Some financial experts advise young people to skip using credit cards. It’s true that if used incorrectly they can be a great way to damage your finances. Even the most disciplined among us know how convenient and seductive it can be to pull out the plastic and swipe.
Even if they aren't purposely skipping credit cards, studies show that millennials are using debit cards much more frequently than credit cards. And that's a bad thing (and we talk about it during our 15 minute money bootcamp).
So for young people unaccustomed to using credit cards, they can be dangerous. It’s easy to put yourself into debt if you are not careful. But used properly, credit cards can be tool to build up credit and potentially acquire points and travel miles. Let’s review the steps necessary for avoiding debt slavery and using credit cards to your advantage:
1. Be Honest
Do an honest assessment before you apply for your first card. Only you know your true nature, so plan accordingly. Are you financially disciplined, or does money burn a hole in your pocket? If you know you are going to get yourself into trouble with a card, then you should probably skip it until you get a bit older (and wiser). In the meantime, you can build your credit in other ways.
2. Start Early
Can you handle the responsibility? Then get a credit card as soon as you can. If you know that you can control your spending and pay your debt on time, then there is no reason to wait. I got my first credit card when I was 19 years old. If you are careful and start small, then you can start young without any problems.
Getting a credit card early, and using it carefully, is a good way to build a solid FICO score. This will help you out later on in life and could potentially save you thousands of dollars in interest costs over the course of your life. How? If you have good credit score, you will be able to borrow money at lower rates. If you are a credit risk who can’t pay his or her bills on time, then you will pay much more for borrowing money.
3. Low Limits, Benefits
I started with just one credit card. I had an account with the local credit union, and applied for my new card through them. It had a $500 monthly limit. This is a good way to begin, get your first card through your bank or credit union. Try to find a card with no annual fee. Consider one that earns you points or frequent flyer miles, although now that’s secondary to just getting approved for the card.
4. Small Purchases
So, how should you use your card once approved? Strike a balance between using the card too often, and not using it enough. When you are in the building credit stage, be sure to use it at least once a month. One way to begin is to use the card for designated purchases only. For example, you could limit yourself to using the card for buying gasoline only. Or, you could use it to pay just one or two bills like your car insurance or cell phone bill. Keep your purchases small, and don’t screw it up by overspending.
5. Pay It Off Every Month
This is the most important point on the list. Never exceed your credit limit, and pay off the balance every month. If you don’t pay your credit card balance in full, then the credit card company earns money off you in the form of interest. And when you pay them interest, they own you.
Remember Fight Club? Of course that was an extreme example; I’m not advocating blowing up any credit card companies. But the underlying message there was correct; credit card companies do essentially make slaves of many people. Never allow that to happen to you.
Treat it like a game. Pay your balance each month, and you’ve won. You’ve successfully borrowed money from the credit card company for free and helped build your own credit score in the process. And if you earned miles or rewards, even better. That's free money!
Rolling your balance over from month to month? Then you lost. You are paying them for the “privilege” of owing them money. Fuck that. Don’t let the credit card companies win. Keep your purchases small and manageable. Make a commitment to yourself to pay your balance in full every single month, without fail.
6. Credit Increases, New Cards
Once you have proven to yourself and your card issuer that you can pay your debts on time, ask for a credit limit increase. Most issuers are happy to raise limits if you have been paying your balances regularly. Just give them a call and tell them you want to increase the limit, some of them also allow you to do this online.
Later on, you can apply for new cards if you want to. Remember, there is such a thing as too many credit cards, even if you have zero balances. More than four or five cards and loan officers will get suspicious. Keep your open credit lines reasonable and your credit utilization low. Here’s the formula for credit utilization.
Credit utilization = your total debt/your total credit
Experts recommend you keep your credit utilization number at 30% or less at all times. Zero is ideal.
If you have the discipline and trust yourself to make good financial decisions, then don’t wait on getting a credit card. Use it as a way to control your spending, and don’t let the card control you. Minimize spending, pay on time, and avoid debt slavery. Be smart and your card can help make your credit score strong, potentially saving you lots of money in the future.
What other tips do you have to avoid the slavery of credit card debt?