This was originally published on Monday, August 7, 2017, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I have never had a credit card and have always used cash. I am considering getting one to use in case of emergencies and for the trip I am planning next summer. I have considered several types but honestly, I find it all a bit confusing. Do you have any tips that could help me decide which credit card is a fit for a first-time owner?
Answer: There are many types of credit cards and looking for the right one can be perplexing and overwhelming. Taking the time to find one that fits your lifestyle and budget is essential.
When used responsibly, a credit card can help you build a good credit history. Good credit history can help you get loans with reasonable interest rates, insurance, cell phone plans and, in some cases, secure a good job.
Some cards reward you for using their cards and others can help you protect your purchases in case of theft or damage. In your case, you may need a credit card to secure your travel plans such as rental cars and hotels.
Before you decide, ask yourself three questions: Do you really need a credit card? How much of my budget can you commit to paying the credit card loan (because that is what a credit card is, a loan)? Can you save to purchase the item instead of using a credit card?
Answer these questions honestly. Knowing the answers to these questions will help you determine which card meets your needs. There are other aspects that you should understand before making a decision.
A credit card is basically a short-term loan. Depending on the amount you pay monthly, you may or may not accrue interest. If you pay your entire credit card balance at the end of the billing cycle, you will not accrue interest. However, if you pay a partial amount of your balance, you will accrue interest on your average daily balance. The interest is a charge for borrowing the money.
A normal billing cycle is usually 30 days. Most billing cycles will have a few days grace to pay on your loan. If you miss the cutoff date, a late fee will be assessed.
Credit cards use revolving credit that is automatically renewed as the balance is paid off and can be kept open indefinitely. Your credit limit, or line of credit, is the maximum amount you can borrow. If you have reached that limit, you must pay down the balance before you can borrow more. Some credit cards will assess charges that are beyond your limit and will charge you “over the limit” fees which can be a monthly or daily fee.
Why get a credit card?
There may be many personal reasons why you may need one, but from a financial point of view, a credit card is a method of building good credit. Your credit score is factored by your payment history, the amount you owe on your accounts, how long you have had the credit and the type of credit you use.
Another reason for owning a credit card may be the perks. Some cards offer cash, points or other bonuses. For example, if you travel a lot, consider getting a card that rewards you with airline miles or points for hotel stays. Some cards offer discounts at certain partnering stores or gas stations.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.