How to Adult: Credit Cards

Within the past 5 or so years I have been forced to learn how to ‘adult’. Unfortunately, I am learning that the generations I have looked up to for guidance and support are also still endeavoring to be full-fledged adults themselves. In this “How to Adult” series I will attempt to shed some light on topics that young adults struggle with the most.

Thanks to my somewhat money-savvy parents I had a head start on my friends when it came to savings accounts, investing in securities, and credit cards. Finances are a struggle that teenagers, families, politicians, countries and movie stars alike all face. Everyone has different methods of dealing with this issue: ignoring (or being purposefully ignorant of) the responsibility is probably the most popular solution, there are investment accounts, CDs (Certificate of Deposit-a low risk option),  keeping it simple by spending what is in the bank, opting for a homestead option like the Kilcher family, going in debt to live a preferred lifestyle, or penny-pinching like Scrooge.

Let’s get to it.

What does a credit card do exactly? What is the difference between a credit and a debit card?

debit card is issued through a bank and functions like a check does, only you slide it through a machine rather than giving it to someone to turn into cash. It is electric cash, if you will, with no paper involved. When you use your debit card, it withdraws the money directly from your checking (or if you have it set up through your savings) account. A credit card on the other hand when used, at a store for example, withdraws the money from a third party’s pocket. When you sign the receipt you are agreeing to pay that third party back that money which they paid the store for you.  A credit card offers a line of credit (a set amount that a third party agrees you can borrow from them) that you can use however you like so long as you pay them back the amount you borrowed at an agreed upon date. Usually you are allowed 30 days to pay that money back.

Why should I get a credit card when I have a debit card?

A couple of my friends argued that the debit card is better for them because they can only spend what is in their account that way, and not go in debt. That is true, you aren’t allowed a line of credit to draw from therefore you cannot spend more than you have. However, a credit card, if used wisely, can offer rewards to make your everyday spending increase the amount in  your bank account. Seriously!

Firstly, credit cards offer security. A debit card withdraws money directly from your personal checking account. Once it is gone, you cannot get it back (for the most part). It is safer to use a credit card in place of a debit card because the charge doesn’t have direct access to your personal checking account information. That third party offers a barrier between you and a potential fraud. Within the past couple of years there have been a few scandals in the news where hackers have infiltrated the customer financial information from retailers such as Target. With this information they can make fraudulent charges, steal your identity, or disrupt your life in various other ways. As the PRC explains, if you had used a debit card at such a store and your information was confiscated, the perpetrator can wipe your bank clean without you being the wiser. Contrariwise, if you use a credit card instead you will most likely receive a letter or phone call from your credit institution explaining what happened and you will be allowed to dispute any charges on your card that you were not responsible for. Often times they will automatically send you a new card with a different number to prevent any possible theft.

Read more about the privacy a credit card can offer you on the PRC website: https://www.privacyrights.org/how-to-deal-security-breach.

Second of all, credit cards offer rewards. Ever heard the phrase “cash back rewards”? Well it is a real thing. It was through the rewards program my credit card offers me that I was able to purchase a good portion of my Christmas presents this year. To stay competitive, almost all, if not all, major credit cards offer some kind of incentive to get you to use their card. There are airline rewards programs, stores offer discounts when you use their card, and many do a quarterly rewards program. Here’s how it works. You apply for a credit card, receive it in the mail, call the activation number to verify that you are the intended recipient, then head over to the pizza joint with some buddies for dinner. The eight of you decide to share 3 large pizzas and you offer to pay for the meal with your card to go easy on the waiter, if everyone will give you the cash. When the bill comes around for $41.73 you mentally remind yourself how much cash is in your checking account and how much your line of credit is for your brand new credit card. Everyone pays you the cash, and a couple of them even rounded up to make it easier. Then you remember that you signed up for 5% cash back rewards for this quarter and it happened to be for restaurants. Usually a credit card will offer 1% or 1.5% cash back for each dollar you spend. Then some will additionally offer 5% cash back for select categories certain times of the year. Thankfully for you, this quarter’s category is restaurants (next quarter could be gas stations, or online shopping, etc). It is great, because the categories are somewhere you will most likely make purchases at. So, while everyone at your table is paying you their portion, you are making an additional $2.04 through your credit card rewards. Now, you are probably thinking that $2 won’t even cover the gas it took you to get to the restaurant, but if you use the credit card for all your purchases, it will add up over time. Regardless of how much it totals to, it is money you did not have before, for making the same purchases you would have done anyway.

