Reading time: 4 minutes
- Young adults who may not understand how to use credit cards wisely can find themselves in financial trouble
- As a first step, evaluate whether you need a credit card
- Make a plan, understand minimum payments and debt, and shop around
Whether they’re entering college or living on their own for the first time, many young adults find themselves responsible for managing their own finances. But young adults who may not understand how to manage money and how to use credit cards wisely can quickly find themselves in financial trouble.
Here are a few things you should know when it comes to credit cards:
1. Evaluate whether you need a credit card
First, think about whether you really need your own credit card – and be honest. What do you need the credit card for? Do you have a job and a strategy for paying back any debt you might accumulate? Do you know how to save for emergencies? These are important things to consider when you’re deciding whether to get a credit card.
If you aren't ready to get a credit card just yet, there are some alternatives. If you want to start building a credit history, for instance, you could become an authorized user on a parent or guardian's credit card account. That means you're added to a primary credit card account and the account will show on your credit reports (assuming the credit card company reports to any of the three nationwide credit bureaus). While authorized users aren't responsible for the financial obligations on the account, they can be impacted by whether or not the account is paid on time -- meaning your credit reports, and by extension your credit scores, will likely reflect positive or negative payment history.
If you think you may need a credit card for emergency expenses, you may want to consider an emergency savings fund as an alternative.
2. Plan it out
Before you apply for a credit card, determine the monthly payments you can afford. What’s your monthly income? If you’re in college, do you need to budget for books and food? Remember that you need to adjust your spending to match your situation. If you’re paying your credit card bills with income from a job, and you need to work fewer hours during exam time, for instance, you will have less money to spend.
3. A word about minimum payments and debt
A minimum payment is shown on your credit card statement, and it's the lowest amount you can pay each month and not face additional fees or have a late payment reported to credit bureaus. It is always best to pay off your balance in full every month, but if you cannot do so, you must at least make the minimum payments to remain in good standing with the creditor.
Lenders and creditors are required to tell you on your statements how long it will take you to pay off your debt if you only make the minimum payment. Why is that? That’s because when you enter into an agreement with a lender that extends you credit, in addition to paying back what you borrow, you are also paying interest on any balance remaining at the end of each month. Interest is simply the price you pay to borrow money. If you only make the minimum payment, and you have a balance at the end of the month, the lender will charge interest on that balance. The more often you carry a balance, and the more interest you incur over time, the longer it will take you to pay off what you owe. Remember that the way you use credit now may affect your future.
4. Learn how to shop around for the right credit card
If you’re in college and looking to get a credit card, some financial institutions offer credit cards specifically geared toward those consumers who are just starting to build a credit history.
The Credit CARD Act of 2009 requires anyone under age 21 to either have a co-signer or earn enough yearly to pay off the entire credit limit (the maximum amount you are able to borrow). But it's still important to review any offers you may receive. Make sure you understand the terms, such as any promotional interest rate that may expire and later increase.
Remember that when you apply for a credit card, the company will likely review one or more of your credit reports from the three nationwide credit reporting agencies. That’s known as a “hard inquiry.” Multiple hard inquiries at the same time may impact credit scores, so it's not a good idea to apply for many credit cards at the same time.
If you decide to get a credit card, ask the credit card company if they report to any of the three nationwide credit bureaus. Then, you can start to get into the habit of checking your credit reports regularly to make sure the information is accurate and complete. You’re entitled to a free copy of your credit report from each of the three nationwide credit bureaus once every 12 months by visiting www.annualcreditreport.com.