You Need a Credit Card

October 2018

Credit is a non-optional, mandatory part of being an adult. My friend Ashley's parents (very savvy, Mark & Darja) knew that credit mattered, so they opened a card in Ashley's name when she was young (early college, I believe—Ashley, keep me honest). She told me I needed to open a credit card and begin paying it off so I could establish good credit early in life. 

I didn't really think much of it at the time, since I was a snot-nosed, punk-ass, Budlight-drinking college student who figured I'd buy a house around the same time I bought a minivan and that I'd never see graduation day anyway (just kidding).

Now, I'm a money-obsessed amateur personal finance connoisseur (#GREED). I'm reading Money Diaries right now, highlighting and doggy-earring the pages like it's an SAT prep guide. If you're reading this, it's probably safe to assume you care about getting your financial shit in order, so pick up a copy  here.  

During my first internship (i.e., when I started making money), I opened a credit account with Discover. Before long, I was putting everything on my credit card. Truthfully, I don't know how I ever lived without it. 

So let's address some key points here, in case you:

(a) don't have a credit card (apparently this is an issue for Millennials because they're terrified of credit card debt, rightfully so) or
(b) don't know why you need one (I realize this is basic, but there's a lot of confusion surrounding credit within my own personal circles so I know it exists).

In 2016, a Bankrate study found that just 33% of Millennials had credit cards. Yikes. Here's why that's scary: 

You need credit to make big purchases, take out loans, and even rent things like apartments, appliances, and sign up for utilities. 

It's basically the only way a company or seller knows that you're good for the money you say you're good for. It's also sometimes used in job interview processes (YEAH, apparently they check that sometimes) and in other situations because it's thought to give an indication of your ability to be responsible. For better or worse.

Credit cards are the best, fastest way to establish credit while  you're young. 

I know a lot of people are apprehensive because of how often we talk about "credit card debt," but how much you spend on the card is up to you (paying it off is up to you as well). As long as you're paying off the statement balance every single month on time, you'll never incur any interest penalties. Plus, the cash back options with some cards are incredible—it's like getting free money. In that way, it's much better than a debit card.

I've gotten to the point where I put almost everything on my credit card, except for things like rent (which I pay directly out of a checking account to avoid fees with the leasing office). I'd only recommend this if you budget closely and have a very good idea of how much money you're spending every month—in other words, your  cash flow.

The reason credit cards can become problematic for people is because they enable you to spend with a "I'll figure it out later" mentality, which can be dangerous if you don't know much about your cash flow.

Speaking of cash flow, I think my  next post will deal with setting  up a "net worth spreadsheet" to show how you can track your net worth every month and get a better idea of your cash flow (and why it's important in the first place).

But back to debit cards—they're less safe than credit cards. 

Think you're better off only using debit? Think again. I've gotten to the point where the ONLY place I'll use a debit card is at an ATM. NEVER use a debit card for online shopping. I randomly sat next to a cybersecurity guy on a flight once, and he told me the safest way to pay for things is with Paypal, and the second safest way is credit cards.

He said you should never use debit cards online because if someone scrapes the page for your information they get direct access to your checking account. Anyone who's ever been defrauded knows it's a scary feeling, but most credit card companies are fantastic about striking those purchases from your record immediately. Not all banks work the same way. Sometimes once that money's gone, it's gone.

So, let's say you're really, REALLY  new to the idea of a credit card. Maybe you're 17 and it never occurred to you before, or maybe you're  25 and always felt a little unsure of the concept. 

Here are a few basic "how-to" items, assuming you haven't had an issue with credit in the past (i.e., your credit score does not yet exist):

Find a basic starter card that doesn't require you to have credit already.

As I've mentioned before, my favorite card for starting out is the Discover It card [apply using that link and get a $50 statement credit]. You earn 5% cash back on different categories every month (one month it was Starbucks and Amazon—I think I got $50 in cash back that month—i.e., free money) and I don't remember having any issues getting approved initially.

You'll just need basic information about yourself, like your social security number and income. Keep in mind the "limit" on the card (how much the credit card company will allow you to spend) will be based on your income and credit history, but  as you establish credit over time and make more money, you  should keep requesting credit increases.

Rule of thumb: Never utilize more than ~30% of your available credit line. E.g., if my credit limit is $10,000, I shouldn't carry a balance of more than about $3,000 to keep my credit score healthy. 

Already a cardholding member of the credit card club? (I hate myself.) Nerdwallet is a great resource for comparing credit cards if you're already established and want to explore options that offer relevant  perks (some American Express cards grant you access into airport lounges and other cards, like the Capital One Savor card, are specifically for cash back at restaurants and bars, for example).

And if you’re REALLY ready to take things to the next level and start maximizing rewards, the Travel Hacking section of this site shows the best possible combination of travel cards to travel for (almost) free.

Know the difference between your statement closing date and statement due date.

This seems self-explanatory so I apologize if I offend you by  addressing the obvious, but I know it confuses people since it works differently than a debit card. Each month, the credit card company will record your charges for a set period of time (mine always ends and begins again on the 26th of the month) so it can charge you your credit card statement (or bill).

So, it accounts for all charges for a full month, but the money for that period of time is due almost a month later (my statement cycle is the 26th-26th, but my billing date is the 21st). That means I wouldn't pay for the charges I rack up between Sept. 26-Oct. 26 until Nov. 21. And so forth: Oct. 26-Nov. 26 gets paid for on Dec. 21.

Make sense? This explains why your statement balance and current balance can look really different sometimes, so make sure you're paying attention to the statement balance and due date.

Most cards offer 0% APR for the first year, which means even if you carry a balance on the card you won't be charged interest. While good-intentioned people are inclined to believe this is about forgiveness, I'm pretty sure they only do this to get people in the habit of carrying a balance from month to month (i.e., not paying off the statements on time and allowing charges to pile up) so once the year is up they can start charging you 25% on the total (yes, it's not unusual for that to be the interest rate!). Don't carry a balance. Just don't do it.

I think that about covers it for the basics. What questions do you have about credit cards? What confuses you or scares you? Let me know so we can tackle in a follow-up post.