Getting Your Finances in Order in Your 20’s: Credit Cards

 Credit Cards are so ubiquitous that you may not even think about how they work or that you don’t have to have credit card debt. Many people talk about credit card debt as if it is to be expected, but it is completely possible to get all the benefits of using a credit card without the extra fees or debt.

First of all, what’s the deal with credit cards? Do you really need one?

Short answer: Yes, Sort-of

Do you need to pay more than the cost of an item just to own it? Absolutely, of course not. I’m not suggesting you do that. In fact, I highly suggest not putting yourself in that situation.

However, the benefits from purchasing with a credit card, when done wisely and fully informed, can actually help you save money.

THE PROBLEM WITH CREDIT CARDS

Credit cards prey on the desire to get what you want right now. Credit cards allow people to purchase things they otherwise wouldn’t be able to afford. They do this by charging interest on the borrowed money used to purchase the items. Interest rates for credit cards, especially for users with low credit scores or no credit history can be astronomical. They make money by making you pay them extra money when you don’t have to. Of course, they make this sound really attractive because you can purchase that expensive item and only pay a small amount every month instead of having to wait until you have the money to pay all at once. All you have to do is the math to see why you wouldn’t want to take this deal.

Let’s say you want to buy a new home theater system for $1,000. You decide to use a credit card with 15% APR and make the minimum monthly payment. Assuming this is the only item on your credit card balance and your minimum payment is $25/mth, it will take 4 years to pay off. It will end up costing you $1,395. Instead you could save $25/mth and it will take you 3 years to save up. That is a year less time to pay for, and $395 you saved. I’m not saying you shouldn’t buy yourself nice things, but that you should wait until you can properly afford them. 

I’m also not saying you shouldn’t use a credit card to pay for things, in fact, I think you should. You should use a credit card to make purchases you can afford without falling into debt. When used correctly, credit cards can be a great financial tool. They are the easiest way to boost your credit score, and some will give you rewards to use them.

Best Way to Use Credit Cards

I always say, use a credit card like you would a debit card. Now let me clarify, never use a credit card as a way to get cash from an ATM or cash register. There are really big penalties for that, use a real debit card for that. What I mean is, don’t put anything on your credit card that you don’t already have in the bank. Same as how a debit card would get declined if the funds don’t exist in your account prior to swiping, don’t swipe a credit card if the funds don’t already exist. And no, I don’t mean funds that will be in the account. I mean it’s already there right now.

Available funds is money that:

1. Exists
2. Is not already assigned to something else, like a previous purchase, bills, or retirement.
3. Is not part of the last $1,000 you have. (Leave that for emergencies.)

After making a purchase on your credit card, pay it off immediately after it posts to your account. This will avoid any interest fees I talked about earlier, and it will guarantee your payments are always on time. That is why you have to have the funds available before the purchase.

Why Use a Credit Card

It makes sense if right now you are wondering, if I’m supposed to pretend my credit card is a debit card, why should I not just use my debit card??

Good question. Now if you don’t trust yourself to actually use the credit card in the way I’ve described, then you probably should just keep using your debit card for now. This is really just a self evaluation. If you know yourself well enough to acknowledge the credit availability will present too difficult a temptation, then congratulations on making a very adult decision to wait on a credit card.

When you are ready to use a credit card, then let me explain why a credit card is better than sticking with the debit card. I have 2 reasons.

Credit cards are the quickest way to build your credit. Good credit opens up more financial options like auto loans, better apartments, and home loans. I talk about ways to maximize your credit in my related post here. The earlier you can begin building good credit, the more it will pay off for you. Debit cards don’t contribute.

The second reason, many credit cards pay you to use them. You’ve probably heard people talk about miles earned or such-and-such cash back, but it doesn’t mean much until you begin using credit cards yourself. Many cards offer incentives to use their card in rewards earned by making purchases with their card, and following those with on time payments.

Some cards rewards are calculated in airline miles. These are usually cards from or associated with airlines. Qualifying purchases earn so many miles per dollar purchased. You can then use these miles before they expire to exchange them for airline tickets. 

Another way card companies reward users is through reward points. Depending on the card, points can be converted into gift cards or even cash. Capital One and the Amazon Prime Chase card both allow you to convert your points into money on your amazon account, kind of like a gift card although it is categorized differently on the site. They also let you pay off your balance using your points, so essentially like getting your groceries and gas purchases for free. I mention these cards only because I have used them and know how they work. Clearly, I prefer this option over miles because I don’t buy airline tickets very often, and if I need to I could always use the cash to pay off the airline purchase.

