What My School Didn’t Teach Me About Credit Cards
Many people see credit cards as one of the primary keys to financial imprisonment, and this has proven to be the case for many people. However, the problem isn’t the credit card itself, but how they are used.
Photo by Ian Britton via FreeFoto.com
When I was in school I received a well rounded education which covered everything from Pythagorean theorem to “Tippy Canoe and Tyler, too”. The one thing that wasn’t covered is how to manage my personal finances. I didn’t learn the value of compounding interest, or how to calculate the total cost of a loan until I was out of school.
For most American’s the story is the same, which makes it all too easy for us be suckered in by credit card ads promising no spending limits, or free vacations. Here is a cheat sheet to help catch you up on the credit cards 101 class you missed in school:
- Never carry a balance on your cards. A credit card balance is one of the highest interest loans you can have. If you have a balance, paying it off should be at the top of your financial priorities list.
- If you have a balance currently, switching it to a card that offers a 0% intro APR can be a very effective tool for paying it off. Switching your balance to interest free credit cards can provide you with a full year or more of no interest charges, which can help you make significant progress by applying the full payment you make each month to the principal. This only works if you stop charging on this new card, and actually pay off the balance, though.
- Stay away from rewards cards. In general, rewards cards charge a significantly higher rate than their non-rewards equivalent. If there’s any chance you will carry a balance on the card, or spend more to gain the extra rewards, you should avoid them like the plague.
- Limit the number of credit cards you have. Your credit report takes a hit for each open account you have, so think twice before applying for 20 store credit cards.
- If you’re absolutely positive you won’t carry a balance, choose a card that will help you save for the future. The Fidelity Investments Rewards Card automatically places 1.5% of every dollar you spend on the card into a retirement account that will accumulate interest for years to come. Similarly, the Merrill+ Card allows you to contribute your rewards towards a 529 college savings plan.
By using these credit cards properly, they can help contribute to your financial freedom instead of imprisonment. A credit card is a very powerful — or dangerous — tool, and just like you learned in shop class, it’s important to use all tools the way they are meant to be used.
This article was featured in the Carnival of Debt Management #28 hosted by Phil For Humanity.
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compound interest, 529 Plan, financial imprisonment, Credit Card, credit card balances, LoanRecommended articles
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I disagree with #3 – the one about staying away from reward cards! Yes, certainly it’s not for everyone, but I think if you’re responsible with credit and timely pay off your balance every month, maximizing your money by using reward cards is the way to go.
My brother uses this Capital One card that doesn’t give him any cash back or rewards. That boggles my mind. He’s missing out on the best part about using credit cards – getting some cash back for buying something you were going to buy anyway.
-Raymond
I disagree with 3 and 4.
re #3: I get $25-50 in Amazon credits every month by using my Amazon Visa. It’s not much, but should have an extra $425 this year for nothing.
re #4: Having available credit and not using it is a big factor in credit score. Having only a small amount of credit and using 50% of it is worse than a lot of available credit and only using 10% of it, even if the total amount borrowed is the same.
@Alex – welcome to Moolanomy.
To Jw’s defense, he did say “If there’s any chance you will carry a balance on the card.” Personally, I love rewards card and I do get a lot out of them. That said, I do pay them off each month.
Regarding #4, Alex’s point is a very good and valid one. However, I think Jw is trying to address people who actually respond to every pre-approval letters and get all the retail cards they can get their hands on.
Rewards cards do tend to carry an annual fee, but if you payoff your bills every month and charge a lot to those cards annually, it can payoff. Just make sure it the rewards make up for the annual fee and/or finance charges.
@Credit Help – Welcome to Moolanomy. There are plenty of free rewards cards that I wouldn’t even recommend ones with fee. For instance, I use Discover and Citi Dividend cards.
I have always really thought that there should be some sort of class on personal money management taught in schools. That could be something useful that kids can actually use.
It would of saved me a lot time from researching and learning on my own.
TheWild1 – welcome to Moolanomy. I agree, in fact, I wrote a little bit about it here. I think a class would be tremendously useful; especially because most high school kids are about to spend the most they ever spend in their entire life over the next 4-5 years.
Well I’m never going back to My Old School
Rewards credit cards are great if you pay your balance every month. That’s the only way they make economic sense.
Here’s an article from the FDIC on rewards credit cards that dispels some common myths: http://www.fdic.gov/bank/analy.....icle2.html
i Wish that schools related math to practical subjects like making/saving money as I think that this would be more inetresting for children and teach them the value of money early on and how to manage it effectively. I agree totally with your point about Staying away from rewards cards. The whole reason they offer rewards is because they know that they are charging a higher rate of interest and they use some of this additional interest charge to provide you with the rewards, so in the end you pay for it anyway.