A credit card is like a chainsaw; really quick and convenient, but you need to follow the safety instructions or you could cut your arm off!!!

Credit cards. What an invention. They say the whole economy is based on them and I probably believe it. I guess by now you have probably been bombarded with offers to sign up for one, two, three, four, maybe even more. Believe me, more offers are sure to come.

Some people will tell you that credit cards are evil and to reject every offer.  There are certainly plenty of horror stories out there that would support that idea, but let’s be realistic. A credit card can be a great tool. You just need to choose the right one and be a smart user.

We will talk a little later about choosing a credit card. But before we do, I want to fill you in on some credit card lingo and give you a few suggestions on how to go about using this marvelous, but potentially dangerous tool.

Before I tell you anything else, I want to get one point across, if I were there with you, in person, this would be the point where I would look you right in the eye and put on a serious voice.  So, imagine I am doing that as you read these next few words.

A credit card is not a new income source and you have to pay it off with interest.

You are probably thinking “that’s pretty obvious” but there are plenty of people out there who don’t. They max out one credit card after another and do the ‘credit card shuffle’, using one credit card to pay off another one each month, just to get by.

Mark, a guy I knew in college, lived like a king for his freshman year.  We all thought that he must have come from a wealthy background, and to be fair his folks were pretty well off, but that wasn’t where he was getting his money.  He was using credit for everything.  Credit cards, store cards, you name it, if he could sign up for it, he had it.  He got away with it for a while, but by the end of the second semester he had run up a mountain of debt and just couldn’t keep juggling it. That was when he told his parents; I don’t know how they reacted but the next thing everyone knew, Mark was moving back home to New Jersey. We didn’t hear much from him after that, but someone told me he was living at home, working at the local Home Depot, paying off his debts and doing some classes at the local community college. I felt bad because much of the debt had been run up entertaining his friends. I was one of the beneficiaries of that entertaining, frequently taking advantage of his eagerness to impress. I would hate to see you or any of your friends find yourself in that situation.

As I said before, credit cards can be a great tool, but you need to use them properly. Now, the first step in learning how to use them is knowing the terminology, and with credit cards, there is plenty of that. Jennifer and I prepared a quick crib sheet on the language of credit cards. You can see it below.

With our crib sheet as a handy reference, you should be able to start to understand the terms and conditions that are given for each credit card. We will take another look at that in a little bit when we look at choosing a credit card. There really are some huge differences in those terms and conditions, but if you don’t know what all the terminology means, you can’t always spot the differences.

Now that you have a handle on that, let’s take a look at using a credit card.  The common temptation is to use it all the time and then deal with the bill at the end of the month.  The problem is that a lot of people don’t have the money to pay it off at the end of the month. Instead, they make the minimum payment or a payment that is less than the total amount due.  They start carrying a balance, which is great for the credit card company as this means they start to collect interest.  What people don’t always remember is that once you carry a balance forward from one month to the next, interest is charged on all your purchases after that until the balance is paid off.  So, every new purchase you make while carrying a balance immediately gets interest applied, which makes it harder and harder to pay off the balance.  When you carry a balance, there is no grace period.  No free ride.

There are two lessons to be learned here. First, use cash, checks and debit/ATM cards whenever possible to make your purchases. That way, you avoid the nasty surprise at the end of the month when you might not have the money to cover the credit card bill. Of course, in order to make purchases with cash or cash equivalents, you have to have the money. That means you may have to plan and save for things, I know that doesn’t sound too appealing, especially compared to credit. It’s what our parents used to make us do and Jennifer would call delayed gratification, which sounds even more dull. Think of it like this -- if you save to buy something, it costs you less because you don’t pay a finance charge for using credit.

Second, if you do need to use a credit card, pay off the balance each month.  If you cannot pay off the balance, pay as much as you can and pay off the remainder as quickly as you can.

Something else just came to mind, something that I just found out about minimum payments. I always thought that if you kept making the minimum payment you would eventually get out of debt.  This used to be the case.  But now, in a lot of cases, the credit card companies have set the minimum payments so low (1-2% of the amount owed) and the interest rates so high, that all you are really doing is mostly paying the interest.  It can take years, literally, to pay off a credit card, if all you do is make the minimum payment, even if you don’t make any new charges.

While I am thinking about the dangers of carrying a balance, something else came to mind. That’s the practice of rolling credit card debt over into student loan debt.  Of course, student loans are a whole subject by themselves and I am not going to discuss them, except to mention how some people use them as a way to deal with credit card debt. They run up big credit card debts, accumulate interest, making them even bigger and then take out a student loan to cover the debt.  Many of them repeat this process again and again while they are in school. It’s a pretty innovative solution to the problem of credit card debt, that is until they leave school and find themselves with a mountain of student loan debt due with payments to begin shortly after graduation.

Jennifer had a friend who did that.  She graduated and found a good job, but she really wasn’t enjoying the financial benefits of the job because a big chunk of her earnings went to pay for her student loans. Now, she would probably have taken loans anyway, but without the additional amount of credit card spending that she did, the loans would have been considerably lower. She would be enjoying life a lot more now. Instead, she’s kicking herself thinking about all the credit card charges and interest that are now a part of those debts that she’s paying interest on again.

I’ve said enough for now, but before we move onto the worksheet, just take a quick look at the credit card info sheet Jennifer and I compiled below.