A scary part of growing up is getting a credit card. Your whole life you’ve heard of people’s financial ruin, but at the same time it's expected that you must have one. While looking, you’re overwhelmed by all the information on what card to get: rewards, APY, amongst a mountain of other new terms. You might begin to think, “Are these things worth it?! If these things are so dangerous, why should I even have one!” And that is what we’re going to answer today.
The first big question that is posed when someone is considering getting their first credit card is truly, “Do I really need this thing? It seems like I’m getting it just because my parents are telling me to ‘build credit’, or whatever. I don’t even know what that is either!” That first part is a valid point, you don’t necessarily need one.
Dave Ramsey is the primary person that you’ll think of when it comes to a no credit card stance since credit cards led to bankruptcy at one point. The pros to this approach are apparent: If you don’t use debt, then you will never accumulate it. This keeps you living within your means and purchasing things when your income allows for it. The cons, while not terrible on their face, do pose an issue when a closer look is taken. If you are not taking any debt, you cannot have a credit score.
If you read the previous installment of “The Financial Journey Begins”, you’ll remember learning that there is “good” and “bad” debt. That idea can be expanded upon with credit scores. A credit score shows how good you are at paying off your debts. If it’s high, you’ve been a good egg. If it's bad, then lenders know you most likely won’t pay it back. Why does this matter to you? If you want a larger asset, like a car or especially a house, you will need to wait years and maybe even decades before one can be afforded. This point is very well made right now with the affordability of housing. The only viable way for a lot of people to get a house is to get a loan, and the best way to get the loan you need is to show you’re good for it through a good credit score.
“That all makes sense, but I still don’t exactly see how a credit card will help me get a house or a car.” True, and that’ll all be explained right now. What a credit card does for someone without a credit score is it allows them to begin building it. By making small payments monthly, your score will grow and grow as time goes on. The key though is to keep those payments small, which is easy to say but can prove to be hard in practice.
The best way to keep these things manageable is to only use your card for specific recurring expenses. The two biggest ones that can be attributed to this are gas and groceries. Smaller recurring expenses like inexpensive subscriptions can also be considered in allowable credit card expenses.
That sums up the basics of what you need to know before considering a credit card. You learned if a credit card is right for you, and why they’re important to building credit. You also learned a good rule of thumb for keeping expenses low and staying away from credit card debt.