“So we’ll have fun, fun, fun ‘til Daddy takes the plastic away…” (kinda like the Beach Boys)

There are few things as cool as a credit card. To most of us, it is a symbol of financial independence, a chance to show our parents and friends that we’re in charge of our lives.

What is cool about credit cards? Let’s face it: it’s more convenient to carry a credit card when you go to the mall than it is to carry cash or checks. Credit cards let you buy things online more easily. Credit cards also offer you some protection against fraud or faulty merchandise. The more you use your credit cards, the more your bank promises to give you: gifts, air miles, and sometimes, even cash. Some cards work with companies to give you discounts at shops and restaurants. And at the end of the month, you even get an itemized list of how and where you used your cards, so you can keep track of what you spent.

But it’s not as simple as that.

The minimum you need to know about credit cards.

What happens when you use a credit card to buy something?

1. The shop sends the slip you signed to the bank, which then pays the amount of your purchase to the shop (after taking a discount).

2. At the end of the month, the bank sends you a statement, which is like a bill with the details of every purchase you have made with your credit card.

3. But here’s where things get complicated. The bank gives you a choice: either to pay the whole amount or you pay a minimum agreed when you signed up for the card. If you decide to pay for the whole amount, that’s it—your debt is settled.

BUT if you pay the minimum, the amount you have not paid becomes a debt that you will have to pay the following month and from this point on, that amount will start collecting interest.

And interest rates are high on credit cards. Let’s say your credit card has a 14 percent yearly interest rate, and you’ve put $1,200 on your card. You decide to pay $200 and still have $1,000 to settle. One month later, you will owe $1,012. If you let that debt grow, one year later, you will have to pay $1,149. Wait a minute: a $1,000 debt at 14 percent... should make $1,140… not $1,149. It does, because the interest is calculated on the full amount you owe, late interest included. In other words, unpaid interest not only piles up, it generates more interest too. That can quickly get out of control. So rule number one: don’t get trapped by interest. Always pay your monthly statement in full. Otherwise the great T-shirts you were happy to buy on sale are going to turn much more expensive than their regular price!

Be also aware too that banks don’t hand credit cards for free. You have to pay fees to keep these cards going. Find out what these fees are before you sign up for a card, and find the company that offers you the best deal. Don’t sign any papers with terms and conditions you don’t understand… even if it means turning down a present that the credit card company was ready to offer you.

Master your card… don’t let your card master you!

Easier said than done. But how can you make sure you are going to pay the monthly statement in full and don’t use your credit card too enthusiastically?

One way is to use a debit card instead of a credit card. What’s the difference? When you use a debit card, the amount you pay is taken out of your bank account or “debited” a few days later, so debt doesn’t pile up.

Have your credit card company take the full amount on your card at the end of the month. If you have over used your credit card one month, you will get the immediate picture at the end of the month.

Just get one credit card. The more cards you have, the more tempted you’ll be to use them and the more likely your debt will spiral out of control.

The ultimate way to use your credit card smartly is to set yourself a limit. Track what you spend in a spreadsheet, notebook or mobile phone. The limit you set for yourself is calculated by taking your income and subtracting all your other daily expenses, including food, phone bills, taxes, insurance, and savings. Track what you spend and as soon as you have reached your limit, leave your credit card at home until you get your next pay check and you have paid off the balance of what you owe.

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