Getting a credit card simplifies your personal finance transactions. This is a double-edged sword, however, as lowering the barriers to consumption can cause certain individuals to spend themselves into debt. So, how can you know when is the best time to open a credit card?
The power of plastic can open up a world of purchasing opportunities, both online and in person. Therefore, before opening a credit card, it is important to understand the full repercussions of adding this financial tool to your wallet.
How Does a Credit Card Function?
Credit cards function by allowing you to buy now and pay later. Though the fees, spending limits, and interest rates can vary, the basic gist of a credit card is that it will allow you to make purchases that you will only need to pay for at a later date.
In essence, the vendor that you purchase from will be paid by the credit card company, who will keep a running tab of your expenses. They will send you a bill at the end of the month for the balance that you have accrued.
Depending on your specific plan, you have a spending limit that represents the maximum amount you can have on your balance at any given moment in time. You will have to pay off this balance every month, or you will be charged interest fees.
These fees and interest payments can quickly accumulate and skyrocket upwards if you are unable to repay your balance on time. Most credit card companies compound interest on a daily basis, which can make the amount owed increase rapidly.
Are Credit Cards Right For You?
The best way to answer this question of whether credit cards are right for you is to consider your spending habits. For those individuals who are disciplined with their purchasing choices, credit cards can add ease to your life. You can seamlessly make purchases far and wide without worrying about having enough cash in your wallet (or in your bank account).
Credit card companies often offer points and discounts for specific purchases. These can add up, allowing you to save money or redeem your points for airline flights, hotel stays, and other options available.
However, there is a big caveat to these positives. If you are unable to restrain your spending, you can end up in a big deficit that all the points and miles in the world will not help you get out of. Budgeting methods such as the envelope system are designed to help you ensure that you do not spend more than you can afford. By only using the cash you have available, you will not be in danger of overspending.
Having a credit card flips this equation on its head. There is nothing stopping you from spending more than you can afford except for your own self-discipline. If you are not confident in your ability to restrain yourself, then a credit card is not for you.
Because of their ease of use, fee structure, and compounding interest, individuals and families can find themselves under a mountain of debt. These obligations can strangle their ability to fulfill their financial and personal goals and dreams.
When Should You Get a Credit Card?
It follows that the best time to get a credit card is when you feel that you are capable of moderating your spending. There is no specific age when this becomes the case. Rather, it is directly related to your spending habits and your relationship with money.
For those who are unsure, you can always stick with using a debit card that is tied to your bank account. Alternatively, for those worried about a propensity to overspend, one can opt for a low limit credit card. These types of cards will only let you carry an outstanding balance that is fairly minimal. While this would preclude using your credit card for large purchases (and thus accumulating large amounts of points and miles), it would prevent you from overspending.
Some credit card companies offer limits as low as $200. This would give you a taste of buying on credit without the concern that you would be entering into (exceptionally) dangerous financial territory.
Conclusion: Know Your Limits
At the end of the day, like every personal finance decision, obtaining a credit card depends on both your circumstances and your individual choices. A credit card can be a nice tool to have for those who are standing on firm financial ground. Similarly, it can lead to a devastating slew of decisions for those who are not as well-situated.
Knowing your limits and your relationship with money and your finances is simply paramount. The best time to get a credit card is when you feel like you are able to responsibly manage yours.
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