There is an allure to credit cards. A credit card promises you access to immediate cash for an interest. Surely, it would seem like a bad idea not to get one as an adult. Am I right?
Wrong.
The truth about credit cards is it is not meant for your own benefits. They are solely to generate profits for the issuing company. By profits here, I refer to some charges made each time you use the card. And, I will be coming to that later.
For young adults- aged 18 to 25 years old, credit cards are there for you to use and establish a good credit history. Credit cards are useful for such purposes. Otherwise, it is a debt trap for the average young adult. This is because one can easily get into huge debt, given the convenience of credit cards.
With that said, here are what you need to know about credit cards.
What Is A Credit Card?
A credit card is a plastic card issued by a financial institution, which gives a user access to certain agreed maximum fund. The agreement is the user pays back parts or all of the borrowed fund every month. Of courses, with some interest and charges.
It is worthwhile to remember credit cards and debit cards are two different things. How is a credit card different from a debt card, good reader?
A debt card gives your access to money in your bank account, while a credit card loans you money. Also, you do not pay interest or fees for having a debit card. On the contrary, credit cards charge you fees to give you access to its immediate loans. This is what is called an APR- annual percentage rate.
What Is An APR On A Credit Card?
An APR on a credit card is the interest rate you pay on an amount you spend annually. Often, this is charged as a percentage. However, the annual percentage rate is not the interest rate you are expected to pay monthly during monthly repayment.
To know what it simplifies to monthly, just divide whatever they give you with 12 months. You will get your interest per month. Here is an example of what I mean.
Let us say you spend $500 on your card and the apr is 22%. Your interest rate is 22% and the interest rate on the $500 expenditure is $110. As a result, you end up paying $610 at the end of the year. Do you understand it now, my dear reader?
Assuming the lending company wants you to pay $41.67 monthly, you will pay 1.83% interest on the total expenditure. This is in addition to the $41.67. The monthly interest rate of 1.83% on $500 is $9.17. I got this by multiplying 1.83% with $500.
At the end of the month, the credit company reports your successful monthly repayments to a Credit Bureau. As a result, the Credit Bureau rewards you with something called a credit score. The higher you score on credit history, the more easily it will be for you to get future loans anywhere.
If you break your contract with a credit card company, you are reported to the Bureau. The Credit Bureau punishes you by lowering your credit score. In other words, some points get deducted from your overall credit score.
Lowering your credit score is bad, since it affects your ability to borrow future loans. You can read about other things which could ruin your credit score and history. Anyways, this is basically how credit cards APR work.
how to qualify for a credit card
To qualify for a credit card, a proof of employment is likely to get you approved than the money in your bank account. From my personal experience, lenders are usually looking for people who can pay back loans in a timely manners. This is regardless of whether you have thousands in your bank account.
It is why lenders will run a credit background check on you. They want to know your history of paying back debts on time, less about your credit score. It is true a good credit score may lower your interest payment a little, but it is actually your credit history which matters.
This is why some banks or lenders just want to see you can pay them back at agreed time monthly. Additionally, print out six months of steady employment history and take it with you during your application. You can use previous pay stubs for this purpose.
It is worthwhile to mention, banks tend to consider banking history with them prior to approval. If you are in the habit of debit deficient, you may not get approved. This is regardless of whether you have a steady employment or not. I advice you work on your credit history, because it will get approved for a credit card.
How Long Does It Take To Get Approved For A Credit Card?
How long does a credit card approval take?
It does not take long to get approved for a credit card. The average time depends on the results of your credit background check. What do I mean by this, my dear reader?
Well, I had gotten one within an hour of walking into my bank. Earlier in my twenties, it would take a business day or two before I know whether I was approved or not. Thinking about it now, I believe it is because I have good credit history and a good job now.
As a result, banks do not have to wait a few business days to ran their gimmick on me. For you, it depends on your credit history, employment status and bank status. By bank status, I mean whether you are customer of the bank or not.
Typically, it will take an hour to two business days. If it is face to face, the lender will tell you whether you qualify or not. If it is online, you may have to wait a few business days to be approved or denied.
Which Credit Card Is Best For You?
The best credit cards for beginners, offer no or low interest rates. Not just low interest rates on purchases, but also zero or low maintenance fees. At least, for certain period of time. Yes- some credit card companies have such a deal.
