As a teenager, I believed credit cards (actually, debt in general) were evil. Money talk was taboo in my family, yet every disagreement my parents had was about it. And debt was a major topic of these arguments. Coming from a family with persistent struggles with debt and credit scores, I remember deciding not to get a credit card at a young age. But mere months after I turned 18, I had the good fortune of being exposed to 3 lessons that taught me there is more than one narrative in the world of credit.
Credit Card Lesson 1:
To get a favorable loan, you need (good) credit history. When lenders evaluate you for a loan, they must know you can pay them back. The credit score is one of the principal factors banks use to assess your risk to the bank. With a maximum of 850, the higher your score, the more trustworthy you are.
If your score is not high enough, the bank may reject you. Another potential response is for the bank to give you a higher interest rate loan- meaning you pay way more in the long run. Why does this mean you should get a credit card? Simple- credit cards (if used right) are one of the easiest ways for a beginner to build credit. Credit cards are a stellar first step to building your score. According to American Express, a global credit card giant, it usually takes a minimum of 6 months for you to get your first credit score. It takes much longer than that to build excellent credit.
Imagine you are trying to buy your first house at age 26. However, you do not have any credit history. You may get turned down or ripped off with inflated interest rates. If you somehow beat the national average savings for people under 35- $11,250, buying with cash is an option. However, $11,250 is a far cry from the average home price in the U.S.A.- $400,000 in mid-2022.
Credit Card Lesson 2:
There are benefits to having a credit card and using it responsibly. When I say responsibly, I mean it. Although the dangers of credit cards are avoidable, they vastly outweigh the advantages if we lose control. Alternatively, if we learn how to use credit and stick with the principles of responsible use, there is so much opportunity. I like to shop around for the best rewards, and the three most common types include cashback, flyer miles, and reward cards.
Cashback Credit Cards
Cashback is the easiest to understand because it is a fixed percent back on a purchase. For example, a 3.5% card gives you $3.50 for every $100 you spend. And a 1% cashback card gives you $1 on every $100 spent. Over the lifetime of cards, it adds up. When I play my cards right, I can get enough cash back to pay off my whole statement balance! When I am going to spend the money anyways, an extra 1-5% off of every purchase is outstanding.
Rewards Credit Cards
Rewards are a little different from cashback since it takes some strategy to use them effectively. Most point programs will give you many redemption options like statement credits or gift cards at restaurants and retailers, but not all redemption opportunities are created equal. If you do the math, converting your point to a gift card may be better than using your points as a statement credit. If you are willing to do the math and use the rewards strategically, these cards can give you outstanding value compared to cashback cards.
Miles Credit Cards
Flyer miles (or company branded) are similar to reward cards. The main difference is these cards are company branded. These cards are becoming popular in other industries. One example that I have is the Capital One Walmart card. The Walmart card has the perk of 5% cash back on the Walmart App. Five percent is high for cashback and valuable with how often I use the app! You will know if it is a flyer card- also becoming known as a company card or a co-branded card if it shares both brands’ logos. For example, my Walmart card is a Capital One Mastercard. Instead of having only one brand on the card, it displays the Capital One and Walmart logos. Like reward cards, these cards often let you choose how you redeem your points. Unlike reward cards, there are fewer options, and the best value is typically store credit.
On top of these three common reward structures, many cards will provide additional incentives. Some cards will give new cardholders a special cashback rate until they reach a certain amount of rewards. For example, a card may offer a usual cashback of 1.5%, but for your first year, they will let you earn 4%, capping at $300. So either when you spend enough to get $300 cash back or your first year with the card ends, the rate will go back to 1.5%. There are also several possible perks that you get to keep, such as one-time discounts on certain purchases, price matching, the opportunity to book cardholder-exclusive events and seats, and many more possibilities.
Credit Card Lesson 3:
Especially with all the ways criminals can steal your information today, credit cards are often more secure than debit cards. When we put in our card number online or swipe our card anywhere in public, we risk running into a skimmer that records our card info and uses it to make fraudulent purchases. Although safe online practices and knowing what to look for in person can almost guarantee we avoid these problems, I love the extra security of credit cards.
First, if a fraudulent purchase happens on your account (this has happened to me), the money is taken from your credit card. Fraud is still terrifying, but it is comforting to know that you did not lose your money- you can still pay your bills and have time to fix the issue. If you report suspicious activity within a specified (and reasonable) period, the company will forgive the fraudulent charge fully and investigate the source for you. Credit cards include fraud protection that many debit cards do not.
Another security feature I love on newer cards is SNN personal information alerts. Many of my cards come with companion apps that constantly look for my associated information on sketchy parts of the web. These security features can give you the first red flags of identity theft before too much damage is done. Once through these features, I even caught a hacker that gained access to my email before they could damage anything linked to that email! Despite existing security features, credit companies continue to roll out more convenient security features that truly benefit you as a customer.
Conclusion
As soon as I learned these lessons, I researched and got a credit card since FICO (one of the most trusted credit reporting companies) uses your oldest account age as 15% of your score- the third most significant factor. My first card was the Discover IT secured card. After a while of responsible use, you even get your deposit back! Check it out here: https://refer.discover.com/s/342i6i It took me years to learn these lessons, but thanks to this post, you can learn them all in minutes and avoid wasting precious time. It took me over two years from my first card for my credit score to reach 750, a number far above average for my age group but not perfect (850), and it will take many more years for the average credit builder to reach that.