A credit card can be a very useful thing. You get the convenience of making purchases without the risks of carrying cash, and you get protection against fraudulent or inaccurate charges. You can gain valuable rewards and build up your credit history, and if you select your cards wisely and pay your balance in full every month you can get these advantages at little or no cost.
A credit card can also be a challenge. Once you have a card the temptation to use it is always there, and that temptation can quickly bury you under a mountain of high-interest debt.
Only you can decide whether it’s the right time for you to get a credit card. To make that decision you need to understand how credit cards work and how your credit card use affects your credit. You also have to honestly assess your spending habits and financial discipline. That information will help you make the decision that’s best for you.
How Credit Cards Work
A credit card account is a revolving line of credit, which means that you can borrow money over and over again as long as the total remains below a set limit, and you pay it back on a regular schedule. As long as you keep making the minimum monthly payment, you can keep drawing on your credit line.
Every time you use your card you are borrowing money from the card issuer. If you pay your balance in full every month you pay no interest on these loans. If you carry a balance past the end of the statement period, you will pay interest on that balance. Credit card debt often carries high interest rates, so carrying balances can get expensive very quickly. Some cards will raise your interest rate if you pay late or miss a payment.
Many credit cards have an annual fee that you pay to use the card. Some credit cards do not have annual fees. Cards that offer high rewards often have higher fees. Credit cards may also charge fees for certain types of transactions, like cash advances or overseas purchases, or charge penalty fees for late payments or exceeding your credit limit.
The interest rate and all the fees of a credit card will be described in your credit card agreement, which will accompany your application. If you decide to get a credit card, you need to review this document carefully and understand all the potential costs of the card you intend to get.
How Credit Card Use Affects Your Credit
Your credit card payment history is part of your credit report. It can help or harm your credit, depending on how you use your card.
If you pay your credit card balance in full and on time every month, you establish a good payment history. Payment history is the single most important factor in most credit scoring models, so a good payment history can have a significant positive influence on your credit.
The high priority that scoring models give to credit history can also work against you. If you make late payments or miss payments, those will also go on your payment history, and that can damage your credit.
If you keep your credit card balance below 30% of your credit limit, you are establishing a good credit utilization ratio, which can also be a positive influence on your credit. If your balance is often near your credit limit, you have a high credit utilization ratio, which can harm your credit.
Credit scoring models favor a mix of installment credit, like auto loans or student loans, and revolving credit like credit cards. If you don’t have a credit card, getting one can improve your credit mix. That can have a positive impact on your credit.
Getting a credit card can help you build good credit, but you have to keep your spending under control, make your payments in full every month, and keep your balance under 30% of your credit limit as much as possible. That sounds simple, but it can take a very high level of personal discipline to achieve those goals consistently.
Why You Should Get a Credit Card
We live in a credit-driven economy and there are real advantages to having a credit card.
- Holding a credit card confirms that you have passed a financial evaluation process and establishes a level of credibility. Some transactions, like reserving a hotel room or renting a car, can be more difficult if you don’t have a credit card.
- A credit card allows you to make purchases without the risks of carrying cash.
- A credit card gives much better protection against fraudulent or inaccurate charges than a debit card.
- A credit card can help you build a strong credit history.
- Credit cards may offer valuable rewards.
- If you’re self-employed or freelancing, using one card exclusively for business expenses is a great way to track those expenses for tax deduction purposes.
- If you choose the right cards and use them carefully you can have all these advantages at little or no cost.
Those are compelling reasons, but let’s look at the other side as well.
Why You Shouldn’t Get a Credit Card
There are also good reasons not to get a credit card. Here are a few of them.
- Holding a credit card may tempt you to spend more than you should. Studies have shown that people have fewer inhibitions about spending on a card than they do when they are spending cash.
- Even if you spend within your means, you’re still spending money that you may not have yet. A sudden major expense, job loss, or other unexpected events could leave you unable to meet your payments.
- Interest on credit card balances is high. The average annual credit card interest rate is over 16%, and younger cardholders or those with less good credit often pay over 20%.
- Many credit cards charge penalty fees or raise interest rates if you miss payments or pay late.
- If you lack spending discipline or an unexpected event suddenly cuts your income, high interest and escalating fees can leave you in a downward debt spiral that can be very difficult to break. This is called the credit card debt trap, and millions of Americans have learned about it the hard way.
If those factors seem more compelling to you than the arguments for getting a credit card, you might consider the possibility that while you may eventually want or need a credit card, this might not be the best time to get one.
Is This the Right Time to Get a Credit Card?
Most of us will have a credit card at some point in our lives. If you’re not sure that this is the right time to get one, consider these questions.
- Are you already in debt? If you already have student loan debt, car loan debt, or debt from other sources, you might want to postpone getting a credit card.
- Are you having trouble paying your bills? If you’re behind on other loan payments or having trouble paying your rent or utility bills, a credit card could add to your problems.
- Do you have a steady income? If your job is seasonal or part-time, if you’re unemployed or not sure if your job will last, this might not be the right time to get a credit card.
- Are you confident that you understand how credit cards work? Managing a credit card effectively is not just about swiping. If you’re not sure, you might want to learn more before making a decision.
- Do you trust your own financial discipline? This is the big one. Most of the downsides to credit cards come from the inability to control spending. You have to be honest with yourself: can you control yourself or not? Sometimes the best way to resist temptation is not to face it in the first place!
Answering those questions honestly should help you build a clear idea of whether you’re ready for a credit card or whether you might want to build more stability and discipline first.
You Can Live Without a Credit Card
You’ve probably heard people say that everyone needs a credit card, or that you can’t get by without one. That conclusion may not apply to you. Credit cards are useful but many people do get by without them.
- Credit cards are useful for building credit, but if your income is not steady or sufficient or you’re worried about controlling your spending, the risk to your credit may outweigh the potential gain.
- Credit cards are useful for many transactions but in most cases, you can manage with a debit card, though you may have to plan a bit more and be aware of the risks.
- Some people use a credit card to handle emergency spending, but that can be dangerous, especially if you’re regularly using your card to get out of financial trouble. Consider building up an emergency fund as an alternative.
- Credit cards offer appealing rewards and discounts, but remember that those perks are designed to get you to spend more, not to help you save. Your spending helps the card company make money, but it may not help you!
There’s nothing wrong with deciding that this isn’t the right time to get a credit card. You will get by without one, and the time will probably come when you decide that you’re ready to get one.
Making Your Choice
If you’ve honestly considered all of the points discussed here, you’re probably ready to decide whether you’re ready for a credit card now or whether you’d rather wait. You know your financial situation better than anyone else, and you know your spending habits and discipline better than anyone else. That knowledge is a key part of your decision.
Don’t let peer pressure influence your choice. It might be hard to be the only one in your group without a credit card, but being buried in debt could be a lot harder!
One choice isn’t better than the other. Getting a credit card can help you build a better financial future, and postponing a card can also help you build that future. What’s important is that you make an honest, informed decision and that you’re confident that the decision is right for you.