Recently, I sat down with couple of my friends that are also a recent graduates. We talked about credit cards and it caught my attention. They told me that we should get our first credit card as early as possible. This is the reason that they offered:
Use the credit card on groceries, fuel and other small bills, and pay it off at the end of the month. This will raise one's credit score so that if we want to take a loan from bank for a house or car, the bank will loan the money.
Is this true ?
In the US that would be generally correct. By using your credit card responsibly (i.e. paying off the entire balance every month) you would build positive credit history which can help you with getting loans or mortgages in the future.
You may also benefit from cash-back or other benefits, depending on the credit card.
Certain type of purchases (rental cars, hotels, flight tickets, many things international) actually require a credit card, so it's good to have one, even if you rarely use it.
Two main things to keep in mind:
I would like to offer a bit more nuanced advice to getting a first credit card - specifically for things you should do before you get one. I base this on both my own experience with credit cards (through periods of both good and bad financial health), and the experience of seeing my kids struggle to varying degrees.
1. Do you have a budget?
Specifically, have you written down in some form what your income is (if any), what your expenses are/will be over the coming month, and have you had at least one month where you compared your actual expenses to what you thought your expenses should be in the budget?
If you don't, do so before you get a credit card! Preferably, well, now! Otherwise saying "don't spend beyond what you can afford" means nothing, because without a budget no one can know what that is. Remember: a personal budget is not what someone else says you can spend, it is what you yourself say you expect to spend over a set time period, and the kind of things you both must and want to spend money on - and how much for each. Income and expenses come in on different schedules, vary over time, and what you think is important and valuable reflects your personal beliefs and behaviors. Your budget is a reflection of what you think about money, just as much as it is a reflection of your current financial status.
2. Have you gotten a copy of your own credit reports? Even - especially - if you think nothing should be on them?
In the US you are legally entitled to a free credit report from all three bureaus once a year through AnnualCreditReport.com. Have you gotten it this year, or ever? If not, building credit comes after you know what your credit actually is.
You really must do it even if you think it shouldn't have anything on it - people are often surprised, because being listed as an authorized user or having some form of joint account with their parent can show up, fraud shows up (stealing identity's from kids is especially popular because they are less likely to be checking their reports!), and errors show up. If you want to build a good credit history, making sure things are accurate and knowing what is on your report comes first - not a credit card!
3. Do you know how people make money offering you a credit card? Do you know what can go wrong, and just how wrong it can go - and how easy it is to go there yourself?
If you were going to try cliff diving (I have), I would ask that you first evaluate the actual dangers, what would have to go wrong and how that could happen, and evaluate whether you can mitigate and avoid the common/worse risks - and then decide if you want to go ahead.
Credit card companies make a little bit of money on transaction fees, and people offering them to you make commissions for signing you up. But credit card companies make most of their money on fees and interest - late fees, over the limit fees, times when balances aren't paid off in full, etc. And the interest on most cards is between 4X and 10X what a bank could make on money loaned out on a home mortgage. The only limit to the profits they rake in are the fact that some people end up unable to pay at all - but the companies rack up so much money before that usually happens that it hardly slows them down. Besides, if the industry blows up they will just get the government to save them anyway, so it isn't like they are especially risk averse :)
4. Do you know how little you use the card matters for credit history?
If you look up example credit reports - and get your own - you will see just exactly what gets reported as part of your credit history, which is the vast majority of what is used to make most credit decisions. What is there, and what isn't? You will note that there is no listing, for instance, of what is charged on a card, how many uses there are, how much in total is used on a revolving basis, nothing about what you paid in fees, and also nothing on how much is charged on the card (utilization) beyond the most recent month (each new month overwrites the old utilization figure).
Knowing these will help you understand that even when you do get a credit card, you need not use it daily or even monthly. If you don't use it at all they may close the account (banks like Synchrony/store cards are especially bad about this, I've found), but other than that a few times a year is generally plenty. More regular use will generally only increase how often the credit card automatically increases your limit - which if you don't use it that much matters little. Having more income and an older positive credit history matters a lot more for that, anyway.
Personally, both myself and my kids made the mistake of doing what banks tell you to do in getting a credit card before you are actually in a position of being ready for it. It makes them plenty of money - you, not so much.
What I learned the hard way is that it is far more important that you get the basics of financial health down, like budget, regular work, develop clear priorities for your spending, decide what you care about most, and create financial goals for yourself. Plan more than a day or a week out - at least a month, and preferably multiple months - and get the personal experience of reflecting back and see how things went versus how you thought they would go.
Once you've got the basics of plan, earn, spend, reflect, repeat down, then great - feel free to add a credit card to your list of financial tools!
But getting a credit card is far, far, far from a first step towards a healthy financial future. But you want to know a little secret? Most financial institutions aren't designed to maximize profit based on you engaging in healthy behaviors that are best for them. The value of their stocks depend on millions of people, just like you, engaging in self-destructive and costly behavior that transfers the wealth from the many to the few in the institution.
Develop a healthy foundation - which doesn't really take that long to do, once you decide to do it - and then circle back and decide if a credit card is a good thing to add. There really is no big hurry - the companies will be thrilled to offer you a whatever-new-metal-they-invented-this-year card when you are ready.
That is correct if you actually do it -- that is, if you actually view the growing balance on your credit card as "tying up" some of the cash in your wallet, rendering it unspendable.
So for instance if you know you have run up $80 of credit card charges, you know that four Andrew Jacksons in your wallet are reserved for that and cannot be spent. Or they can be in your cookie jar, or in your bank account; wherever.
We have this concept in nonprofits called a "Restricted Fund". If someone donates $5000 to paint the building, and we haven't painted the building yet, that $5000 in the bank account is untouchable. We can't spend it except to paint the building.
And by the way, nothing says you must wait 'til the bill arrives to pay off the credit card. If that $80 is burning a hole in your pocket, pay the bill early. I used to make Xerox copies of the payment slips, but now you just pay online :)
The ultimate risk is that you start playing headgames with yourself and start down the road to debting:
That very rapidly ballons into running with a credit card balance all the time, and then you're in a cycle of debt that is hard to get out of.
I work in the credit card sector and I can tell you absolutely, if you are in either UK or USA, this is correct as long as you are able to have control over your spending. Never get a pay-monthly, never spend more than what you can afford to pay back at the end of the month. Find one that might offer 0% int. in the first 12-18 months. A good record of paying back every month will prove to lenders that are able to pay back what you owe every month. This will help in the long run when needing a mortgage where you need to pay back every month for 20+ years