Inquire before you apply. Will you?
As for late penalty fees, I am afraid it cannot be waived. This is because it curbs indiscriminate use of credit cards. If not, people can spend more than they can afford to within a short period of time.
Besides, credit card companies have to make money too. A credit card is a financial product of its issuer. Therefore, they are expected to return profits. This is the most important thing to remember about credit cards. It helps with decisions made with respect to them.
Having said that, always go for a credit card deal with no interest for six months. Or, little interest rate during your usage of such a credit card. It will help you meet your monthly payments without succumbing to high interest rates. And, you get to build your credit history before the normal interest rates kicks in.
hidden credit card fees
On 5 Outrageous Hidden Charges In Credit Cards article, I talked about how some lenders try to get you with hidden credit card fees. Understanding credit cards contract as a user is crucial to your financial health. The truth about credit card is it is meant to enrich the issuer, not you the borrower.
Always bear this in mind, whenever you apply for one. Otherwise, you may quickly accrue more debt than you ever had. What do I mean by this, good reader?
You have to throughly read whatever contract the credit card company is trying to get you to sign. This is because some credit card companies put outrageous clauses in their contract. These clauses are subtly put there to keep you repaying the credit card debt for a long time. This way, the financial issuer can generate a sizable amount of profit from you.
Speaking of clauses here, I refer to an agreement to pay high interest rates, minimum monthly payment cost, annual maintenance fees, crazy-high late penalty fees and other surcharges.
To be sincere, this is why I do not recommend credit cards from credit and loan shark places to people. These places are designed to feed off your card debt, until you are flatline broke. I am talking growing old with your credit card debts.
These above issuers I talked about exist. The only way not to fall prey to them is to apply for credit cards at your local bank. Not that your bank will not charge you interest, but it does not exist solely to generate profit from your credit cards. Therefore, their interest rates are often more affordable than you-know-who!
Cost Of A Credit Card Per Month For You
How much does a credit card cost per month?
The cost of a credit card depends on five major factors signed on your contract. Namely:
- Minimum payment cost: When you agree to pay the credit card minimum payment monthly, it may change the interest rate. Know what your new interest rate is, before agreeing on any minimum monthly payment.
- Annual Percentage Rate (APR): It is the net interest rate you pay on credit card debt annually. Divide this by twelve months. And, you will get your monthly interest rate.
- Maintenance Fee: Some credit card issuers charge maintenance fee. Basically, I call this the privilege of using the card. This is because it keeps your account open.
- Late Penalty Fee: This is different from your Annual Percentage Rate (APR). You are charged a late penalty fee, each time you miss the monthly payment towards your debt. According to Credit Karma, you can get charged up to $39 late fee for a missed payment. Whether the transaction costs $5 or more, is not considered by some lenders.
- Other Surcharges: These are other fees charged by some credit card issuers. It may be called processing fee or convenience fee. Some states like Texas, Kansas, Florida, Maine, New York, Oklahoma, Connecticut, California and Florida prohibit credit card issuers from charging you this fee.
This is the cost of having a credit card. Some issuers may not charge you surcharges and maintenance fee. However, a majority will make you pay these costs. These are things you should be aware of when getting one.
How Many Credit Cards Are Considered Too Many?
Having too many credit cards is a big no for young working class adults. I do not recommend it, since it can lead to uncontrollable expenditures. This is why one card is enough to build your credit history.
As mentioned earlier in this article, you have no business getting a credit card as a young working class adult. Unless it is to build a good credit history- a high credit score. Otherwise, stay away from one.
At least, until you are able to afford one. After you get one, read what not to do with your credit card to avoid getting in serious debt.
Mark Cuban- a billionaire and owner of the Dallas Mavericks, advise not to use a credit card. According to Mr. Cuban,
Cut up your credit cards. If you use a credit card, you don’t want to be rich. – Mark Cuban
I share the same view as Mr. Cuban. But, since a majority of young working class adults cannot build a credit history without a credit card, I would say to do this after building a good credit score. And of course, pay off whatever credit card debt you have managed to accumulate.
Well, this is all the information about credit cards to get you started. Here is an additional detailed 6 important research to consider before getting one. With that said, I encourage you to spend responsibly, my fellow adult.
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