Credit Cards 101
Aug. 27th, 2022 08:23 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
canyonwalkerI've written a lot over the years about credit cards, most of it about the practice of credit card churning. In my last post on the topic someone remarked that churning seems like an advanced topic; what should people who aren't really using credit cards at all yet do? Indeed it is an advanced topic. In the world of credit cards think of my 5 tips about churning as kind of a 300 level course.
Funny but true story: First week of freshman year in college, my roommate read his schedule wrong on the third day of class and walked into the room an hour early. It was coincidentally the same topic and the same professor, but it was the 303 level course instead of 101. He furiously wrote out pages of notes as he soberly contemplated changing majors as his pick was obviously way too advanced. Then the prof asked him at the end, "Hey, aren't you in my 101 class?"
People looking for the 101 class may recognize all the terminology at the 300 level but think, "*gulp* That sounds hard!"... just like Keith when he went to the wrong mechanical engineering class. You'll get there eventually. But now let's talk about Credit Cards 101. Here are Five Things for people new to credit card to consider:
1) Get started establishing a credit history.
There are two situations I hear for people asking about which credit cards to use. One is a person who's young (over 18) and is just now eligible to start getting their own credit. The other is a person who's older, say in their 30s, often someone who had credit problems in the past, and has been doing pay-as-you-go for years now. Yeah, PAYGO works, but not for everything. To have a full range of options as an adult in modern society you need a credit history. A good credit history. Want to buy a house or even a car, and don't have a suitcase full of cash? They'll need to see a good credit history. Want a good job? More and more employers include credit checks as part of routine background checks. Even landlords do credit checks on rental applicants. And BTW, just having a decent salary is NOT a replacement for lacking a credit history. You need both.
2) Start small, pay it off every month.
Establishing a credit history is not only really important but definitely also takes a while. You're not going to do it overnight... or even in 6 months. So start small. Everyone does. Get one credit card first. Use it. Pay it off every month. Don't treat it like an open line of credit to borrow money for luxuries like a fantastic trip overseas that it'll take years to pay back. The credit card issuers are hoping that's what you'll do, BTW. They're hoping that because they'll make bank on you with their sky-high interest charges! Instead think of the card as a monthly payment aggregator. Instead of carrying cash for your ordinary purchases like groceries, or using a debit card, charge the purchases to your credit card and make one payment at the end of the month.
3) What card first? Look for a NO FEE card.
So now you're wondering, "Which card should I get?" There are a lot of choices out there. Try searching phrases like "Best credit card for students" or "Best credit card for bad credit" to see good matches. Rather than recommend a specific card I'll recommend what to look for. You want a card with no annual fee and no junk fees. This may mean you don't get a card that pays airline miles or hotel points or cash back. That's okay; you're starting out here, and this is 101 level stuff. Optimizing the benefits comes later. ...Especially because the cards with good benefits generally require better credit scores. You'll get there as you build your knowledge and confidence along with your credit score.
4) Use apps and other tools to avoid missing payments.
"What if I miss a payment?" is the biggest fear most credit card newcomers have. For those who are doing PAYGO 15 years later a screwup with missed payments is often the reason they stopped using credit cards. It's a reasonable thing to be concerned about.... Making payments on time is the most important factor in your credit score! Fortunately it's way easier now than years ago not to lose track of due dates and get dinged with expensive fees and bad marks on your record. All the major credit card banks have apps you can use that include options like "Remind me X days before a payment is due." There are also a number of third-party money management/budgeting apps that can do the same. I use the bank apps and set the reminder to 7 days while aiming to pay 10-12 days in advance. That way I get a helpful text if somehow I forget, and there's still plenty of time to make the payment without having to call in and beg for an extension.
5) Raise your limit when you can; keep your charges low.
I noted above that the most important factor in credit history is a clean record of payments. The second is total credit limit. And it may seem counterintuitive to noobs, but higher is better. Higher limits demonstrate that you can manage more credit. So ask your credit card issuer to raise your limit after 12 months. Usually they will; and some may offer raises sooner. Try opening a second card if the first bank won't give you an increase. The third factor in credit scoring is your utilization rate. And this is one where you want it low. Utilization is how much you charge, per month, as a percentage of your limit. Ultimately this is part of why you want higher limits. Anything above about 20% utilization is a bad mark that reduces your credit score. So if you charge, say, $500/month in groceries and transit passes, try to get your card to a limit of at least $2500. If you're charging $2,000/month on shopping, dining out, and buying gas, you want a credit limit of $10k. The proportions applies both per-card and in aggregate across all your cards. Again, start small and build your way up to it.
