Understanding Credit Card Use

Last week I gave a talk on what parents can do to help young people become financially savvy, and a few really good questions came up.

I’m going to split these up over a few posts, so today’s question is: What can you do as a young person to avoid falling into the trap of buying into the brands and lifestyles of credit card use when you arrive on campus?

It’s true, when you first arrive on campus, there are a ton of ads hitting young people about getting a credit card, and there is a certain amount of peer pressure from friends as well – it might just be that feeling of wanting to belong to a group of people who uses credit cards.  Unfortunately, these credit cards don’t come with in-depth manuals explaining the full risks and rewards of credit card use, and while they do come with a set of terms, these usually are not in a format that is easily understood by young people.  So what can you do?  You need to understand how credit cards work, and decide whether you are responsible enough to use them.

The truth of the matter is that credit cards aren’t evil, they aren’t bad, and credit card companies are not out to get you, rather they are a tool, which if used incorrectly can have serious penalties (such as paying up to 28.8 percent in interest fees). And like any tool in life, if you use it correctly it can be really useful, but if used incorrectly and mismanaged, it can be extremely costly.

Now I’m sure you’re wondering, how do I use this tool correctly? Well you have to understand how credit cards work to understand how to use them.  Credit card companies make money by allowing people to borrow money under a set of terms (you don’t pay interest on the money borrowed until you receive a bill, and then you can have anywhere between a few to 26 days which are interest free, this is known as the grace period – note: recent laws being discussed would see this grace period changed to a minimum of 21, and also require credit card companies to disclose what your interest rates are, what your minimum payments are, and what annual fees you have to pay on each statement).  If you break the terms, meaning you don’t pay the credit card company back within the grace period, the credit card company will automatically start charging you interest.

As an example, let’s say I spend $100 buying books on my credit card on May 12, and I receive my credit card statement on May 31.  From May 12 to May 31, I don’t have to pay any interest fees, but depending on what the terms of my credit card are, I could have up to 26 days to repay the credit card company without having to pay any interest – it’s important to know what this grace period is though, because if you don’t know what it is, you could end up paying large interest fees.

Just remember, credit cards are a tool, and it’s up to you to use them responsibly.  If you can be responsible and make sure that you are paying off your credit cards without having to pay those large interest payments, credit card use is for you.

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One Response to “Understanding Credit Card Use”

1. Mom You Don’t Know Finance! | Following The Goods says:

   June 25, 2009 at 12:56 am

   [...] a recent post I mentioned that I had given a talk on what parents can do to help young people become financially [...]

   Reply