Do you remember your first credit card?
I will never forget the day I got my first credit card.
It was the first week of college and I was walking back from my 11AM English 101 class to my now-defunct dorm room when I passed the infamous Nick’s Canteen (The previous weekend I had stumbled into Nick’s and discovered their bacon cheese chippers, which is heaven in your mouth).
Standing outside of Nick’s Canteen was this young guy who looked like he just graduated from college himself with a sign that said, “Free Sub?”
Now… be honest, what do you do when you’re a college freshman and you see the word FREE in front of any type of food?
YOU STOP AND FIGURE OUT WHAT IS GOING ON.
Which is exactly what I did. I mean WHO WOULDN’T stop and grab a free sub….??
People who understand how credit card interest works, that’s who. Because when you really begin to assess the situation, is it really worth getting a credit card?
Here is what you need to know about credit cards.
Mistakes I Made with My 1st Credit Card
The first mistake I made when I got my first credit card was that I didn’t understand how credit cards even worked.
Since personal finance class was never taught in high school most of what I knew about money came from my mom who always made it clear to:
- Never rack up credit card debt
- Pay your credit card monthly if you use it
But up until that fatal moment when a free sub was just too hard to pass up, I had never had a credit card. I was only 18 and a few months, it was my first week at college and the marketing guy from Discover told me I would “Definitely qualify for a credit card.”
Now what I didn’t know when I got approved for that discover credit card was that the interest was somewhere around 24-30%. Luckily for me, I couldn’t spend more than $1,000 or so and I did remember my mom’s advice.
However, two of my mistakes with getting a free steak n’ cheese in exchange for a credit card was that I had no income AND it was super easy to use.
Having a credit card made it wayyy too simple to buy a few extra drinks, grab the new sweatshirt at the bookstore and stop at the pizza place on the way home each weekend. To top it all off, I just figured I could reach my limit, then pay it off with some money I would make during winter break.
But at approximately 25% interest would I didn’t truly understand was how interest works.
Do you understand how credit card interest works?
I will admit it, I thought I knew how credit card interest worked in college but honestly, I didn’t. To fully maximize the benefits of even having a credit card, you must understand how credit card interest works.
Credit cards have what is called an APR, or annual percentage rate. Most of the time the rate is fixed, but some can be variable, meaning they can change based on the prime rate. There are different types of APR’s including:
- Balance transfers
- Cash advances
Let’s be honest, who really knows all of this (Or cares)? So imagine when a somewhat naive legal adult finds out they can get a credit card for a free sub sandwich?
I actually thought I was doing just fine making the $25 minimum for all the care free spending I had made the first few months of college. Having a $600 credit card balance at 25% meant I was paying roughly $12.50 per month in interest.
Easy way to calculate credit card interest (for normal people like me):
Take your APR, divide it by 12, then multiply that by the balance. So when I was 18, my 25% APR worked out to be about 2.08% per month on a $600 balance ~ or about $12.50 a month in accrued interest.
I had no clue that half of my minimum payment was going to interest each month! So here is the biggest rule when it comes to credit card interest:
If you carry a balance each month, you will pay interest.
It is how credit card companies make their money…. And give away free subs.
How to officially calculate credit card interest from Credit Karma
- Divide your APR by the number of days in the year.
0.1599 / 365 = a 0.00044 daily periodic rate
- Multiply the daily periodic rate by your average daily balance.
0.00044 x $1,500 = $0.66
- Multiply this number by the number of days (30) in your billing cycle.
$0.66 x 30 = $19.80 interest charged for this billing cycle
Pay your credit card OFF monthly.
To answer the question as to whether or not it is worth getting a credit card boils down to if you plan to pay your credit card balance monthly.
- Option A.) Pay it off monthly
- Option B.) Pay interest
The choice is yours, but the banks need to make money. And the reason the can offer so many perks like miles, rewards points and cashback is because most DON’T PAY THEIR CARDS OFF MONTHLY.
Not to mention that spending on plastic is always convenient, but also psychologically easier to swipe. Valuepenguin did a study on credit card spending habits and something like a tip for a meal was higher by 1-4% just because of credit card use.
Another stat indicated that people who primarily use plastic will spend 12-18% more than someone who uses cash. This is why the infamous Dave Ramsey is so hell-bent on cash purchasing.
All this being said, it is OK to leverage credit card used for things like recurring utility bills, cell phone bills, internet (How to get free internet) and groceries to also redeem perks. Just make sure you only do this if you plan to pay your cards off monthly.
Remember if you don’t pay it off, you eventually will… just with accrued interest.
Credit Cards for Emergencies
A pretty common use/excuse for credit cards is emergencies.
Just fill in the blank for, “I needed a new ____________,”
In addition to the free sub credit card thing, I have also been in tight spots where I needed to either use or get a credit card because of my lack of emergency funds (Hence why you should always have an emergency fund).
I vividly remember needing four new tires that would have depleted my checking account. So I went with the Goodyear Visa and took advantage of the 12 months interest-free opportunity. After graduating college I did something similar with a Best Buy card and a new t.v.
The pros of doing the interest-free credit card (for a limited amount of time):
- Gives you time to pay something off without going in the hole for the month
- Don’t have to use emergency fund unless you want to
- Easier to manage the smaller payments
The cons behind using interest-free (for a term) credit cards:
- If you don’t pay them off in time, ALL the back interest is charged
- You might be tempted to buy something you really don’t need
- You could forget to pay it each month on time, resulting in other issues
If you find yourself in the position where you might need a credit card for an emergency it isn’t always a bad idea to have one handy. However, the last thing you want to do is get stuck in a cycle of debt.
Which leads to my last and final point…
Are credit cards worth the hassle?
Sure, you can get some points for your spending or a $1 back for every $100 you spend, but last time I checked credit card points never paid for student loans or car payments.
As I stated earlier, you can leverage credit cards for recurring bills, but you have to be careful. Displaced spending can lead to more spending and the reason banks offer such great rewards programs is to encourage spending.
The more you spend the higher the likelihood they make more money on interest.
So here are a few tips I would recommend as we part when it comes to credit card use:
- Pay it off monthly
- Don’t get so caught up in “Getting Rewards”
- Ask yourself what the bank wants you to do, then do the opposite.
- Make sure you’re interest isn’t variable
- If you get interest or late fees assessed, call and ask them to be removed (this really works)
- Try to use cash
- Have multiple credit cards if you’re disciplined only – gas cards, grocery cards, utility cards, travel cards, etc.
- Set personalized spending limits, like $300 per month for groceries
- Pay your credit cards weekly or even nightly!
And last but not least….Don’t fall for the FREE SUB! It will always end up costing you!
Question: What credit card offers have you fallen for?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