Credit shy? Here’s a crash course in credit cards

It’s normal to have mixed feelings about credit cards. Many of us have watched our parents dig themselves into debt and then struggle to get back out.

But credit cards can also do great things for us. They can get us early access to things like concert tickets for shows that sell out instantly. They can give us cash back on all our purchases or free airline miles to take a mind-blowing trip. Even more importantly, they can help us build credit, which is something we all need.

A good credit score is becoming increasingly important to have. Used to be you only needed it if you wanted to buy a house or finance a new car. But these days you also need a credit history to rent an awesome apartment, get the best deal on a cell phone plan or even, in some cases, to get your dream job.

Credit or debit—what’s the diff?

They look the same in your wallet. They even work the same way in the checkout line. But credit cards and debit cards are two different beasts, and both have their uses.

A debit card is linked to your checking account, so every time you use it the money comes straight from your cash reserves. You buy a $20 book, and now you have $20 less in your checking account. And when your checking account runs dry, you’re done until you deposit more money.

A credit card, however, is linked to a revolving credit account you can borrow from whenever you need it. You buy a $20 book, and now you owe someone $20. Your checking account balance doesn’t change right away, but you’ll have to pay that $20 back at the end of the month—with interest if you haven’t paid off your balance in full every month.

Here’s another important difference between debit and credit cards. Using a credit card helps you build up a credit history, which makes lenders more likely to let you borrow more money in the future. Using a debit card doesn’t.

How credit cards work

If you’ve never used a credit card before, there are a few things you should know about how they work. Every credit card comes with the following strings attached.

• Credit limit: This is how much you can charge on your credit card. Once you hit your credit limit, you’ll have to pay some of it off before you can use your card again.
• Interest rate: This is how much interest you’ll have to pay on the money you borrow. Interest makes every purchase on your credit card more expensive than it would be with your debit card, so choose wisely. Interest rates typically range from 10 to 22 percent—the lower the better.
• Balance: Your balance is the total amount you owe on your credit card. It includes the sum of all the purchases you’ve made, plus the interest you’ve accrued on them.
• Monthly payment: Once you start using your credit card, your lender will expect you to pay off a portion of your debt every month. Part of your monthly payment gets eaten up by interest, while the rest pays off a small fraction of your balance.
• Late fees: Paying your monthly bill on time is very, very important. If you don’t, your lender will charge late fees, which can add up fast. Plus, your credit score will get docked.

How to charge like a pro

Using a credit card doesn’t mean you’ll end up with a mountain of debt—and if you do, you’re doing it wrong. People get in trouble when they start treating their credit card like free money. Instead, think of it as a second debit card. Everything you charge has to come out of your checking account eventually; you’re just putting it off for a while.

So what’s the point, you ask? For starters, you’re building a reputation for being financially responsible. That’s what your credit score is—a number that tells lenders how responsible you are. The best way to improve your credit score is to develop smart credit card habits. These habits will also help keep you out of debt, so it’s a win-win.

• Pay your bill on time. It helps to set up auto-pay to avoid accidentally missing the due date.
• Pay more than the minimum. The more you pay each month, the faster your balance will shrink. If you can, pay off your whole balance every month.
• Use less than 30 percent of your limit. If you have a $1,000 limit, for example, don’t charge more than $300.
• Be selective about applying for credit. Don’t open too many credit cards at once; pick the one with the best terms and stick with that.

When you know how to work the system, you can use credit cards as a stepping stone to get the things you really want. Just keep in mind that credit takes a long time to build, and here is no benefit for using your credit line a ton in the beginning, so take it slow.