Are You Really Ready for a Credit Card?

It’s important to understand how credit cards work – and be honest about whether or not you are truly ready for a credit card. In the right hands, a credit card can be a great financial tool. However, when used irresponsibly credit cards can shackle you with excessive debt loads and unmanageable payments. For several Canadians, this path will lead to bankruptcy. Consider the following before you begin using a credit card:

A Credit Card Doesn’t Represent “Your” Money

It can be tempting to think that your credit card limit represents “your” money. However, it is vital that you understand that this money is actually borrowed money. It’s money that you have to pay back. Unless you pay off the balance every month, you will pay interest, and that could mean that, over time, you pay much more than you borrowed.

Before you are ready for a credit card, whether your parents add you as an authorized user, or you get your own credit card when you reach the age of majority, you need to understand that a credit card is a loan. It’s not money you have; it’s money you borrow. You should be prepared to immediately pay back whatever you spend on your credit card, since you don’t want to be stuck paying interest.

Do You Already Manage Your Money Responsibly?

Before you get a credit card, you should know how to manage your money. A credit card should be a progression: You should learn how to use a checking account, and how to set money aside for the future in a savings account before you start using a credit card. Here are some questions you should ask yourself before you get a credit card:

• Do you save up for the things you want? A credit card isn’t a blank check to buy whatever you want, regardless of whether or not you have money. Get in the habit of saving up for what you want before you buy it.
• Do you track your spending? In order to avoid going over your credit limit, you should know what you are spending. Get practice tracking your spending with personal finance software before you start using a credit card.
• Do you have a checking account? Practice with a checking account. Don’t overdraw your account, and make sure that you track your spending. It’s even better if you can use a debit card effectively as part of your checking account management; it provides great practice for using a credit card.
• Do you understand the importance of prioritizing your spending? Learn how to prioritize your spending so that the most important items are taken care of first. It’s also important to have a solid understanding of the difference between needs and wants.
• Do you have self-discipline? In order to succeed in any area of finances, you need to have self-discipline. The same discipline that results in you practicing at a sport or a musical instrument should be used in your finances. Have the discipline to say “no” to some purchases, and save money for the future.

You know you are ready for a credit card when you have a good understanding of basic financial principles – and the discipline to manage your money according to those good principles.

If you can honestly say that you know when it’s appropriate to use a credit card, and when you show that you can manage your money responsibly and pay off your credit card each month, then you know you are ready.