Remember the other week when I made this Comprehensive Guide to Personal Finance for Millennials? If you haven’t read that yet, start there and come back. We went over budgets, having an emergency fund, saving for retirement and paying down debt. There is something we didn’t talk about though. This week, I’m back with part two and we’re talking all about credit for millennials.
Whenever I say credit cards I feel like I’m saying a bad word. So many people have such strong, negative opinions about credit cards. It can be a hard topic to address or bring up because of this. I’m going to tell you guys right now, I don’t think credit cards are inherently bad. I think if you have a little bit of willpower and the right attitude, credit cards are great. But, like most things in life, they aren’t for everyone.
one// know your credit score
The first thing we need to cover is knowing your credit score. If you don’t know what your score is, you aren’t making informed financial decisions (and I’m trying to make you an informed millennial). How do you check your credit score? You can check for free once a year at each of the 3 credit reporting agencies through Annual Credit Report. If you stagger the checks, you can check for free 3 times a year (say January, June and November). This way you can keep tabs on it and can react quickly if any issue comes up.
How is Your Credit Score Calculated?
For this section, I’m going to focus solely on your FICO credit score. According to FICO, this is the breakdown of your score:
The biggest takeaway here is that your amounts owed and your payment history is a big deal. If you have never had a credit card or aren’t paying on any loans (student, car, ect), your payment history is going to be minuscule, if it exists at all. The second biggest category is your amounts owed. This is credit after all, so you want to keep your amount low but anything you owe on your credit card, house, car, student loans, ect is factored in here. To keep your credit score in good shape, always make the minimums on all of your debts owed.
two// should you have a credit card?
This answer is complicated but generally I think the answer is yes. Credit for millennials can be complicated. You first have to establish that you aren’t going to treat a credit card like a credit card. Treat it like a debit card. As a rule of thumb, if you don’t have the money for it in your checking account, don’t put it on a credit card. It’s that simple. Then credit cards aren’t scary. They’re actually a great idea. You just have to stick to this principle.
Benefits of a credit card
My FAVORITE thing about credit cards is that if you use them correctly, you can get a lot of stuff for free! Essentially, I put everything on my credit card that I can (exceptions are rent, student loans, ect). I normally don’t even take my debit card out of the house. This is because you can earn points when you spend money on a credit card where as you don’t if you spend money with your debit card. I don’t buy things just for points, I just put things on my credit card that I was buying anyways. I pay off my credit card in full each money and never carry a balance. Through this, I paid for my hostel stays in San Fransisco, Hawaii and Seattle just by using my credit card reward points. So by spending money I was going to spend anyways on my credit card as opposed to my debit card, I save money on my trips! That’s a huge help to me when I’m traveling.
Negatives of a credit card
If you don’t have a strong hand on your finances, credit cards can act like a tiny devil. They taunt you to spend money until suddenly you have thousands of dollars in credit card loans. Credit cards have crazy interest rates, especially if you are just starting out. If you carry a balance on your credit card, you will end up paying much more for the items bought than if you just bought it with cash/debit. At this point in my life, I don’t have a problem with this. I never buy anything on my card that I don’t have the cash for and I don’t carry a balance (so I never pay interest). But take this part seriously because this is how people charge $1,000 and end up paying back credit card companies $3,000. Credit cards want you to pay interest, that’s how they make money. But you’re a boss, you understand the game now and you’re gonna let the credit card companies pay you.
three// finding the right credit card
If you decide that you can treat your credit card like a debit card, pay it off in full each month and not rack up thousands of dollars of debt, you’re probably wondering what credit card you should start with. This is such a complicated question because it’s going to vary for everyone!
My first credit card was the Bank of America Travel Rewards credit card. I first applied for this card when I switched to BoA in 2012 in advance of my semester abroad. I wanted a card that didn’t have any foreign transactions fees and something I could use abroad if I got into a pickle and really needed it. It didn’t cost me money to use it in foreign countries and I earned points for everything I put on this card.
I can’t tell you what credit cards you should and shouldn’t apply for. I can tell you that I use The Points Guy whenever I’m considering a card. He spells out the benefits of cards and compares to other similar cards.
If you travel a lot, you might want to look into a travel rewards card. If you spend a ton of money on groceries, you might want one that gives cash back for purchases on beer… I mean, groceries. The important thing is to know what you spend money on and find a card that will reward you the most for those purchases. How do you know what you spend your money on? Make a budget (read part one of this series here). See, credit isn’t that hard!
Many credit cards will now tell you your credit score for free every month so you won’t have to go out of your way to keep up with it. Bank of America does this for me since I have a credit card with them.
four// credit card best practices
- treat your credit card like a debit card. don’t charge what you don’t have cash for
- put everything you were going to buy on your credit card instead of your debit card to earn points
- don’t buy things on your credit card just because you can
- pay off your balance in full each month so you don’t pay interest
- stray away from cards that have annual fees unless you really feel like the benefit outweighs the cost of the card
Okay friends, I’ve given you so much credit card knowledge. It’s time to go forth into the world of credit for millennials and start earning those points like the millennial boss that you are.
*as always, there are exceptions to everything and sometimes you do have to charge things you don’t have cash for. Just be smart and use your head when making decisions. As a disclaimer, I don’t have a finance degree. If you need some serious help, consult an expert or a financial advisor.