It’s been almost one year since I graduated college (I can’t believe I just wrote that), and I’m still working on adjusting to adulthood. One of the many adjustments I’ve been making is being financially independent. I was very lucky to find a great job with a GOOD company when I graduated. One of the things I did in setting up my finances was to get my very first credit card. There were so many options, and I wasn’t sure what to get. I went with a big carrier card with a very low credit limit. I pay off my balance every month and make sure that I don’t go over my limit. I like that I have one bill to pay, and I earn points on my purchases.
Recently, I’ve been starting to use the chip part of the card for purchases, and I’m not loving it. It takes longer, and I don’t understand what the point is. I asked some of my friends about the chip and none of them knew either, so I decided to do some digging—here’s what I found: the chip itself is called an EMV (Europay, MasterCard, and Visa) and it’s a small computer chip that “creates a unique signature for each transaction” unlike the regular magnetic strip cards, which uses the exact same signature on every transaction. The EMV is safer because thieves can’t duplicate your information by stealing the data from a single transaction. Which is significant—because theft of information from magnetic strip cards makes up 37% of all credit card fraud in the country, according to TimeMagazine. While you can’t use the chip reader everywhere yet, it’s definitely starting to become more popular. I guess it really can make a difference and save some potential headaches if someone steals my information. The one downside is it really does take longer to process a transaction. I guess patience is part of adulthood…
Learning about the EMV chip was eye opening, because I realized there was so much about credit cards I still didn’t know. This got me thinking back: Did I pick the right card? Do I even need one? I felt like I needed some more information from a trusted source, and I wasn’t sure Google was up for the job. So, I decided to sit down with Kara Leclerc, an experienced colleague of mine on our finance team, to ask some questions:
What factors should I think about when choosing a credit card?
Kara: What are the rewards for each card and how do you earn them? Ask yourself if that is something you would actually use. Points and rewards do expire so be wary of the timing. Some cards offer rewards for gas, groceries, or just pure cash back when you pay your bill. My suggestion is to read everything. Know how your interest is calculated, how your points work, what fees are involved, and what the penalties are. Most cards give a grace period for a late payment, but you should always check what the deadline is, and what will happen if you go beyond it. A lot of times there will be a fee, but it may also trigger a higher interest rate. There are other fees to watch out for as well, and you should know what your limit is and how close you are to it. While you may not be stopped at the register if you go over your limit, you may trigger a fee. Some cards have an annual fee you need to watch out for. How your interest is calculated can also have a big impact. Different cards calculate interest in different ways. Some do it on your balance at the end of a period; some do an average over the last 2 or 3 periods. By knowing how yours is calculated you can manage your payments and save a lot of money.
What are the benefits of having a credit card? What should I look for?
Kara: Credit cards are great for a lot of reasons. They can allow you to manage your expenses in a way that rewards you and allows you to manage a length of time for repayment. Credit cards are also great for:
- Deferring your expense at a cost (if you had a large expense, you could incur the cost over a period time for a fee–the interest incurred by paying off the cost for the card).
- Building credit–particularly for a mortgage, loan, or other large expense, it’s a good thing to have a good credit score so you can get a loan at a better interest rate.
- Rewards–if you’re going to spend the money anyway, you could accumulate points for airlines, grocery stores, store rewards, gas, etc.) “you’re paying yourself to use your credit card.”
- Carrying a balance. How do you want to use it? If you choose not to carry a balance now, will that change over time? If so, perhaps opening a different card to carry that balance could be a good idea.
What are the dangers? How do I know if a particular card is too good to be true?
Kara: Having a credit card isn’t for everyone. It can have long-term negative consequences if you’re not fiscally responsible. If you do feel you’re ready to have a credit card, changing interest rates are something to watch out for (ex: 4% for first year, then 25% interest after that, or if you miss a payment, it could trigger an interest rate increase). Make sure you know what triggers an interest rate change. Other things to think about include:
- Being conscious of your limit–if it’s too high for you, it could be dangerous. It’s tempting you to go closer to that limit and carry a larger balance, even if you can’t afford it–a good marker for yourself could be thinking of your percentage of take home pay or how many months of living expenses you would like the limit to cover.
- Having too many cards or opening and closing multiple cards.
- Paying off one credit card balance with another credit card–you could be subject to balance transfer fees.
After talking to Kara, I examined my situation and feel better about my choice to get this credit card. I do get reward points that I’ll use, I’m conscious of my credit limit, and I know how my interest is calculated. Now if anyone asks me about getting a credit card, I’m going to pass along the last piece of advice that Kara gave “use responsibly, read everything, and don’t be scared.”
Co-authored by Patrick Meany, Financial Analyst at National Life Group. Patrick is a recent college graduate who majored in finance & economics. He is interested in applying these topics to everyday life.