Why I have a Credit Card
Having good credit is one of your most important financial assets. Your credit score determines if banks or car dealerships will loan you money, it determines if you can get reduced fees for some insurance policies and utilities (cell phone, cable, etc), and it can even determine whether you get hired for certain jobs. For most young people, the most pressing issue is not that they don’t have GOOD credit, they just don’t have ANY credit history at all.
To all companies that have money to lend, young people with are wild cards, and loaning money to them is often a risk they are unwilling to take. And most young people do not have the cash to buy a car or a house without a loan. Something as small as a required deposit on your cable service may break the bank for someone who is living paycheck to paycheck. I have a friend who can’t even rent his apartment without his parent’s co-signature. His parents have credit, he does not, and that makes all the difference.
I don’t know what more to say to convince you that having credit is important, so now I’m going to move on to the important part: how to start building credit for yourself.
Credit card companies are some of the most willing entities out there to trust you. You might think that it’s a foolish move on their part, but it seems to be working for them!* Many credit card companies will give you a card with a small limit no matter how little credit history you have. And with this seed, you can grow your credit tree.
Now, I’ve heard a lot of reasons why people don’t have credit cards. Here are some of the most common.
1) “I have seen people get into so much debt, and I don’t want to risk it.”
2) “I would rather use a debit card so I always know how much is in my account.”
3) “I know I need to, it’s just simpler to use debit or cash when I can.”
4) “I don’t mind using my debit card online.”
For each of these, I have a different response.
1) If you don’t overspend, you won’t get into debt. Having a credit card doesn’t have to change ANYTHING about your spending habits. Just because you have the ability to access an extra $1,000 dollars doesn’t mean you should. And if you’re someone who worries about debt, you know this already. So, having a credit card will just be a different way for you to spend like you already do. If you track your money and never spend more than you have, you’ll be set.
2) A credit card can be just like a debit card, if you treat it that way. Balance your checkbook every week (or even every day, if it gives you comfort) with your current balances and your recent transactions. If your current credit-card-free lifestyle is sustainable, and you don’t change any habit when you get a credit card, you will be fine. Also, I personally think my bank statement looks cleaner when it only has one big monthly withdrawal for my credit card.
As a side note, you can still get into “bank” trouble with your debit card, because transactions may not clear the account immediately. So, if you ovespend with a debit, you risk overdrawing your account, which can have negative financial consequences. However, if you overspend with a credit card, you have at least 30 interest-free days after your statement closes to come up with the extra money. More on this later (E).
3) It may be simpler for you to use debit or cash right now, but there are ways using a credit card can be simple, too. For instance, if you do all of your purchases on credit card (which is more feasible than ever before), you have them all in one place in a nice, neat monthly statement (that you can still check online 24/7). Plus, there are so many POSITIVE things about having a credit card that they certainly outweigh the complications of changing your spending routine.
4) If you continue to use your debit card online after you have a credit card, I will judge your sanity. Using a debit card online is one of the most dangerous things you can do, because you give online merchants access to your bank account and all of the money in it, with no security on that money. You can dispute any credit card charges, and there are security measures in place to save you from any fraudulent charges. However, if someone makes unauthorized purchases on your debit card, the money is just gone. They can wipe you out. And if you fight with your bank to get it back, it will usually be an uphill battle. Don’t use your debit card online. I don’t even use MY credit card online. But I’ll get to that later (D).
So, let’s recap what we’ve learned so far. Having good credit is important. As a young person, you do not have credit at all. A credit card, used responsibly, can help you build good credit. Having good credit is the foundation of your financial future, especially as it applies to borrowing money for a house or a car.
Here are even more good reasons to have a credit card.
A) A credit card protects your assets and your purchases. You can dispute fraudulent charges, as I’ve mentioned before. You might even get “purchase insurance” to protect against faulty products, or renters’ insurance, depending on your card. I will say that every credit card is different, so it is important to read the fine print to learn about all the benefits and limitations.
B) Credit cards can give you rewards! Mine gives me one point per dollar spent, and those points translate into merchandise, travel, gift cards, and even cash! Some rewards that my family has gotten over the years include airline tickets, gas cards, restaurant gift cards, iTunes cards, a TV, a Wii, and a Kindle.
C) Credit cards can come with numerous other benefits, including but not limited to concierge, insurance, special rates on purchases, and customer service to talk you through any questions or concerns you may have. I just called my credit card company to get an explanation of a few new benefits and policies, and they couldn’t have been nicer to me.
D) Credit cards give you security. I have two main examples of this to bring up.
My credit card offers an online safe shopping program where I can pre-authorize an amount for a purchase and generate a new credit card number. For instance, I was buying a necklace online at a non-corporate website with which I wasn’t familiar, so I gave them a credit card number authorized with the exact amount of my purchase. Companies don’t know the difference just looking at the number, and this protects against anyone having my ACTUAL credit card number. If my non-corporate jewelry website tried to use the number I gave them anywhere else, it would be declined, and I would be safe.
In addition, I have the security against overspending. If I spent $500 this month on my credit card this month when the statement closes, and I only have $400 in my bank, I have until the due date to come up with the necessary amount. I have time to tighten my budget and make up the difference. However, if I overdrew my bank account by $100, or even $1, I would be in trouble.
E) Having a credit card is almost like having an interest free loan. If I spend $200 on the first day of my statement cycle, I effectively have 60 days before I have to pay for that purchase: 30 days of the cycle, and 30 days before the due date. The credit card company paid for my purchase, I have all the time before I have to pay them back. It’s brilliant!
F) In an emergency, you can spend up to the limit of your available credit. Let’s say your car needed new tires and those weren’t in your budget. As long as you paid the credit card minimum on time, your credit is still as good as ever. Now, I wouldn’t recommend carrying a balance for longer than absolutely necessary, but it is good to have that option in case you needed to utilize it.
Of course, I don’t usually use my credit card that way. I pay off my balance every month within a few days of the close of the statement. This is because I carefully monitor my spending, and ensure that I always have plenty of money in my bank account to cover it. I use my credit card whenever I can because I like accruing the points and getting the rewards. My card is even having a summer special on GAS where I get 5% cash back. Gas is cheaper for me, and it’s only because I have a credit card.
For me, having a credit card is completely stress free. I can check my purchases any time online. I only have to pay for it once a month, and I get an email reminder. It’s easy to use, easy to monitor, and I get great benefits. In my opinion, there are no downsides to having a credit card.
And, most importantly, as a young person, I am proving to all of the money-lending institutions that I can pay bills on time, I can be responsible, and I deserve to be entrusted with their money to help me buy a future home.
I hope this makes you think twice before declining to have a credit card. If you can learn to use it responsibly, the financial benefits are innumerable.
*Credit card companies don’t ONLY make money when you are late on a payment and racking up interest. They will still like you even if you are a perfect client who always pays on time, like me. This is because they make money from every credit card terminal and every swipe of their card. So, all they really want you to do is use their card to spend money, and they are starting to offer you more and more benefits just to spend with them.