8 out 10 Americans have credit cards and over half of those consumers carry a balance on their credit cards. With so much differing information out there, it can be hard to understand if you should even use credit cards. This article explores the question ‘Should I get a credit card?' so that you'll make the best decision for your current and future self.
With that, let's talk about what you should know about credit cards and whether you should even get one.
Why Should I Get A Credit Card?
When used the right way, credit cards can be great.
They can be used to build a credit history, raise your credit score, protect yourself, and accumulate rewards.
Credit Cards Are Great For Building Credit
It's true, credit cards are one of the first ways Americans can begin to build a credit history. Credit cards can be beneficial when paid off fully each month. They can help establish and increase your credit score and you can accumulate points that can be converted to cash or other rewards. The key however, is to follow your budget strictly and not view your credit card as additional purchasing power. Use it like a debit card and don't carry a balance at the end of your billing cycle.
As a refresher, a debit card is your ATM card and is linked directly to your checking account. While a credit card is essentially a loan that you access via a card and is replenished as it's paid off. However it comes at a HUGE cost since the interest rates on credit cards are staggering. Not to mention that many cards have an annual fee.
Credit Cards Are Safer Than Debit Cards
Secondly, in this day and age where Americans are purchasing a huge amount of things online, security is extremely important. One big reason to use a credit card is for the added security that a credit card can provide. Credit cards provide security because if you lose the card or your information is stolen, the criminals cannot drain your bank account. If someone were to have your debit card and pin, they'd be able to spend and steal your hard earned cash directly from your checking account.
Wait, doesn’t my debit card provide me security?
Yes, but the big difference here is that when you use a credit card, you are effectively borrowing money from the bank and then repaying them when your statement is due. What this means is that if your card gets stolen or used by someone else, the credit card company won’t hold you liable if you prove the charges are fraudulent and you notify them quickly. With debit cards, you are more likely to be held liable for the fraud. On top of that, your checking account money will be gone until the bank reimburses you for the fraud. It can cause a lot of problems if you suddenly realize someone emptied your checking account.
Credit Cards Can Provide Great Perks and Rewards
Third, cash back is nice to have. In our post on emergency funds, we recommended putting your money in a savings account with the highest interest rate possible. We even told you that 1%, though it may seem small, can make a difference. Along that train of thought, if you’re going to spend your money each month on groceries or other routine expenses, why not use one of the credit cards that offers 1% or more cash back?
Finally, one nice perk about using a credit card is that it allows y0u to delay when your money leaves your bank account. What this means is that with a credit card you are able to make a purchase today, but not have to actually pay for it for another 15 to 45 days later when the credit card bill is due. That delay could make all the difference if your pay check arrives later than expected. Or if you have an unexpected emergency arise. To be clear though, a credit card is NOT an acceptable replacement for an emergency fund.
Why Should I NOT Get A Credit Card?
Credit cards sound pretty awesome, right? They offer a lot of perks like cash back and extra security. On the other hand, they can lead to financial catastrophe. In 2017, credit card debt in the U.S. topped a trillion dollars! Yes, trillion with a “T”.
Credit Cards Come With High Interest Rates
If you, like the majority of Americans, carry a month-to-month balance on your credit card we recommend that you STOP using them. We repeat, If you are unable to pay off your card in full each month you should NOT use them AT ALL. Go ahead and grab those scissors… it'll feel better than you think.
Not sure if your credit score matters? Read our post about why your credit score can make a difference.
The problem with credit cards are the extremely high interest rates! These interest rates, which are usually well into the double digits, can even get as high as 25%. That new pair of shoes that cost $80 bucks can end up costing a couple hundred dollars in a very short amount of time once you start racking up interest charges. Using credit cards (or debit cards) also makes it very easy to spend more money than you realize.
