Credit card debt is one of the reasons why many people, especially those who are poor or considered low income, can’t get ahead.
Credit card companies and banks often target us with endless offers, and you’ve probably been receiving credit card envelopes in your mailbox since you turned 18. If you just turned 18, here’s some news: it’s not going to stop.
Before you get tempted by these offers, take a moment to consider whether or not a credit card is right for you.
Contrary to popular belief, you don’t need a credit card to get by. Some people don’t even carry a credit card, while others carry one but don’t carry a balance. It’s important to understand that there’s a difference between the two.
When it comes to debt, some of it can be good, and some can be bad. But before you even think about handling credit, you should understand these concepts.
Credit Cards and Debt: The Basics
Credit cards can be a useful financial tool, but they come with risks, especially if you’re not careful. Here’s what you need to know:
- Interest Rates: Credit cards often come with high-interest rates. If you don’t pay off your balance in full each month, you can quickly find yourself paying a lot more for what you bought.
- Minimum Payments: Credit card companies often only require you to pay a small minimum payment each month. This might seem convenient, but it can lead to a cycle of debt because most of your payment goes toward interest, not the principal amount you owe.
- Credit Score Impact: Using a credit card responsibly can help build your credit score, but missing payments or maxing out your card can hurt it. A good credit score is important for things like renting an apartment, getting a car loan, or even some job applications.
Do You Really Need a Credit Card?
Not everyone needs a credit card. Here are a few points to consider:
- Budgeting and Cash Flow: Can you manage your finances without borrowing money? A good budget can help you live within your means and avoid debt.
- Alternative Options: Debit cards, prepaid cards, or even cash can be alternatives that help you control spending without the risk of debt.
- Emergency Fund: Instead of relying on a credit card for emergencies, consider building an emergency fund. Even a small amount saved can make a big difference.
Good Debt vs. Bad Debt
- Good Debt: This is debt that can help you build wealth or improve your life, like student loans or a mortgage. These types of debt often can be considered investments in your future, an example, if your starting salary for your degree will pay more than the debt taken out.
- Bad Debt: This is high-interest debt that doesn’t provide a return on investment, like credit card debt from buying things you can’t afford to pay off right away. This type of debt can be a financial burden.
The Catch with Credit Card Rewards
Most people, when they talk about credit cards and the benefits, highlight cash rewards and how you can get cash back. What they don’t talk about is that oftentimes you might not even need to spend that much to get the rewards.
For example, if you get cash back when you spend $500 on groceries, it sounds promising—you’re like, “Oh yeah, I can get 1-2% cash back on that.” But if you don’t even need to spend $500 on groceries, it defeats the purpose.
Credit cards are great if you already had those expenses and you have enough cash flow to cover the balance. Don’t be fooled by those who tell you it’s free cash or that you’re leaving money on the table.
A lot of times, those people are the same ones who, in a decade, are going to be struggling to get rid of credit card debt because they thought they had a handle on it. Some people do, maybe you will too, but can you be certain?
Smarter Strategies for Using Credit Cards
One of the smarter strategies for credit card use is for someone who has enough cash flow but needs to build credit. Let’s say you decide to get a credit card with a reasonable interest rate and use it for groceries.
Every month, you use the credit card for groceries, but you pay off the balance right away. This way, you’re building credit without carrying a credit card balance.
The key difference between not having credit card debt and being in debt is making sure you don’t carry a balance. If you do carry a balance, minimize it as much as possible.
Understanding Compound Interest
Another thing to keep in mind is compounding. Einstein is often quoted for saying compound interest is the great eighth wonder of the world. We’re not sure if he actually said that, but regardless, the truth remains: compound interest can be the most amazing thing to happen to you, or it can be the worst.
To understand compound interest, look at it like this: if you carry a credit card balance and can’t pay it off, the interest rate—the money that you owe on top of the principal—will compound and build over time. So, a payment that starts at $300 might grow to $340, then $350, then $360, and before you know it, it’s at $1,000.
On the flip side, compound interest can work for you when you invest in a quality business in the stock market. For example, say you invest $200 and it grows to $220, then to $250, then to $255, and so on. This is how compound interest should work. You want to make sure it doesn’t work against you.
You can find the concept of compounding in many areas of life. For example, fitness: the more you work out over time, the better you feel and the better shape your body is in.
The opposite is true if you sit around a lot, don’t watch what you eat, and don’t move much—you’ll gain weight and feel out of shape.
Understanding the concept of compounding is one of the greatest tools you can have in your toolbox.
Helpful articles on understanding credit card and student loan debt
It talks about credit card being a double edged sword similar to what we discussed here.
It talks about compounding interest in various areas of life and briefly touches on credit card debt.
Understanding the difference between student loans and grants and whether you should take out a loan and if so, how much?
Conclusion
At least now you have a bit more information under your belt to understand whether a credit card is right for you or not.
When it comes to finance, understanding everything you can before making a decision that impacts your future is crucial. Just because you might not feel the effects of a credit card now doesn’t mean that down the road you won’t feel the effects.
Again, compounding is everywhere, and it’s important to understand the whole picture of your financial future.
The Broke College Student 
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