Credit cards don’t come with training wheels, so when you get one, you’re dealing with the real thing. If you don’t know what you’re doing, you can get into real debt and experience real credit card problems. While you don’t get a training period with a credit card, there are some things you can do to prepare. With a great financial foundation in place, you’re better prepared to use a credit card without destroying your credit rating or going into debt.
Here are some ways to prepare for a credit card
Know basic math.
If you can’t add and subtract, you’re not ready for a credit card. You need to be able to add and subtract numbers with two decimals and at least up to the thousandth place. Yes, credit card issuers have automatic billing and will do the necessary math for you. However, you need to be able to double check your balance, fees, etc. to avoid being taken advantage of.
You need to be able to add and subtract to figure out how much your balance will increase with an additional purchase or decrease when you make a payment. Multiplication is beneficial in figuring out your finance charge and division will come in handy if you want to estimate the amount of time it takes to pay off your balance. There are online finance charge calculators to help you figure these things out, but knowing how to do it yourself won’t hurt.
A credit card is a digital or electronic form of money – which is a way to make transactions.
Before you can properly use a credit card, you have to understand basic money management, e.g. that money is earned, you can spend the money available to you, and that each dollar you spend subtracts from what you have available. When you run out of money, you’re not able to spend more until you get more, so it’s important to make good spending decisions.
Understand borrowing and paying back.
When you borrow money from someone, you’ve taken a loan from them. Until you pay them back (or they forgive the debt), you still owe the loan. A credit card is a type of “open-end” or revolving loan that you can borrow from continually as long as you abide by the terms (vs. a closed-ended loan that you can borrow only once).
Whenever you borrow money, whether from a bank or a friend, you must know what the lender expects from you. Specifically, when you’re supposed to pay them back, the amount of the payments, and the date each payment is due. In addition, you should know what happens when you don’t fulfill what’s expected of you, e.g. if you don’t pay the money back on time.
Be able to meet deadlines without someone reminding you.
A monthly billing statement will likely be the only reminder your credit card issuer gives you to let you know your statement is coming due. And, your statement will arrive about three weeks before the payment is actually due. If you’re not ready to mail payment as soon as the statement comes, you’ll have to remember to make it before the due date. Fortunately, your credit card due payment will be due on the same day every month, so it’ll be a little easier to keep up with.
If you often forget due dates, e.g. the date your homework or a big project is due, you may not be ready for a credit card. To prepare for a credit card, get in the habit of remembering and preparing for important dates without having someone else remind you. You may come up with a system for remembering due dates, like a calendar app on your phone, but use a system that’s reliable and consistent.
Manage a checking account without overdrafting.
If you can’t handle a checking account without overdrafting or bouncing checks, you’re not ready for a credit card. Chances are, you’ll misuse your credit card as well. You need to have a solid history of handling your checking account without overspending before considering a credit card. How do you do that? Make regular deposits into your checking account, balance your checkbook, create a habit of checking your account balance before spending, and never write a check or swipe your debit card for more than your available balance.
Understand how credit cards work.
Credit cards are different from most of the financial products you’ve handled up to this point. You can’t see the money you’re spending and you’re not even spending money you actually have. Instead, you’re borrowing money that you have to pay back with your future earnings.
That said, get rid of any misconceptions you may have about credit cards. It’s not free money – you have to pay it back.
Basic credit card terms are fairly simple: you can borrow a certain amount of money (your credit limit) as long as you send a minimum payment by the due date each month. There are consequences if you borrow too much (go over the limit), send less than the minimum payment, or send the minimum payment too late.
Understanding how credit cards work before you get a credit card puts you in a good position for building great credit.