“Don’t get a credit card. Avoid debt altogether!”
“You should definitely get a credit card and rack up those rewards!”
“Credit cards scam you with ridiculous interest rates!”
Well which is it? There are seemingly many contradictory opinions on credit cards that are tossed around and it can be difficult to have any idea what to think! The world of credit cards can be mysterious as there are benefits but also things to be aware of.
Real financial success starts when you consistently manage your spending well. This is most often, and rightly, described as spending less money than you earn. Taking this one step further, successful spending also limits spending on things you don’t enjoy while giving the freedom to spend on things you truly value (assuming the first principal of not spending more than you earn isn’t broken).
One thing nobody enjoys spending money on is interest. While credit card interest is the worst kind of interest to pay; a credit card can be a tool to help cut down on interest expense in the future as it can help build your credit score.
Our credit scores never really feel relevant until we need to borrow money. But if you are thinking about your credit score only when you need money, it may be too late. Consider this example:
Let’s say you’ve never bought a home, but someday you would like to. When you go to take out a mortgage, if you’ve positioned yourself well with a great credit score, the lender will offer you a better interest rate than a borrower with a low credit score. The difference between a few percentage points of interest is thousands of dollars over the life of the loan. That’s real money you can spend on things other than mortgage interest, like fun things to put in your new home (or a Roth IRA!).
Something else to consider with credit cards are their rewards. We’ve all heard of people playing the credit card rewards game of trying to get any and every reward offered under the sun and you may have wondered if you should be playing that game too. Some of these rewards are great, but there are a few more important things to get straight before you should worry about rewards.
For example, if you were going to buy a plane ticket, why not let your credit card company pay for part of your airfare? On the other hand, opening and closing credit cards all the time in pursuit of rewards is a time-consuming and involved game to play, is that worth it? Perhaps, you should first focus your time on building a spending plan and forming sustainable spending habits as those habits will have more of a positive impact on your long-term financial success than credit card rewards ever could. As Dave Ramsey famously said, “no one ever says they got rich off of credit card points”. That’s certainly true, but if you’ve built the spending plan, take advantage of the rewards!
The key to using credit cards as a tool (for both the rewards and credit score building) is to pay off your credit card bill in full every month. If you’re not careful, credit cards can quickly backfire and become a source of additional debt and interest (and often very high interest). One way to prevent this from accidentally happening would be to set up automatic payments from your checking account.
Before we would advise someone to get a credit card, we suggest doing your homework. Know what the interest rate on the card will be if you do miss a payment. Check if there are any annual or hidden fees to this card. Get familiar with its points/rewards system. And be honest in asking yourself if you will actually make monthly payments on your credit card in full.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.