get a Credit Card If You Have No Credit or Bad Credit

If you don’t have a credit score because you are just starting out or your credit score is low, it’s not impossible to qualify for a credit card. A credit score isn’t calculated until you have one active account on your credit report for six months. Some creditors understand the difficulty of getting a credit card for the first time so they created cards specifically for this purpose. Here are a few tips to secure a credit card if you don’t have any credit or have bad credit:

  • Have a job – Credit card issuers want to make sure you have enough income to pay your credit card balance monthly especially if you are under 21. The income noted on the application must be yours and yours only.
  • Get a secured card – A secured credit card is different from a traditional credit card in that it requires a security deposit in order to receive a credit limit. For people who can’t get approved for a traditional card, a secured card is a great way to build or re-build credit history.
  • Get a cosigner – If your credit is bad, you can take advantage of someone else’s good credit in order to get your own credit card. A cosigner applies for the card with you and is on the hook if you fall behind on your payments.

Importance of Credit

Credit affects multiple aspects of your life and allows you to reach milestones (i.e. owning a home, car, etc.). If your credit is bad, it may take longer to reach those milestones. A credit card is a stepping stone in building credit as long as you use it responsibly. If you make your monthly payments on time and keep your balances low, you will set yourself up for a successful financial future. If you need additional help with your credit, we offer credit counseling services through GreenPath Financial. Or, if you’re ready to apply for a credit card, you can check out our options here.