Personal Finance Tip #1 - Credit Cards

One thing I realized after I graduated from university was that I knew nothing about money. I didn't understand interest rates, the stock market, mortgage rates, credit card APR and all that other fun stuff. After reading several personal finance books, it was clear that my schooling provided me with very little education in this very important topic. Unlike our carefree days under our parents' bank account, our decisions now will directly affect our financial futures. Sometimes the damage may be irreparable so I have decided to start a personal finance series.

Credit cards - these magical cards that just "gives" you money to spend and all you have to do is sign up - sometimes you even get a free t-shirt or water bottle. Although personally I have never gotten into credit card debt, I know many friends who have and I see the immense struggle they go through to try to get out. Credit cards are enticing because you can spend $1000 now but only have to pay the minimum $25 a month. What they don't tell you is at 18% interest rate (which is a low rate for most cards), it will take you 153 months to pay off your debt paying only the minimum. What is worse is that the total interest you pay comes out to $1,115.41 which is more than the original amount you borrowed ($1000 becomes $2115.41). Knowing this it is NEVER good to leave a balance on a credit card (unless it is a zero interest rate card).

One of the obvious rules for good personal finance that is rarely followed is to SPEND LESS THAN YOU EARN. If that rule is followed, one will never get into credit card trouble because you will always have the money to pay off the balance. It never makes sense to leave a balance on a credit card because the interest rates are so high. In the aforementioned example, $1000 used now can cost you an extra $1,115.41 (18% interest rate) 153 months later, and this is assuming that you don't buy anything else using the credit card. At high interest rates, it is very easy to fall down the slippery slope of credit card debt. NEVER use the credit card for cash advances unless it is absolutely necessary because the interest rate for cash advances is usually higher than the interest rate for the credit card. Many unwary credit card users who overspend or take frequent cash advances find themselves in a mountain of debt that may take their whole lifetime to pay off.

Despite all the bad publicity, credit cards are actually very useful and healthy for your personal finance well being. They are a good substitute for cash because most restaurants and stores accept credit cards so you don't have to carry a lot of cash, which helps to limit losses if you lose your wallet or purse. In some cases, using credit cards can be faster than using cash - no need to get change. Using credit cards is also a good way to earn money because every month, you obtain an interest free loan which means your cash can be yielding an extra month of interest in a savings account. Many credit card companies provide good customer support if there are any issues with the products purchased. Frequently using credit cards not only helps to build your credit rating but is also a good way to keep track of what you spend your money on. Most credit cards provide a year end summary of all your spending broken into categories such as food, gas and restaurants. All these good qualities to credit cards are only helpful if you pay off your balance on time every month.

Here are some things to look for when finding the "right" credit card:

1) Is there an annual fee? Make sure you are aware of the annual fee of the credit card. This fee is charged whether or not you use the card. Unless you really like a specific card, look for one with no annual fee. Also beware of cards that advertise no annual fee for the first year, which usually implies a fee in subsequent years.

2) What are the rewards? Is it cash, points or frequent flyer miles? With tons of credit cards out there, it does not make sense to choose a card with no rewards.

3) Does this card suit my needs? Usually cards with rewards and perks carry high interest rates which are good for those who diligently pay off their balance fully. Those looking to build credit or looking to pay down credit card debt relatively quickly may opt for zero-or-low interest rate cards. Student cards usually allow students with no credit rating to qualify for a card, although in inexperienced hands, this may lead to disaster. There is a card for everyone's needs, so do your research.

4) What are all the details of the credit card - fees (cash advances, over the limit), penalties, grace periods, APR and interest rates? If you pay your balance in full on time every month, you don't really have to worry too much about these things. If you don't intend to pay off your balance fully every month, you should be aware of some of the fees. If you only intend to pay the minimum balance - Don't get a credit card.

5) Where is this card accepted? Visa and Mastercard are usually accepted worldwide. American Express and Discover are relatively not as popular.

The credit card that I prefer to use is: American Express Blue Cash
I also have: Chase Freedom Mastercard

Useful site that compares credit cards - http://www.creditcardguide.com/