Debit Cards Still Provide Protection Against Theft
The security concerns sound scary, and they are. But the reality is that the big national banks will still not hold you liable for fraudulent transactions if you report the card missing immediately before charges are made. For many banks they will only hold you liable for the first $50 if you report the fraud within 2 days. This isn’t $0 but your emergency fund is there for a reason.
The data says it all. Far more Americans will be filing bankruptcy in 2018 due to a mountain of credit card debt from overspending than due to fraudulent expenses on their accounts. If you want to justify getting a credit card for the security benefits, this is not a good enough reason if you aren’t sure you will be able to spend responsibly.
In addition, if you normally use cash for a lot of your transactions, using a credit card for a cash advance at an ATM is extremely expensive. The interest rates on these withdrawals can go up to 35% which is shockingly high. To put that number in perspective, if you could earn 35% on an investment you'd have people ready to give you millions of dollars to invest.
Credit Card Debt Is Hard To Pay Off
Due to the high interest rates and the ease with which credit cards can be obtained, it can be easy to let your credit card spending spiral out of control. In one survey, 50% of Americans said that they had maxed out a credit card. If you think about the fact that credit cards can have interest rates between 15% and 25%, it is easy to see how it can become nearly impossible to pay back all of the money owed, since the balance starts to quickly grow.
In order to pay off credit card debt you need to create a plan. Your first step is to list out all of your debts and then create a budget to hit your financial goals.
When Should I Get A Credit Card?
If you're excited about the prospect of getting a credit card, the sooner you get one the better (so that you can start to build credit). The age of your credit accounts and your payment history are critically important components of your credit score. This means that building a credit history sooner will help you. If you are able to get an excellent credit score it could save you thousands of dollars in interest when you get a mortgage to buy a home since you'll qualify for better financing options.
However, you need to make sure you have a solid financial foundation first. This means that you should be confident in your ability to live within your means and understand that you should never EVER carry a balance on your card at the end of the month. Paying credit card interest is one of the worst things you can do with your money.
You should also realize that you need to be a 18 years old in order to apply for your own credit card. If you are under 18 or have children under 18, you can always be added as a user on your parents card or add your children to one of your accounts. Often times, this card will be reported on the minor's credit report and it can be an excellent introduction to credit cards.
How To Pick A Credit Card
If you do think you are able to have a card responsibly and not carry a balance, look for a credit card without an annual fee! Some credit cards carry an annual membership fee which is simply not worth it for most people. Especially if you are new to the personal finance world. For your very first card, you'll definitely want to make sure you get a credit card without an annual fee. This is because you'll want to keep this card forever since the age of your credit card accounts is an important factor in determining your credit score.
Remember, we NEVER carry a balance on our credit cards. The rewards are simply not worth the interest rates if you ever carry a balance from one month to another.
Whether you are constantly driving long distances for work or your largest monthly expense is at the grocery store, look for cards that offer the highest cash back in the categories with your largest budgets. Having a credit cards that gives you 3x points for every dollar spent on travel when you don’t have plans to hop on a plane any time soon doesn’t make a lot of sense.
Are The Rewards And Cash Back Even Worth Getting A Credit Card?
Only if you can handle a credit card responsibly without carrying a balance. Ultimately, you need to know that credit card points won't solve your problems.
Never spend more than you have budgeted for the month just to meet a spend minimum for rewards points or miles. That’s a big no-no.
Also, if you only have $50 remaining in your entertainment budget, but have a $1,000 credit limit, that does not mean you can spend a couple hundred dollars on concert tickets. Stick to your guns and only put $50 or less on the credit card towards entertainment and be sure to pay it off – in full – when the statement is due.
Just to emphasize the point again, if you cannot follow your budget 100% or have trouble with credit card debt, you should NOT use credit cards and should stick to cash (or debit). Period. Don’t forget that while credit cards are convenient, they can be very risky. Getting credit card points can be fun until you realize you might have to postpone your retirement for a few years to pay off your credit card debt. Now that sucks.
Do you know how your credit score is calculated? Read our post on how credit cards affect your credit score!