Thirdly, credit cards offer time. Although it is never advisable to spend money you do not have, sometimes you get yourself in a situation where drastic measures are called for. Today, the timing belt in your car, from the last century, has broken. You have it rushed over to your trusty mechanic and he tells you it will cost $900 for the parts and labor. There is no way you have that kind of cash to throw down on your car right now, seeing as you had just gone shopping for the holidays. These things love to sneak up at the worst times. After contemplating your options you remember that you will be paid on Friday and will have enough to cover the car expenses. You know that you are going to have to use your credit card to cover the bill until you can pay it off when your paycheck comes in in a week. If you were relying solely on the cash you have on hand, and you hadn’t planned for a car malfunction, then you would have been in a tough situation.

Fourth point, credit cards help you build up credit to invest in your future. In order to buy big important grown up things – like a house – the institutions who loan you money will most definitely look up your credit score. Now, in order to have a credit score that will secure you a mortgage, you have to build up credit. The easiest way to do that, is through obtaining a credit card, using it responsibly, and paying off your bill on time every month. There is actually a bit more that goes into it than that, but that is it put simply. While there are dealerships who will sell you a car with no credit, but with the disadvantage of an insanely high interest rate. If you have some credit established, or preferably excellent credit, then you can get a lower interest rate, at a better dealership, and possibly some other perks as well.

What kind of credit score do I want?

There are variances in what credit institutions specifically denote as poor, fair, good, and excellent credit scores. The FICO credit score makes up a majority of your overall credit score, so it is pretty important. The numeric scale starts with very poor at 300, and reaches a high of excellent at 850. A score of 745 could be typical for a newer card holder who spends their money responsibly.

Who should get one?

Like I have implied, if you are using a debit card to make every day purchases, you could benefit from obtaining a credit card.

However, it takes responsibility and remembering to pay off the card each month to justify going that route. If the idea makes you uncomfortable or unsure that this is something you can handle, then possibly it is not the best course. I would recommend talking to a financially savvy friend for more specific advice.

I would suggest, if you are ready for it, to look for the best offers in your senior year of high school and apply for one without an annual rate, which preferably has a grace period with no interest rate for a few months, and offers a rewards program that applies to you. If that does not suit you, try again in a few years, keeping in mind that even if you get a credit card, you are under no obligation to use it. Ever. Also, once you open a credit card, it will hurt your credit score to close the account. It will not effect your score when you close a banking account, however closing a credit card has a negative effect.

How does it work again?

Surely, you have received credit card offers in the mail. They all want your attention. Why is that? Other than that is how they do business and they want customers of course, they profit in part from your mistakes and mess ups and being able to charge you 19.99% interest on the bill you didn’t pay. So they try to get your attention through offering promotions and rewards programs.

You can take one of the offers you see in the mail and fill out the form and mail it back to them. Or you can go online and search for a better card company that suits your needs. Or you can go to your bank and talk to them about credit cards they offer. If you are a student it is always advisable to get a student card because they tend to offer a lower interest rate on penalties, even if the rewards are not as good it is a good starting place.

Once you are accepted they will send you a card in the mail, which you activate and can use immediately. I recommend it for online purchases as well, because those tend to feel less secure than going to the store. Then when the bill shows up on your account, you can go online, or through the card’s app and pay it from your checking account. Or you can set it up to automatically pay the minimum due if you don’t trust yourself not to slip up every now and then and forget. I think you will find it is must easier to keep up with than you expect. Set a day once a week where you focus on your finances and just check everything to make sure your charges are legitimate and all your bills are paid. You can do it during your lunch break,  right before bed, on the bus, or at your desk because it will only take a few minutes.

There is so much more I could say on this topic, however, this should be ample to get you started. Good luck, and wise spending.

Although I am still learning myself, I hope I answered at least one of your questions.

Yours,

Alycaria