I hate credit cards.
I hate the concept of living beyond your means. I hate the idea of life in a society that bases your worth off your ability to spend.
So, when my fiancé and I started looking at getting pre-qualified for a loan for a house, and our loan officer saw that I had zero credit history, I was reluctantly forced to get a credit card.
I had no idea where to start. I had advice coming from every direction from my parents to my banker. Which cards could I even qualify for? Do I carry a balance or pay off my debt every month to build my credit? What percentage of my limit should I spend to up my score? According to creditcards.com, I’m not the only person my age that has no idea how to use credit cards to build credit properly. In 2015, approximately 39% of Millennials had some credit card related debt. Of people 18-24 that sent ranged from $611 to $1109 on average- yikes. CBS News has also reported the following stats “People aged 19 to 34 had a 625 average credit score, compared to 650 for Generation X (aged 35 to 49) and 709 for baby boomers (aged 50 to 69) and the “greatest generation,” or those born around the Great Depression.” Basically, as a generation, we have no idea what the hell we are doing with those powerful pieces of plastic in our wallets.
In part one of this series, I went over the history of credit, and what elements make up your credit score. Make sure you check it out here: Part One.
Why is having good credit important?
Do you plan on owning a house someday? Starting a business? Buying a car? Getting a job? If you answered yes to any of these, then having good credit is necessary. While you may not be thinking about it now, your credit score also affects your interest rates on your loans. Good credit means a great rate, and having to pay the bank less over time. Bad credit means a high rate, and paying the bank thousands of dollars more over time. The number one reason to have good credit is the quality of life.
Picking the right credit card for you.
When you’re researching credit cards, you need to consider four things:
1. Your existing credit score
a. If you have either no credit or poor credit, you’re probably not going to qualify for a Gold Card. You can check your score for free at freecreditreport.com or creditkarma.com. Since I have made my entrance into the credit score world, I downloaded the mobile app for Credit Karma and had access to my score anytime. You can also learn more about what could be causing your score to below.
2. Identify which type of credit card you need
There are three major types of credit cards:
i. Cards that help you improve your credit when it’s limited or damaged.
ii. Cards that save you money on interest.
iii. Cards that earn rewards.
Since I don’t make major purchases on my card, I selected the Credit One Bank Platinum card that gives me 1% cash back on all of my gas and grocery purchases. It’s been a win/win since I am getting to build my credit and get money back in my pocket.
3. Narrow your choices by asking the right questions
4. Apply for the card that offers you the highest overall value
I’ve got my card, now how do I use this thing?
1. Pay On Time & In Full
If you’re paying attention, you’ll remember that your payment history makes up the largest part of your credit score at 35%. Delinquent payments, debts that get sent to collections, or maxing out your card and not being able to pay it off in full every month can hurt your credit. Make a budget, and use your card to pay for regular expenses like groceries or gas every week. Many cards will give you the option to opt-in to alerts that let you know when your payment due date is approaching. If that’s not enough, make an alarm on your phone to pay off your balance at the end of every week. This keeps you accountable, aware, and can keep you from living beyond your means. Paying in full will also keep you from having to pay pricey interest rates.
2. Treat it like a debit card
Credit cards are not free money. Many people rack up debt because their bank account balance does not change until the very end of the month when their payment is due. By paying only for regular expenses on your card instead of shopping trips and bar tabs, you are making sure that you stay on top of your spending. Every Friday, I sit down to look at my account and pay for any expenses I paid on my card throughout the week. Again, your payment history is a HUGE part of your score. If you have answer credit history, one skipped payment or racking up debt could have long lasting effects on your credit score.
3. Keep your balance low
Ideally, you should never have a credit card balance of over 33%. It doesn’t look good to lenders when you’re trying to buy a house or a car, and you’re living off credit. The second largest part of your score comes from your credit utilization at 30%. If you’re spending more than that 33% threshold, it’s going to affect your credit by lowering your score. For example, if you’re spending limit on your card is $450, your account balance should never go over $148.50.
4. Keep your accounts open
Do not fall into the trap of thinking that by closing multiple credit accounts you will help increase your credit score. Another aspect if your credit is the length of your credit history. As time goes by, your score should increase in correlation to how long your accounts have been open. This is a huge reason why it’s important to find a card that suits your needs. While getting 20% of your initial purchase at a store is tempting, many department store cards offer little to no benefits for spending outside of their store. This frequently results in people opening cards, just to close them after the initial benefits- don’t. Another thing to keep in mind is that every time you apply for a new credit card, the issuer runs a hard credit check. These types of tests can lower your credit score a few points, and lowers the average age of your accounts.
Using credit cards unwisely can hurt your credit, but one thing I’ve learned is that it doesn’t make them “wrong.” Without good credit, you’re quality of life and spending power is substantially limited. If you limit yourself to living within your means, pay your bills on time and in full, and keep an eye on your score you should not have any issues. If you’re using your card(s) correctly, you won’t incur any debt. As millennials, we have WAY more tools and technology at our fingertips to keep track of our spending habits and credit scores. We have the potential to be the most financial savvy generation yet.