Getting Started in Your 20s: Why You Need a Credit Card
Follow these 4 steps to build a credit score and avoid debt troubles
If you’ve been avoiding credit cards, preferring to make a bank debit card or PayPal your go-to payment system, you are simultaneously very smart and, well, wrong. The screwy reality is that you need a credit card to build a solid credit score, something debit cards don’t help you do.
Don’t care about your credit score? You sure? If you have any intention of ever wanting a loan to buy a home or a car, your credit score is going to be a major factor in whether your loan is approved, and it has a big say in what interest rate you will be offered. A version of your credit score can even be used to set your car insurance premium in some states. And as you may have already learned, cell phone companies, utilities and landlords sometimes check your credit score to determine if you must fork over a deposit to get service.
How to use a credit card to build a solid credit score:
1. Plan to use it for two or three recurring expenses a month. Pick a few expenses you know you will keep incurring and commit to paying them with your credit card. Spotify, perhaps. Or the gym membership. Because you’re only going to use a card for a few items each month, you’re likely best off going for a simple, no-fee credit card, rather than a rewards card – which might charge annual fees – that you’re unlikely to ring up many points on. Run a quick search for “Best no-fee credit cards.”
2. Set up auto-payment. One of the biggest factors in determining your credit score is your track record of being on time with payments. By setting up your credit card payment to be automatically made from your bank account every month, you are going to ace this important step in building a strong credit score. Make sure you set up a payment date that is three business days before the due date. (Side tip: If you want to sync this payment with your paycheck, credit card issuers are pretty easy-going about moving your monthly payment due date to whenever you want.)
3. Pay. In. Full. OK, if you’ve resisted using a credit card, you are probably well aware of their downside: You run up a balance you can’t pay off in full at the end of the month, and you then fall into credit card hell. And pretty soon, your other expenses – rent, perhaps a student loan – start to look overwhelming. The interest rate charged on credit card balances is beyond painful, about 15% on average these days.
The way to outsmart the credit card demons is to only use it for a few recurring bills you know you will be able to easily pay off in full each month.
4. Put the card in a nice safe place that isn’t your wallet. No need to carry it with you. It’s not for bar tabs or meals out. Your debit card is still the smartest way to pay for your day-to-day expenses, to make sure you limit your spending to what you’ve got in the bank.