When I first started my career, I faced thousands of dollars in credit card debt. I was not financially responsible, not in the least bit. As a teen, fresh out of high school, I didn’t think twice about getting credit cards (“free” money in my mind), and splurging on things I didn’t need. As I got older and wiser, my poor choices started to catch up with me and I became determined to get out of debt. I’ve since cut the amount I owe down to about $3k, on a total credit limit of about $10k.
If you live in the U.S., and are over the age of 18, chances are you’ve been solicited for a credit card at some point. It’s almost become a rite of passage. And unsurprisingly, the average U.S. household credit card debt was over $16,000 in 2016, according to NerdWallet.
As such, the average American consumer has two credit cards. Depending on who you ask, a credit card can be one of three things: a lifeline, the bane of your existence, or a tool to be leveraged. We will cover all three categories in depth.
- Related: How to Manage Debt
Three categories of credit cards
Unfortunately, many people fall into the first category, and rely on credit cards too heavily. They use credit cards for everything from food and entertainment to new clothes and expensive vacations. This is an extremely dangerous way to live, as you can easily find yourself in a hole that feels impossible to get out of. Especially considering that the average credit card interest rate is 16%, it can be hard to keep up with payments and get that balance down and pay it off.
The second group of of credit card users (or in this case, non-users) are those that steer clear of credit cards altogether. This is not a particularly bad viewpoint to have, as it will keep you safe from getting into the trap of owing money in interest and fees. I refer to this as the Debt is Bad category.
A huge proponent of Debt Is Bad is popular financial guru Dave Ramsey. He passionately denounces credit card debt and pretty much all forms of debt except for a home mortgage. However, when used correctly, credit cards can actually be of benefit. Which leads us to our last category…
…Those who use credit cards regularly and leverage their benefits. These benefits can include things such as cash back, rewards points, and airline miles. This is a practice known as churning. When you use them correctly, credit cards can get you many of these nice perks for free, which you can use to pay bills, save, or get free stuff. Not a bad deal! You can learn more about churning on the churning subreddit.
I will go in depth with the do’s and don’ts of using credit cards.
Should I get a credit card?
Well, let me ask you:
- Are you disciplined?
- Do you pay your bills on time?
- Do you have self control when it comes to spending?
If your answers to any of these questions are no, then I would strongly advise that you not get a credit card. This is how many people end up in the trap I like to refer to as credit card hell.
Credit cards are a big responsibility, and are designed to keep you paying money to credit card companies via exorbitant interest rates. However, if you answered yes to all of the above questions, then credit cards can be a good way for you to build credit and get cash rewards.
How to choose the right credit card
Nowadays, you can get a credit card from just about any financial institution, from your local bank to major card companies like Capital One. Start by deciding what you want to get out of your card. Cash rewards? Flight miles? Maybe you’re just looking for a secured card (a credit card in which you deposit your own money and use that instead of money loaned by the bank) to build your credit.
Once you know what you’re looking for, start shopping around. Pay attention to things such as rewards programs, sign up bonuses, annual fees, and 0% introductory interest rate offers. I currently have a Quicksilver One cash rewards card from Capital One, which offers me 1.5% cash back on every purchase.
It also has a 0% interest period that doesn’t expire until June of this year. So until that time, I won’t incur any interest charges.
This really comes in handy, as I use it to make most big purchases and then pay it off immediately. That way I get the cash rewards but I don’t get charged any interest. This is basically free money that I get every single month.
Just know that each time you apply for a credit card, your credit score will take a minor hit. Too many applications in a short amount of time may make you look desperate to lenders, lowering your score. So make sure you know what you want before you apply!
Paying off your credit card
This is easily the most important part of having a credit card… paying it off. And the part that many people miss is that you’re supposed to pay it off on time. Never miss a credit card payment. Also, pay your balance off in full each month.
This means, don’t charge anything to your card that you can’t afford to pay for with cash. And you don’t have to worry about charging emergencies to your card, since you’ve established an emergency fund.
If you keep it up and are responsible, not only will you never get charged a penny in interest fees, but in time your credit score will go up, which will be very important when it comes time to make a bigger purchase, such as a house or a car.
These are the basics to getting and paying off credit cards. At a later time I’ll go into specifics about different cards and their benefits.