How a Credit Card Works [For Beginners]

You can think of a credit card as a small loan, that is interest free for approximately 30 days. I say approximately, because it depends on when you make the purchase on your credit card and when your statement is produced. For example, if you make a purchase on your credit card on September 15th, and your credit card statement is produced or printed on September 19th, you will have approximately 2 weeks to pay off that purchase before interest starts adding up. Interest will be added after your payment due date.

So you just received your first credit card in the mail. You want to make in-store and online purchases responsibly. At the same time you want to build credit.

I’ll explain to you how it works.

Here is an article on how to “Establish Good Credit”, for more info click here. 

Making Credit Card Purchases

Making credit card purchases is easy, maybe too easy! Ultimately, this is where you have to work really hard to only buy the things you need. Consequently, this is where people can get into some serious trouble. Therefore, I am so excited to help you understand how a credit card works to prevent you from accumulating credit card debt. I want you to be informed and understand how it works so you can be confident and not worried about making purchases.

First, the most important thing I can say is stay away from making purchases you can’t afford. This will totally increase your stress level and make you feel worried. Second, you will be paying more for your the items you purchased because of the interest added if you cannot pay your credit card in full.

My experience

To illustrate this, when I was in my 20’s, we would be buying clothes, eating out and staying in hotels that we could not afford because we could put it on our credit card. Sometimes, we didn’t even know how much the other person was spending! We just knew that when we wanted something we bought it.

Then came the credit card bill came in the mail. Consequently, my body felt shocked every time I opened the envelope. Another month came and went and we could not pay off the previous balance that we intended to pay off. As a result, we just added more debt to our credit card balance. It was a vicious cycle! For this reason we carried more debt, and ultimately the worry of how we were going to pay off the balance. Truthfully, the only thing that calmed my nerves was the paying the minimum monthly balance.

Unfortunately, we didn’t have money in savings and had to carry a balance on our credit card. Consequently, we were paying more for our purchases by having to pay interest on the balance we could not pay off. As a result, it would make me sick to my stomach wondering how we were going to pay off the balance and I would have a hard time sleeping at night.

Ideas for Small Purchases to build credit:

I care about how you use your credit card and want to strongly suggest making small purchases so that when your credit card bill comes in the mail, you can pay it in full. Here are some things I recommend.

• Put your Itunes monthly storage on a credit card. This is what I still do. The cost for my itunes storage is $1.00 per month. I do this on my credit card that I don’t use very often. The benefit is that, it reports to the credit reporting agency that I am using my credit card and I am paying it off every month. Certainly, this is a very easy payment to make. More importantly, it builds and establishes good credit.
• Purchase one tank of gas on your credit card each month.
• Buy one cup of coffee each month.

If you want to build credit, you will need to use your credit card to make purchases. Consequently, if you do not use your credit card, it will not build or establish credit for you. You can make a purchase for $1.00 during the month. It doesn’t matter how small the purchase is. The most important thing I can stress to you is that you are making purchases and paying them off. Similarly, it shows up on your credit report that you can make purchases and pay them off each month.

My favorite card is the Citi double cash back credit card. I like it because:

• First and foremost there is no annual fee!
• I get 1% cash back when I make purchases.
• I get 1% cash back when I make payments.

Your Statement

Each month you will get your credit card statement either in the mail or an email notification that your statement is ready. Please be careful with this. If you don’t check your email regularly, this is an easy way to miss making your payment. When you get your statement, you will want to open it and review all the details and transactions. Pay special attention to the items below:

1. Summary of Account Activity
   • Previous Balance (this is the balance if you did not pay off your credit card last month)
   • Payments – these are the payments you made to the credit card company.
   • Purchases – Make sure you recognize all purchases on your statement.
   • Fee’s charges – charges your credit card company has charged you.
   • Interest Charged – this is the amount of interest your credit card company charged you.
2. Payment Information
   • New Balance – This is the total amount of your monthly purchases plus the amount of money you didn’t pay off last month. I highly recommend paying the New Balance in full each month.
   • Total Minimum Payment Due – The credit card company will always give you the option to make a minimum payment so they can earn interest from you.
   • Payment Due Date – This is the date your credit card company needs to receive your money.
   • Late Payment Warning – This is the amount you will be charged if you do not make your payment on time.
3. New Balance
   • Credit Limit – This shows the amount of your credit limit
   • Available Credit – this is the amount of credit available after making purchases.
4. Transactions – You will want to verify you made each purchase. If you did not make the purchase, you have 60 days from the statement date to notify your credit card company of the errors.
5. Interest
   • If you carry a balance, you will pay interest and will want to review how much you are paying, monthly and annually.

If your credit card information is stolen, please realize you are not responsible for those purchases. My credit card number was recently stolen. Here is how I handled it.

Helpful Tips:

• Keep your purchases to 30% of your credit limit. For example, if you have a credit limit of $1,000, you should only put $300 on your credit card in purchases to keep your credit report at its best! If you go over this amount, it can hurt (or lower) your credit score.
• If you have a credit limit of $500, and you spend more than half of your credit limit or $250, this can hurt (or lower) your credit score because your balance (or amount of money you spent) is too high.
• Make your payments on time. I can’t stress this enough. Making your payments late, even one day late will consequently report as a late payment. As a result, it will lower your credit score.

In summary, building credit and maintaining credit is really important. I recommend doing this as soon as you turn 18. Similarly, it is very important to make all your payments on time to get a good credit score. For more information on how to repair your credit yourself, click here.

When you have a good credit score you get:

• The best interest rates on loans and mortgages!
• The job you want! Employers can check your credit before employing you to see how responsible you are with your money.
• The apartment you want to rent! Before you can rent an apartment, they will need to check your credit to see how responsible you are with your money.
• Best insurance rates for your home, cars, trucks, etc.!
• Most important, the freedom to make your own choices!

“If you believe you will succeed financially….you will!”

I hope you take the adventure to be independent from your money controlling you. Ultimately, you will have the freedom in your life to make big life changes and it is so rewarding and exciting!

Therefore, pay off your credit card each month. Likewise, create a budget that will work for you and stick with it! Want more info on how to create a budget for beginners? Just click on the link.

I am excited to help you succeed in your financial financial life!