ok so i have seen ‘you want to stay away from credit cards’ in a few posts lately and all you youngin’s are about to benefit from my age and expertise (i am in the real estate/finance industry) bc i wish someone had told me this when i was a lot younger. credit cards are NOT BAD and are in fact VERY USEFUL FOR ESTABLISHING GOOD CREDIT, which is super important (read: required) if you want to:
- buy a house at any time in the future
- buy a car
- take out any kind of loan with an interest rate that won’t slaughter you (with the exception of federal loans, which have fixed interest rates at the time of application nationwide and tend not to be based on an individual’s credit)
- signing an extended agreement for cable/security systems/a handful of other services
- your insurance rates will go way down
- some leases will require it
- lots of other stuff
it’s really important to establish your credit EARLY. here are some things that factor into your credit that you should think about:
- what is your debt to income ratio (how much do you owe vs how much you make)
- gross debt (total amount you owe)
- how many hard credit score checks you’ve had (a ‘formal’ check is a ‘hard’ check. something like creditreport.com is not a formal check and is a ‘soft’ check. you can have as many of those as you want) (this is not a huge factor but it is a factor)
- length of time since last new line of credit/debt (right after you take out a loan to buy a car, your credit score will go down a few points. making on-time payments will make it go up.)
- total number of on-time payments***
- number of lines of credit*** (each source of debt is one)
- duration of credit history***
***these three are not only HUGE parts of your credit history, they are the ones that are SUPER EASY to control, and the reason why you should not be afraid of credit cards.
esp for people who go to university, you’ll start to get credit card offers in the mail about when you start turning 18, saying you’ve been pre-approved for a card. find one with the following characteristics and apply for it:
- no annual fee (you don’t actually have to Pay to own the card)
- 0% interest rate the first year is p typical and doesn’t really matter
- some kind of rewards like percent cash back or miles or whatever
- read the fine print for some kind of language that says that the card will not start charging interest if the last bill was paid in full. THIS IS SUPER IMPORTANT bc what it means is that as long as you pay off the credit card on time, you will not owe any interest. because of this, as long as you pay off the bill as soon as it’s due, you’ll never generate debt from the card
take this card and use it for small, routine purchases. do you go out to eat a lot and usually pay with cash? that student loan payment you have that you usually just take right out of your bank account? a new pair of shoes that you’ve saved up enough money for? pay with your credit card, then pay off the bill right away. make sure not to buy anything that you can’t pay with cash Right Now, and always pay your bills on time. in as little as a year, you can get a credit score in the 700s, which will get you the best interest rates, p much sails you past any loan officer checks when you want to take a loan, and plus you can brag about having kickass credit when most people don’t have any.
while i’m at it, there’s a cool app called mint that helps you manage your money. it’s never too early.
a small disclaimer that you should definitely talk to someone you trust re: money issues because while i am in the industry i’m definitely speaking as general advice and not specific to any one person. also this is USA specific. sorry everyone else, i don’t pretend to know how your financial systems work.