Gordaen’s Blog

When I was at Lackland AFB, I used a debit card to pay at an Internet access site (you might say “Internet Café,” but I feel like that implies that it was “hip” or at least looked modern). A complete stranger said something to the effect of “You shouldn’t use your credit card like that. It’ll get you into trouble.” Perhaps he had racked up several thousand dollars in credit card debt, and that is why he was in the military, giving advice to strangers (and at no charge, what a deal!). At that point, I didn’t even own a credit card, because I didn’t see the need for one. I used my debit card so I wouldn’t have to carry cash and I never bought anything I didn’t have the money in the bank to pay for. That philosophy is very relevant to credit cards, but does not negate their value.

Credit cards build credit very easily and many have good reward packages. Having a solid credit history can save you thousands of dollars throughout your life, ensuring you have a good interest rate on the loans that you will make (such as for a house). The problem with credit is that it takes time to build. If you are 25 and decide to obtain a loan for a house without credit, you’re pretty much out of luck. If you have had a couple of credit cards since you were 18 and never missed a payment, you have a better chance.

The Costs
You should acquire a credit card as soon as you can and you should use it. When looking for a credit card, you should pay special attention to all of the details. Notice the APR. You should be paying off the card each month, but that doesn’t make a 30% APR acceptable. Also look for any monthly or annual fees and avoid cards with these. Credit cards are one of the few chances you have in life of taking advantage of a major company, so you should avoid paying them anything if possible (you can tell all your friends you are “sticking it to the man,” and hope they aren’t laughing at you immediately afterward). The grace period is also very important as it is the amount of time you have after a purchase before it starts to accrue interest. Generally, grace periods are around thirty days, which means if you pay off your card every month, you never have to pay interest, but be wary; some cards offer short grace periods such as 15 days.

The Benefits
The niceties should be the last thing you consider (look at what the card could cost you before you look at what you could gain). I recommend cards that offer cash back. Many cards offer 5% on gas stations, 2% on grocery stores, and 1% on everything else (or something similar to this structure). That’s your chance to make money from these companies while you are borrowing their money. If you make $20,000 a year and half of that goes into credit card purchases, 1% cash back could be $100 in your pocket at the end of the year. Some people prefer frequent flier miles or “reward points” that you can spend on particular items. Whatever it is, make sure it’s something that you will use. Frequent flier miles are great—if you use them. With some cards, they could expire before you have a chance.

Usage
Your limit will be low when you start, but that’s okay. Use the card for smaller purchases (such as $20) and pay it off regularly. Pay close attention to your limit. Never go over your limit. Never miss a payment. Never buy anything you can’t afford. Never buy anything you think you will be able to afford if your paycheck is big enough next time. Those are the main ways people find themselves in trouble. Missing your payment generally means your interest rate jumps (often to 30% or more) and a fee is applied to your card (usually $20-$50), and it’s especially bad if that fee puts you over your limit, because that gives you another fee. Missing your payment could cost you a quick $100 and plenty more down the road when your credit score suffers and causes you to have higher interest rates.

Credit Reporting
Credit cards affect your credit by the percentage you owe. If you owe 10% on your card, that’s “good.” If you owe 50%, that’s “bad.” That means some people can owe $5000 and still have a good credit report, but another person can owe $100 and look bad. This is also the reason you should avoid Capital One and American Express (unless you have a specific need, such as an AmEx card for shopping at Costco). Those cards report your limit as whatever the highest balance you’ve held was. That means they could tell you that your limit if $5000, so you make a $500 purchase. They report it to the credit monitoring agencies as using $500 of $500, which effectively says you have “maxed out” your card. That tells other companies that you are not only unresponsible, but that you are probably in financial trouble. Check your credit report from the three major agencies at least once a year (you can do so for free).

Things To Remember
You should have 3-6 months of income in a savings account. That money should be used for emergencies (e.g., pay the bill with your credit card, then pay it off with your savings). If you rely on your card for emergencies, you might not be able to pay it off right away which will cost you much more in the long run. A savings account will also earn a small amount of interest.

If you can’t afford something, don’t buy it. Don’t think, “I can just put it on my card and pay if off in the next couple of months.” That will cost you money and could be the start of ongoing credit card debt.

If for some reason you cannot completely pay off the credit card, pay as much as you can. Paying the minimum often just covers the interest (and not always all of it). As soon as you have more money, pay more.

Credit cards are considered revolving accounts, and, although they help your credit score when used properly, also having a loan and paying it off can help your credit score significantly. Some people take a small personal loan of a few hundred dollars and put the money into their savings account. They pay the monthly payments, eating the interest, until it is completely paid for. That is a solid way to build credit, but it costs money, so consider if it is right for you.