How to Get and Use Credit Cards

Earlier in the series we learned about banks, and one important service that banks provide is

issuing credit cards. These are cards entitling their owners to buy things based on the owner’s

promise to pay later. In this tutorial, we will look at how credit cards work, the positive and

negative aspects of them, and how you can get one. Let’s say you want a credit card. Not everyone who

wants one can automatically get one. First-time borrowers might find it difficult to get one

without a credit history, which is the record of how someone has managed the repayment of

their debts in the past. If you have never borrowed money from a financial institution,

you may have to get a co-signer, which is a person who pledges to pay the debt if you cannot. Even

still, many credit card issuers don’t allow for co-signers, so you may have to first build up a

credit history in other ways. Common ways to first build up credit include paying rent to a landlord,

regular payments on cell phones, utilities, or even streaming services, or getting a loan

from a bank. Of course, keep in mind that in order to take out your first loan you

likely also will have to get a co-signer. When you do get your first credit card,

you may be tempted to spend more than you need to, but never forget that this is not “free money”.

You will have to pay it back later. Suppose you use your credit card to buy a bike for $200 on

June 6th. Then you use it again to buy a fishing pole for $34 on June 27th. On June 28th, you use

it once more to buy some hiking boots for $100. Your credit card bill may not arrive until July,

or maybe even August. Now you actually don’t have to pay for the stuff you purchased in full when

you receive the bill. Your credit card issuer will only make you pay back a minimum amount, which is

often between 1 to 3% of the card balance. Since you owe $334, let’s say your minimum payment is

3%, or around $10. But the credit card issuer gave you a credit card to make money off of you,

and it charges an annual percentage interest rate, or APR, of 20%. So if you only make the

minimum payment each month, your balance will continue to grow due to interest. This is why

it’s important to pay off your credit card bill as soon as possible, because the longer you wait,

the more interest you will be paying, and this can quickly balloon up into massive amounts of debt.

A positive aspect of credit cards is that they give people the ability to purchase things they

might not have been able to afford otherwise. Using a credit card will also help build up

credit, which is needed for getting loans for bigger things like cars and houses. However,

it’s more important to be aware of the negative aspects of credit cards. First of all,

credit cards encourage impulsive purchases and make people more reckless with spending. Credit

cards often have high interest rates, and only making the minimum payment each month may not

reduce your credit card debt while interest continues to accrue. Credit card issuers may,

without warning, increase interest rates. And if you miss a payment,

credit card issuers will charge a late fee and your credit score will go down.

This can lead to a downward spiral which is difficult to rebound from.

Most of us should avoid relying on credit cards for anything other than convenience and building

up credit. You also should avoid borrowing from one credit card to pay another. Put simply, credit

card debt is not good debt and should be avoided whenever possible. But most people will have

several credit cards in their lifetime, and they have become a common aspect of modern society.