I got my first credit card when I was 17. It was a Visa and I had a $2,000 limit. I thought I had it made. $2,000! That was so much money! What would I even spend that much money on?
I kept that card for 5 years and I used it in very responsible ways, and then in only semi-responsible ways.
After a summer internship in Washington, DC, where I made such a small amount of money I relied on my credit card for everything, I racked up some credit card debt.
I returned to school in the fall of 2010 and worked my butt off at three different campus jobs to pay it off. After I did, I closed that card and didn’t open another credit card until January 2015.
I am definitely a responsible credit card user – now. I understand how interest rates work, how my credit card can affect my credit score, and just how much of a burden credit card debt can be.
Since January of this year I have paid off my credit card in full every month. It’s really gratifying to know I can afford to do that, plus I’m building a great credit score (I’m headed towards that 800!), and I don’t have to rely on credit cards to pay for my life.
I wasn’t always in this position and mindset. There are a lot of credit card myths and a lot of hype surrounding credit cards. It seems like everyone has a couple and throws them down for big purchases or little ones.
How do you know if a credit card is right for you? How do you know if one will help or hurt your lifestyle? Let’s take a look.
What’s Your Debt Relationship?
The first thing I would ask you is what your relationship to debt is like.
Do you have any debt and if so, what kind? Having a mortgage is very different from a car loan. Someone with a lot of debt is, in my opinion, not a good candidate for a credit card. The last thing you want to do is add to your debt burden.
If you have low-interest debt, like a mortgage that will take years to pay off, you’re a better candidate for a credit card than someone with high interest student loans or car loans.
If you have 1) multiple debts already, 2) high interest debts, or 3) short-term debts (5 years or less to pay off), I would suggest passing on getting a credit card.
You should focus your money efforts on paying off your debts. That will help build your credit score and put you on a more stable financial footing for opening up a credit card later.
About That Credit Score
You often hear about people getting a credit card to build their credit score. It’s true, cards can be helpful for that. But why exactly is that?
I find people often don’t know how a credit score is determined, and why a credit card is helpful for that. So let’s break it down!
The simplest way of understanding it is that a credit score is based on your use of credit. Credit is any kind of loan (in the broadest sense of the word) that you carry.
Some people have mortgages, student loans, or car loans. Credit cards are another kind of loan – you use your card to pay for something in advance, and then once a month, you pay that loan back by paying your bill.
Your credit score is determined by how much credit you have and how well you use it. If you have a credit card with a $2,000 limit, and you spend $2,000 each month, you’re using 100% of your credit. That’s a red flag, even if you pay it off each month.
Credit bureaus like to see people use about 30% of their available credit. Using more than that suggests instability in your life – possibly in your finances. Creditors don’t like to lend money to people who may not pay it back.
So if you’re using too much credit, you look risky. If you’re not making payments, you look even riskier.
That’s what people mean when they talk about using cards to build credit. They’re making timely monthly payments to build a solid history, proving their responsibility with credit.
Those with high credit scores get better interest rates on future loans. Those with lower scores end up with higher rates. That leads to paying more in interest.
This is where you have to be brutally honest with yourself. I know I had to be. I had to admit that when I used a credit card, I spent more than when I just used my debit card.
The idea that there’s a company out there that just gives me money to pay for things, even knowing I have to pay them back, is intoxicating for me! In college I was too easily swayed to spend by my credit card. So I closed it out.
If you’re someone who loves to put every little thing on a card and has trouble paying off the entire balance each month, maybe a card isn’t for you. Be brutally honest with yourself about it, because I pinky promise that card companies and loan lenders will be brutally honest with you.
The truth of the matter is, no one probably needs a credit card. The difference between need and want is critical when it comes to this matter.
I lived with a credit card for years and did just fine. If you think one is for you, go for it! If you think it might be more trouble than it’s worth, just skip it. I promise you probably won’t even notice! Just make sure you track your spending and check your balance on a regular basis.
Have you determined if credit cards are right or wrong for you? Did you need to take a break from using one?