What my First Credit Card Taught Me
On my first day attending the Community College of Philadelphia, I was at the student activity center, and I came across a table giving away water bottles and notebooks. The only requirement to get this free notebook was to sign up for a Visa credit card. I thought ok, I could really use a free notebook and I am never going to get approved for a credit card, because I have no credit history. A few weeks later, to my utter surprise, I received a shiny new Visa credit card in the mail. It was silver with a blue logo and had my name in bold letters. This credit card was more than just another symbol of my ascension into adulthood; it was freedom. With a $600 credit limit, I was set!
According to the letter I received with the credit card, as a college student, I had the potential for future earnings. This would allow me to pay this credit card in full one day. When I first received this credit card, I honestly thought it was free money. I immediately went out and bought a new Sony Walkman, a pair of headphones and of course more Ralph Lauren clothing items. My thought at the time was that I didn’t have to save anymore for the things I wanted. I could just use this credit card to make any purchase I wanted. A few weeks later, I received my first bill. Even though I had spent $510 of the $600 limit, I only had to make a $20 payment. I was relieved. I was worried that I had to pay the entire balance at once. At the time, I didn’t have a checking account. So, I purchased a $20 money order from the U.S. post office and put the payment in the mail. Soon, I would have $110 on the card ($90+$20 payment). But, what I didn’t factor in was the interest that was accruing on the balance at a rate of 25%. Well, when the next bill arrived, the available credit on the card had dwindled down to just $3. Between more purchases and the high interest rate, I had reached the credit limit. But, the minimum amount due was still only $20! Just over 3% of the balance.
Despite the fact that I paid the minimum payment of $20 every month, the balance never seemed to get any smaller due to the 25% interest rate accruing on the balance. As a result, I begin to become uninterested in paying my credit card bill. At the time I didn’t fully understand the consequences this change in behavior was going to have on my credit. There were many times I had to make a choice between paying this bill and having some money in my pocket. I chose the spending money option far too often. A few months later, I received a letter from Visa informing me that my credit card was cancelled. I was very disappointed. My beginning steps on the road to financial independence just took a sharp turn into a ditch. I had acquired credit and was entrusted with the responsibility of its management and now it was lost. How could my credit card be cancelled? I still owed a balance. So, let me get this straight, I could no longer use the card, it was still incurring 25% interest and I still had to pay the balance? How was that fair? If I had just continued to pay the $20, the credit card wouldn’t have been cancelled.
It took me over a year to pay that credit card off. I didn’t get another card for three years. The lesson I learned from that experience was not that debt was a terrible burden or paying credit card interest is wasted money but, that I should use a credit card responsibly as a resource for convenience when dealing with emergencies or making quality purchases that I needed to bring value to my life. No matter what, always make the minimum payment before the due date, because these payments decrease the balance, however small. Now, your credit card statement shows you how long it will take to pay off the balance if you make just the minimum payment and if you make higher payments. Paying at least the minimum payment on time each month will help you to have a good credit score.
A credit card is a valuable resource that should be used to acquire experiences and purchase items that bring you personal value. When using a credit card, try to use only a portion of the credit limit; this will always look good to future creditors. Credit cards shouldn’t be used as spending money on every day items like lunch or Friday night pizza. A credit card is a revolving loan. Meaning, once you pay on the balance you can use the card again. Unless, you are able to pay the full balance at the end of the month, you will pay interest on this loan. Since, you have to pay this loan back; you should be paying money back for something specific that added value to your life. The interest you pay on a credit card is the price of the convenience of using the card. However, you should not pay more interest than is necessary, so whenever possible pay more than the minimum amount due.