Why It’s Good To Get A Credit Card … As Long As You Do This

If you are turning 18, good news! You can vote. And now you are eligible to get a credit card in your own name. Just because you can do something, does that mean you should? As far as voting goes, yes, you should absolutely rock that vote! And yes! You should get a credit card at 18, if (and this is important), IF you pay it off in full every month. Think of it like cash. Only spend on things you can pay back right away.

There’s a reason you shouldn’t wait to get a credit card. Establishing your credit history, or trustworthiness, over a long period of time makes it easier for lenders to work with you when you decide to apply for an auto loan or home loan in the future. Lenders can reject applications based on little or no credit history or they may add more stringent requirements to qualify.

It also doesn’t hurt that credit cards often come with perks, like airline points or cash back, so aren’t you foregoing those benefits by waiting?

What gets people in trouble down the road is not paying in full each month which leads to credit card debt. That $20 sweater ends up costing $30 after interest charges. A $1,000 laptop becomes $2,000. Regardless of the interest APR, or annual percentage rate, carrying a balance on a credit card results in paying more for an item than when initially purchased.

Landing in debt is also a disfavor to your future self. Let’s revisit opportunity cost for a minute. Instead of paying off $100 towards debt, that $100 could have gone to buying something new. It could have afforded a nicer house. It could have doubled or tripled through investments. That is the real cost of not paying off a credit card in full.

Now that you’re convinced you should get a credit card at 18, keep in mind one credit card is enough. Not two. Not three. Not more. In fact, there is such a thing as too much credit, which can negatively affect credit score. If you have too much credit available at your disposal, lenders view you as a risk, and you might not qualify for additional loans. So while it’s a good thing to get one credit card, it’s just that. One credit card.

The key is to start early and treat your credit card like cash, only buying what you can afford right away and paying back what you spend each month. From my own experience, having a credit card at the age of 18 and responsibly building my credit history over a few years allowed me to purchase my first home all by myself. It has also given me many free flights too! What will you unlock?

Homework: Which credit card do you choose, and why? If you have multiple credit cards, pick the best one or two and then get rid of the rest.

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Credit Card FAQs

Whether you already have a credit card or are thinking about getting one, it’s time to get acquainted. Here’s what you should know.

What is a credit card?

A credit card allows you to borrow money to make purchases and then pay back later. How much you can borrow is based on your credit, or your trustworthiness to pay back the money. There is also a time limit to pay back the money before interest starts to multiply on the original amount borrowed.

Why use credit cards?

Credit cards carry several advantages:

  • Use credit cards in place of cash, which can be bulky in your wallet.
  • Build and maintain credit history. Mortgages and other loans will often check how well you handled past payments. Did you pay on-time?
  • Earn perks like travel miles or shopping points, and sometimes even cash back, with certain credit cards.

What are some key costs of using a credit card?

  • Finance Charges – Do you carry a balance on the credit card after it is due? Then you owe interest on the borrowed money, otherwise known as finance charges. These get calculated as an annual percentage rate, or APR. If you pay in full each month, you have no finance charges.
  • Late Fee – Don’t pay your credit card on-time? There’s a fee for that.
  • Balance Transfer Fee – Trying to move other debt to your credit card, so that you can capture a lower interest rate? Doing so incurs a balance transfer fee, usually a percentage of the amount to be transferred.
  • Annual Fee – Some credit cards carry such good perks or low finance charges that it costs you money to use them. Using these types of credit cards is wise only if the perks outweigh the annual fees.

As you can see, most of these costs don’t apply if you pay your credit card in full each month. Thus, it is actually possible for the cost of using credit cards to be zero!

How does credit card debt happen, and how do I avoid it?

As long as you pay off your credit card in full every time and on-time, you won’t fall into debt. In fact, it should be the only way to use credit cards. Unfortunately, credit card companies give the option to pay a minimum amount, typically 1%-2% of the total credit card balance. Paying the minimum causes the remaining balance to rack up interest, adding to the cost of what was originally borrowed.

To illustrate the real cost of carrying a balance on a credit card, let’s use this example. Say you buy a bike for $100 on a credit card with 18% APR (annual percentage rate). $100 x 18% = $18. You actually pay $18 more dollars on that bike if you let that debt sit for a year. If the credit card company calculates on a monthly or daily basis, and most do, that bike will cost even more. Much like compound interest on investments, debt multiplies itself over time. Avoid debt altogether by buying only what you can afford and paying off the balance in full each month.

Parents can introduce credit cards using a 3-step approach. 1) Start with gift cards. What’s great about gift cards is that you can only spend what you have and nothing more, but you are required to spend in only one place. Nowadays there is the option to get gift cards to use wherever credit cards are accepted. 2) Get a debit card to allow for spending anywhere, keeping within the limits of what is available. A debit card requires an attached bank account to pull funds from, so you will need to set one up if you want children to access their own money. 3) Graduate to the credit card! Only keep the credit card if every statement is paid in full.

Credit cards: Good or Bad?

Only you can decide whether credit cards are good or bad for you. If you can commit to paying off your credit card in full each month, there really is no disadvantage to keeping or getting one. Choose what’s right for you!

Tune in next week to learn about the 401(k) plan. Is it a type of investment? Is it a savings account? Subscribe below to automatically receive weekly lessons in your inbox!

Homework: Know what credit cards are charging you. Become familiar with the costs before getting a credit card, and choose the right one. If you already have a credit card, is it the best one for you?

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