Intro to Credit Cards
Credit cards are like pit bulls; they often get a bad rap, but they're not as harmful as it may seem. When the average person thinks about credit cards, they often think of debt and stress. They’re believed to go together like peanut butter and jelly and Black folks and Hennessy. Truth be told, credit cards aren’t nearly as bad as most people think. They can actually be a great thing.
I don't want to give off the impression that they're entirely harmless or anything like that, because that's far from the truth. But most of the fear surrounding credit cards comes from the lack of understanding of how they work. No worries, though, that’s why we’re here.
There are four broad types of credit cards, each serving a general purpose:
1) Secured. If you have bad or no credit, a secured credit card is perfect for you. They’re made for that very purpose and are easy to get approved for. The only jig, however, is that secured cards generally require a security deposit. This ensures that credit card companies aren't entirely assed out if you can't pay your bill. This money is returned to you if the account is ever closed or if you’re lucky enough to have your card upgraded from secured.
Pros: Very easy to get approved for.
Jig: Security deposit required.
2) Student. On the surface, it may seem like these cards are meant for those proclaimed as America’s future. You know, the naive, binge-drinking college student who has their whole future ahead of them; ready to take on the world with a smiling face until they start their careers and these two dreadful words echo through their head every 1st of the month : rent due.
The name is a little misleading. Although they're marketed to students, you have to be 21-years-old or working full-time to get approved without a cosigner.
Pros: Incentives and perks that are tailored to students.
Jig: Hard for most students to get approved without a cosigner.
3) Rewards. A rewards credit card is the perfect card for you if you use your credit card regularly but pay off your balance in full each month. Rewards cards are lucrative because they may give you cash back on purchases, airline miles, hotel points, sign-up bonuses, and more! But like a wise man once told me at the bar at 1:30 am, “If it’s too good to be true, the jig lies in the bushes.” I want to stress that with rewards cards it’s in your best interest (no pun intended) to pay off your balance in full each month because of their high interest rates. No need for all those rewards if you’re gonna be paying more in interest than the rewards are worth. That defeats the purpose, fam.
Pros: You get rewards for using the card (almost like free money).
Jig: Interest rates usually higher than Snoop Dogg on 4/20.
4) Balance transfer. Sometimes life comes at you fast. You may suddenly lose your job, you may incur unexpected medical expenses, or you may even go through a period where you believe shopping will cure all your problems. Either way, sometimes you blink twice, and your credit card balance is in the thousands; which could take months (or, God forbid, years) to pay off. With interest rates higher than gas prices during the Bush administration, this could be costlier than you can imagine. Balance transfer cards help with this. These cards allow you to transfer your outstanding balance from one card to the next, giving you an extended period where you pay no interest — allowing your sole focus to be on paying off the debt.
Pros: You can pay off your debt without spending extra money on interest.
Jig: Some cards charge a 3–5% fee for transferring your balance.
I want to take a minute to briefly touch on APR. People see and hear the term APR all the time, but if you ask the average person what it is, they’ll look at you like the Uber drivers in Miami when you speak English. APR stands for Annual Percentage Rate and is the interest you’ll pay if you choose to carry a balance from month to month. Although it has ‘annual’ in its name, it’s broken down into days. For example, a 20% APR should be viewed as 20% divided by 365 days, giving you your daily interest rate.
Below are some of the most common credit mistakes you should avoid at all costs:
- Paying only the minimum due. When the dreadful time comes when you have to pay your bill, you’ll notice a “minimum payment due” amount listed (usually $25). Paying this amount doesn’t leave you in the clear, it just ensures you survive to see another billing period with no missed payment infractions. Consistently doing this will leave you paying more in interest than you’d like to imagine. As previously stated, paying off the statement amount in full each month ensures you pay NO interest. It essentially becomes borrowing money for free.
- Thinking you need to carry a balance to help improve your credit. For whatever reason, many people believe that to improve your credit you should carry a balance on your card. This is 100% false. I’m not sure who started this myth, but it’s about as misleading as people thinking Christopher Columbus discovered America. (After all, you can’t “discover” a place that already had people there, right?).
- Maxing out your card. It may sound obvious, but trust me, it happens every day, B. Aside from an emergency, your credit card limit should not be a challenge to spend up to that amount. If you read my last post (even if you didn’t, at least act like you did to boost my ego) then you know you should ideally keep your balance below 30% of your limit. Your credit score will thank you.
- Closing out a card. Sometimes folks rack up credit card debt, eventually pay off the debt, and then close their card out of fear of repeating the same mistakes. Don’t do this. Just because you have the card doesn’t mean you have to use it. Not only will closing a card drive up your credit utilization because you'll have less available credit, but it can also shorten the length of your credit history – both of which will hurt your credit score. Treat it like those workout supplies you bought in December for your New Years resolution that ended collecting dust by mid-February and just let it sit in the house.
- Applying for too many cards at once. Every time you apply for a credit card your credit score takes a small hit for a short period. Applying for a lot of cards in a short time frame is a red flag and may increase your chances of denial. Be sure to space out these applications and only apply for cards as you need them, not just for the sake of getting a new card. 3-5 inquiries in two years is average.
Credit cards have always had an interesting dynamic in our society. Those who understand how they work appreciate the benefits they bring, and those who are unfamiliar with how they work try to avoid them like the plague. I'm hoping this post gets you closer to being apart of the former. There are hundreds of cards out there each posing their own benefits, so I strongly encourage you to compare a few before settling. We've tried to rate common cards to make your search easier, so be sure to check them out. In the meantime, remember to drink more water, support local businesses and laugh a lil’ bit.