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“AAAHHHH, not again!!!!!!” you scream hysterically while pulling out your hair and snapping the plastic log you bought at IKEA in half as you see this month’s credit card bill.
Welcome to the world of credit cards: only the financially fittest survive – proven by a surprisingly small amount of credit card holders.
This piece of plastic can either make you want to hang yourself or it can actually bring about a good relationship with your bank and provide you with a great credit history (the importance of which will be discussed in a bit) among a few other (extremely) useful functions.
No need to fool me, I was one of them – my jaw dropping every time that shiny golden piece of plastic made its way out of my wallet any time I felt like buying something. It was magical. I could afford anything I want. Then I saw my credit card bill.
For the fans of the book and movie “Confessions of a Shopaholic” – you already know the dreadful part (long story short: maxing out five different credit cards does not end well). As for those who are still contemplating on getting this “I-can-buy-the-whole-world” card, let’s get to know what this thing is all about in the first place.
Introducing the Credit Card!
The Credit Card – I call it “the temporary money substitute”. It allows us to buy things on credit (meaning you owe the sum) and pay the initial amount later (usually within 25 days, otherwise you will be cursed with those horrible things known as interest rates).
Simply put, when you have no cash on you and you think you are going to die of hunger or you saw those shoes you always wanted, you pull out the card and buy it all, even if you don’t have any money in your bank account.
Interest rates
If you have no idea what an interest rate is, don’t you worry, I was one of them some thousand years ago. An interest rate is a percentage that is charged on the amount of money that you owe.
For example, I buy a pair of $50 Nikes, a $150 iPod and spend $200 on beer. My grand total is $400. A typical interest rate is 20% per year. I repeat – the 20% is the annual interest rate, therefore, to make it monthly we divide the 20% by 12 months and end up with an interest rate of approximately 1.7% per month.
Don’t be fooled by the seemingly small number, remember that it is compounded every month (see the Compound Interest article to understand how the numbers work).
To see what 1.7% is going to look like over the span of a full year, take a look at the following chart:
| Month | Debt |
| 1 | $ 400.00 |
| 2 | $ 406.80 |
| 3 | $ 413.72 |
| 4 | $ 420.75 |
| 5 | $ 427.90 |
| 6 | $ 435.18 |
| 7 | $ 442.57 |
| 8 | $ 450.10 |
| 9 | $ 457.75 |
| 10 | $ 465.53 |
| 11 | $ 473.44 |
| 12 | $ 481.49 |
That’s a bit over $80 spent…on nothing (a.k.a. interest).
Banking is business, a big business, and more often than not, they are will reach into your wallet and pluck every penny they can grab with their sneaky little claws – otherwise they wouldn’t be a very good business!
Reward Programs
Many cards come with reward programs such as Aeroplan Miles or Aventura points or cash-back or what have you. Basically, the more you spend the more points you get. If you are a clever credit card user, you can get free points without paying a single extra cent just by going through with your regular day-to-day purchases and paying off your credit card bill before the interest charge kicks in.
Unfortunately, credit cards that come with rewards programs often have annual fees or registration fees. Every bank has different criteria necessary so check out your local branch for more information.
Your credit history
And now for the most important part about having a credit card: your credit history.
Any financial advisor will tell you that credit history is the most important reason to get a credit card and in many cases, should be the only reason to get one.
If you’re puzzled by the importance of having a good credit history – you will need a good credit history if in the future you are planning on acquiring more credit, such as leasing a car (article coming soon) or taking out a mortgage on a house or any other major expense you may inquire.
Furthermore, you might be thinking of opening up your own business one day – and oh does it come in handy to have it all down packed with the bank (for help on starting your own business, head over to the Business & Investing section). The bank has to be convinced that you are safe to lend money to; although the sums of money you dealt with earlier were way smaller than the ones you are asking for, it still shows your commitment to paying them off on time and having the ability to do so in the first place.
Just make sure you pay your bills off on time! And that’s about it. Handle your credit card smartly and use it to your own advantage and not the other way around.
A note of caution
When you decide to get your shiny new piece of plastic, be sure to choose the one that suits your lifestyle best.
For starters, you don’t need any fancy stuff, so pick the one without an annual fee that is charged for some extra rental/medical/travel/insurance points that make no sense to you at the moment. All of the cards offered at your bank should be on their website, so check that out before heading down to your branch.
One more thing
When you are sitting down with the banking representative to open up a spanking new credit card – ask a lot of questions! Ask about all the fees and let him/her point out all the charges and extras that might pop up here and there. They want your money as badly as you want more money for yourself – don’t forget to ask about the minimum monthly payments!
So, just to wrap this up – to be safe and sound, do your best to pay off the bill the very day you receive it or at least a few days before the payment is due.
Here are a few Big Fat Moneybags rules of thumb on how to properly use this plastic wonder:
- Be sure you can pay off the bill before you make any purchases.
- Buy now, pay later – as long as you are sure you can pay it off later.
- Don’t be lazy to check your transactions online, make sure everything is the way it’s suppose to be and you have no “miscellaneous” items you didn’t buy (meaning no one is using your card without you knowing)
- Don’t give out your credit card number to anyone that asks for it – I hope you know this one.
- Make sure you know all about your charges/fees/rates and deadlines.
- A credit card can be a great thing – make sure to make it exactly that for you!
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Thks for yr article but would like to know if these rules apply in all countries or yr article targets how things work in the USA ?
The article is written with North Americans in mind but most of the information applies to other countries.