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Introduction to Credit Cards

You probably already know what a credit card is. You see the ads every day – in the television, on the radio, in the newspapers or on billboard advertisements. Your friends, parents and relatives use them all the time. But just to clear up any misinformation, let’s look at what credit cards are, why you should have one and what risks are involved with using one.

Simply stated, a credit card is a financial arrangement between you – the card holder – and a financial institution such as a bank or credit union. The arrangement specifies that you can borrow money from the lender as long as you promise to pay them back in the future. The lender sets the terms for the deal, including how often payments are due, what the minimum payment will be and what interest rates will apply. Your payment will include not just the amount of money you borrowed, but also an additional charge based on that rate of interest.

Credit cards can be used as a tool, offering many benefits for consumers. Some of these benefits include:

Convenience: With a credit card, you can buy anything you want right away, whether or not you have the cash available at the time. If you’re purchasing a big ticket item like a computer or a washing machine, you don’t have to wait for months until you save up the money.

Emergency Protection: If you’re ever in an emergency, you’ll see how helpful a credit card can be. Whether you’re stuck with medical bills or auto repair fees, using a credit card can help you get back on your feet again.

Security: Large amounts of cash can be lost or stolen. But if your credit card goes missing, you can have the account cancelled and a new card issued without losing any of your money.

Building Your Credit: If you dream of buying a house or really nice car, you need to have a credit history that demonstrates you can take on debt and pay it back on schedule. You can use a credit card to make small purchases and build up your credit score by paying your statement on time.

When used responsibly, credit cards can help improve our daily lives. But the temptation to live beyond your means and max out your credit limit can be a problem. That’s why it’s important to think of your credit cards as tools that you can use, not free tickets for anything you want. Here are some simple tips to help you cope with your credit card debt:

Make a Budget: One of the first steps to financial freedom is a realistic budget. If you don’t already have one, check out the article “Creating a Budget” on Smart Young Money and set one up for yourself. Sticking to a budget will help keep you from splurging with your credit card.

Set a Limit: Many analysts recommend keeping your credit card balance around 30% of your credit limit for maximum benefit in the formula used to calculate your credit score. Promise yourself not to exceed that limit and you won’t have with out-of-control credit card debt.

Go Back to Cash: If you’re having trouble keeping your credit card in your pocket, switch back to cash for awhile. When you use a credit card, you don’t get the same feeling of having forked over your hard-earned cash, so you’re prone to spending more. Using cash for a bit will help you remember that little purchases add up.

Get Credit Counseling: If your debt gets out of control, talk to someone! Ignoring your credit problems won’t make them go away – it will only make them worse. Talk to your parents or a trusted friend who may be able to help, or consider getting help from a group or institutions that can help you with your problems.

Credit cards can be helpful tools, but the potential for abuse always exists. Taking the time to learn how to use credit cards properly can help you prepare for a bright financial future.