Funny but true story: First week of freshman year in college, my roommate read his schedule wrong on the third day of class and walked into the room an hour early. It was coincidentally the same topic and the same professor, but it was the 303 level course instead of 101. He furiously wrote out pages of notes as he soberly contemplated changing majors as his pick was obviously way too advanced. Then the prof asked him at the end, "Hey, aren't you in my 101 class?"
People looking for the 101 class may recognize all the terminology at the 300 level but think, "*gulp* That sounds hard!"... just like Keith when he went to the wrong mechanical engineering class. You'll get there eventually. But now let's talk about Credit Cards 101. Here are Five Things for people new to credit card to consider:
1) Get started establishing a credit history.
There are two situations I hear for people asking about which credit cards to use. One is a person who's young (over 18) and is just now eligible to start getting their own credit. The other is a person who's older, say in their 30s, often someone who had credit problems in the past, and has been doing pay-as-you-go for years now. Yeah, PAYGO works, but not for everything. To have a full range of options as an adult in modern society you need a credit history. A good credit history. Want to buy a house or even a car, and don't have a suitcase full of cash? They'll need to see a good credit history. Want a good job? More and more employers include credit checks as part of routine background checks. Even landlords do credit checks on rental applicants. And BTW, just having a decent salary is NOT a replacement for lacking a credit history. You need both.
2) Start small, pay it off every month.
Establishing a credit history is not only really important but definitely also takes a while. You're not going to do it overnight... or even in 6 months. So start small. Everyone does. Get one credit card first. Use it. Pay it off every month. Don't treat it like an open line of credit to borrow money for luxuries like a fantastic trip overseas that it'll take years to pay back. The credit card issuers are hoping that's what you'll do, BTW. They're hoping that because they'll make bank on you with their sky-high interest charges! Instead think of the card as a monthly payment aggregator. Instead of carrying cash for your ordinary purchases like groceries, or using a debit card, charge the purchases to your credit card and make one payment at the end of the month.
3) What card first? Look for a NO FEE card.
So now you're wondering, "Which card should I get?" There are a lot of choices out there. Try searching phrases like "Best credit card for students" or "Best credit card for bad credit" to see good matches. Rather than recommend a specific card I'll recommend what to look for. You want a card with no annual fee and no junk fees. This may mean you don't get a card that pays airline miles or hotel points or cash back. That's okay; you're starting out here, and this is 101 level stuff. Optimizing the benefits comes later. ...Especially because the cards with good benefits generally require better credit scores. You'll get there as you build your knowledge and confidence along with your credit score.
4) Use apps and other tools to avoid missing payments.
"What if I miss a payment?" is the biggest fear most credit card newcomers have. For those who are doing PAYGO 15 years later a screwup with missed payments is often the reason they stopped using credit cards. It's a reasonable thing to be concerned about.... Making payments on time is the most important factor in your credit score! Fortunately it's way easier now than years ago not to lose track of due dates and get dinged with expensive fees and bad marks on your record. All the major credit card banks have apps you can use that include options like "Remind me X days before a payment is due." There are also a number of third-party money management/budgeting apps that can do the same. I use the bank apps and set the reminder to 7 days while aiming to pay 10-12 days in advance. That way I get a helpful text if somehow I forget, and there's still plenty of time to make the payment without having to call in and beg for an extension.
5) Raise your limit when you can; keep your charges low.
I noted above that the most important factor in credit history is a clean record of payments. The second is total credit limit. And it may seem counterintuitive to noobs, but higher is better. Higher limits demonstrate that you can manage more credit. So ask your credit card issuer to raise your limit after 12 months. Usually they will; and some may offer raises sooner. Try opening a second card if the first bank won't give you an increase. The third factor in credit scoring is your utilization rate. And this is one where you want it low. Utilization is how much you charge, per month, as a percentage of your limit. Ultimately this is part of why you want higher limits. Anything above about 20% utilization is a bad mark that reduces your credit score. So if you charge, say, $500/month in groceries and transit passes, try to get your card to a limit of at least $2500. If you're charging $2,000/month on shopping, dining out, and buying gas, you want a credit limit of $10k. The proportions applies both per-card and in aggregate across all your cards. Again, start small and build your way up to it.