So how do you get the points? You will often see or hear them say “qualifying purchases.” These are purchases that you don’t return, and fall into a specific category. The categories vary by card. Some cards have rotating categories that change how many points you earn a month, others have set categories. Common categories include: restaurants, gas, and pharmacies. It’s a good idea to know what earns you what on each of your cards so you can optimize your benefits. 

Some cards will also have some extra benefits like travel or luggage insurance, extended warranties, and other benefits to using their card. These are always good to be aware of so you can take advantage of these free benefits.

One last reason to have a credit card, is in case of extreme emergency. Now I highly recommend saving up an emergency fund for this exact reason so that if an emergency does arise you won’t have to go into debt to cover it. However, my dad insisted that I get my first credit card when I was going to Moscow by myself. In case I needed to book an emergency flight home or other such emergency that I didn’t have the cash for, I would at least be able to purchase one on my credit card to fix the immediate problem.  Again, going into debt should be the last resort to any emergency, but it is a good last resort to have available. Luckily, I’ve never needed to use my credit card in this way.

Things to Look for in a Card

Interest Rates

First of all, you should take into consideration the variable interest rate. If you always pay off your balance in full, this won’t make a difference to you. On the off chance that you do use your credit card for an emergency, a lower interest rate will make your accrued debt lower.

Where Can it be Used?

Firstly, I mean that certain cards are more widely accepted than others. VISA and Mastercard are accepted almost everywhere in the United States. I believe they are widely accepted abroad as well, but your mileage will vary. Discover now seems to be more widely accepted, but when I was a child I know there were a fair amount of establishments that wouldn’t accept Discover so we would have to use another card like VISA. American Express is notorious for being a prestigious card, but it is frequently not accepted by businesses due to the high fees they charge businesses to accept the card. If you are looking to get a second card, I would recommend looking to get a card with a variety of carriers so you are never stuck because your brand isn’t accepted.

Secondly, knowing if you can use your card abroad (with or without fees) is an important thing to know. I specifically got my second card for the express purpose of having a card that I could use overseas without foreign exchange fees. If you are going to be living abroad for an extended time, it may be prudent to research cards from within that country or region.

Reward Systems

Almost all cards offer some kind of reward program now, as I mentioned before, there is no reason not to get a card with a good reward system. Research the various types of reward systems available and determine which will be the most relevant to your current habits. Many cards will have specials where if you spend so much in a certain amount of time, then they’ll give you a reward bonus. Don’t be distracted by the one time offer, especially if it exceeds your normal spending habits. Look for the offers that will give you the best return over the course of the life of the card.

Annual Fees

Many cards charge an annual fee to be able to have their card. Make sure you know the cost to have each card you research. Personally, I don’t see the point in paying an annual fee when so many good cards are out there without any annual fees. Especially if you are working on tighter funds, look into cards with 0 annual fees.

Early Repayment Penalties

Avoid all cards with a penalty for early repayment or guaranteed interest payments! These negate all of my earlier advice by still charging you the interest you would accrue in the allotted time even if you pay back the total early. You do not want this. Most cards don’t have these penalties, but it is essential that you avoid any that do.

Some Cards I Use and Like

1. Capital One Quicksilver* – I got this card when my credit history was too young. It’s a good card for those with growing credit.
   • It offers 1.5% cash back on all purchases. That’s a pretty good deal in my opinion. If you aren’t earning interest fees, that means every purchase they pay you a little to use the card.
   • It has no annual fee, and is accepted anywhere VISA is.
   • It has no foreign transaction fees.
   • It has push notifications for every purchase on my phone. Gives me a sense of security that if anyone used my card without my permission, I would immediately see the unauthorized purchase.
2. Amazon Prime Credit Card by Chase* – My credit was much better when I applied for this card. I don’t know if those with younger or lower credit will qualify.
   • This card varies it’s cash back based on whether or not you are a prime member.
     • 3% or 5% – Amazon Purchases & Whole Foods
     • 2% – Restaurants, Gas Stations, and Drugstores
     • 1% – All other purchases
     • It has no foreign transaction fees.
3. Credit Card through my Bank
   • This is the best place to start for someone with little to no credit history.
   • They often don’t have rewards or not a great system.
   • They are a great way to build up credit history to boost your credit so you can upgrade to better card later.
   • I don’t use this anymore, but I didn’t close it because it’s my longest credit card account.

Please do not use a credit card as an excuse to put yourself in debt. Credit cards can be an amazing tool when used correctly. 

Please use responsibly.

Remember, these are more like guidelines.

I am not a certified financial advisor. All opinions are my own. Please, consult with a professional before making any financial decisions.

*I am not affiliated, endorsed, or compensated by Chase, Amazon, or Capital One in any way. My experience and opinions are my own.