There are many reasons people shy away from getting a credit card, but the truth is that it may be one of the best things you can do for your credit score.
Getting your first credit card used to be a rite of passage that people looked forward to; however, the overall perspective on credit cards has significantly shifted over the past few years. Research has shown time and time again that young people are steering clear of credit cards because they have concerns about incurring debt.
A poll published by Money Under 30 found that the most common reasons that people in their 20s don’t have a credit card were:
- They were being cautious
- They are unwilling to borrow money
- They have poor credit
- They have no credit history
All of these reasons make sense on the surface, but they all reflect that there is a larger problem at hand here: Most people don’t understand how to manage their credit effectively.
That’s not to say that there are no risks or drawbacks to having a credit card. For many people, there are some things that they need to look out for when considering if a credit card is worth it or not. However, for the average consumer, a credit card can be an extremely valuable tool in keeping their credit healthy. In this article, we’re going to explore those risks and explain how a credit card can be worth it regardless.
Why Should You Get a Credit Card?
Regardless of what your credit history looks like, credit cards are one of the best ways that you can establish, build, and even repair your credit. There are several factors that make that true and it all comes down to how credit scores are calculated.
The absolute largest factor that credit bureaus use to calculate your credit score is payment history. This alone accounts for 35% of your credit score. Having a positive payment history is one of the strongest things that you can do to help build your credit if you have a limited history or are rebuilding your credit because of some problems in your past. When you open a credit card and are able to make your payments on time every month, you’re going to be steadily building up that positive payment history that creditors are looking for.
The next largest factor that is used to calculate your credit score is something called your credit utilization or credit utilization ratio. If your credit utilization ratio looks bad, then it will drag your score down and that can create problems. However, opening a new credit card does increase your overall available credit which can bring down your credit utilization ratio.
How the credit utilization ratio is calculated is very simple. Let’s say that you have one line of credit with a credit limit of $1,000. If you spend about $400 on your credit card every month and then pay that balance off in full, you’re using 40% of your available credit every month. According to the experts, you ideally want to keep your credit utilization ratio under 30%, but even lower is better.
Opening another line of credit but keeping your spending habits pretty much the same can help your credit utilization ratio go down. So, following the same example as above, let’s say that you open a new credit card that has a credit limit of just $500 and plan on using it just for emergencies. What the credit bureau sees is that you have a total of $1,500 in available credit and you’re only using $400 of that available credit regularly. That brings your credit utilization ratio down to about 27%. This would definitely help boost your credit score.
Opening new lines of credit helps bring your credit score up if that’s something you’re concerned about—as long as you use them responsibly. If you have a limited credit history, you may already know how that can come back to bite you. Limited credit history is going to make it difficult for you to do things like finance a car, purchase a home, or secure a loan in the event of an emergency or large purchase that you’d like to make. Opening a credit card is going to help you build that credit history. The average age of your credit is also a factor in calculating your score, so having a card for a longer period of time will also be helpful in boosting your score.
Even apart from helping your credit score, there are a lot of ways that having a credit card can be helpful. You may end up being pushed into making a large purchase because of an emergency or you need something that you’re not able to buy outright, and having credit available at times like this can be helpful. Just be wary of the high interest rates on credit cards — sometimes as high at 30%.
Credit cards can also be helpful in other ways because many come with perks. Some of them have travel insurance if you’re planning a trip, while others offer cash back or other benefits for users. You can also use credit cards to help you pay off debt faster and at a lower interest rate via a balance transfer, particularly if you have debt on an existing card with a higher interest rate.
Just be aware that when you open a new credit card, your credit score could take a slight hit initially. However, it will generally have a large net positive effect after just a few months of using it responsibly.
Addressing Common Credit Concerns
There are a lot of reasons why people may not want to get a credit card. The five main reasons that people have cited in the past are being afraid to incur debt, being cautious about overspending, being uncomfortable with borrowing money, having poor credit already, and not having a credit history at all. Those are valid concerns to have, but even in those cases, having a credit card can still be worth it.
If you’re worried about incurring any debt, the main thing to understand is that there is such a thing as good debt. One of the most common forms of “good debt” would be student loans. Borrowing money to pay for school is something that can increase your wealth over time because it can lead to higher-paying jobs later on. Mortgages and business loans are also common forms of “good debt,” because they can increase your overall wealth later. Taking on a new credit card is not a traditional form of good debt.
However, as long as you use your credit card wisely, it can do good things for your financial health in the long run. If you use the credit card like you would a debit card and then pay the balance in full every month, it is effectively the same as not taking out any debt since no interest will accrue. Just be sure not to spend too much of the available credit in order to keep your credit utilization low.
There are some things that are going to come up that will force you to incur some kind of debt, like financing a car or buying a home. Having good credit when the time comes for either of these things in your life is going to help save you money. Opening a credit card sooner rather than later is going to increase the age of your credit down the line, which will improve your score. Using your credit card but working to keep your credit utilization ratio low is going to help boost your score.
Having a positive payment history on your credit card is going to show lenders that you’re not as risky and improve your score. All of these things can help you see lower interest rates and better loan terms when it comes time for you to get a car, get a house, or if you ever need to take out a loan.
If you’re just being cautious because you don’t want the temptation, that’s completely understandable. Having a credit card can make it tempting to overspend when you know you can’t afford certain things. If this is something that you’re legitimately concerned about, then it makes sense for you to avoid credit altogether. However, having a credit card could provide you with a good tool to help create more financial discipline in your life. Something like Self Lender may be a good option for you to build credit and build the discipline of having a credit card.
Self Lender works by establishing a credit-builder account for you. You are able to choose an amount and payment terms that work for you when you open your account. Over a specified period of time, you will be required to make monthly payments into the account without having access to any of those funds until it is fully paid off. Self Lender is a credit-building loan, so the company reports to all the major bureaus every month which helps bring your score up. However, you won’t have access to any of the money you put in until you’ve paid the full amount. This can be a good place to start creating the financial discipline you’re worried about not having while building up your credit in the meantime.
You could also open a credit card that you don’t carry with you. Instead, you can stick it somewhere safe in your house and just set it up for automatic bill payments for things that you already pay, like your phone or your utilities, and pay your full statement balance every month instead of your regular bill.
If you don’t believe in borrowing money, Self Lender can be a good option for you as well. You don’t have to borrow anything and can build your credit as you build your savings. There are a lot of reasons that you may not believe in borrowing money, but having a good credit history is still very important. Having a credit card doesn’t necessarily mean that you have to use it or that you’re unable to cover all of your costs on your own. You can get a credit card and use it to pay for expenses you’re already incurring, then pay that full statement balance off every month. This can help you establish good credit without feeling like you’re really “borrowing” anything.
This isn’t a common reason for people not to get a credit card, but there are still options out there if you fall into this category.
If you have bad credit or no credit, you might be struggling to get a credit card or just feel like it is a bad idea to even bother. Like you’ve read a few times, having a credit card is one of the best ways to repair your credit or to get started on building your credit history. There are a lot of starter credit cards out there that have options for those who’ve never had credit before. One of the most popular options is to get a secured credit card, which is perfect for those with bad credit as well.
Secured credit cards require a deposit to get started, which is designed to help the card company or bank mitigate the risk of taking you on as a borrower. Your deposit usually sets your credit limit, and that can be as low as $200 to open an account. Using a credit card like this regularly, even for small things or expenses you already incur and pay out of pocket, can do wonders for your credit score.
When Is A Credit Card A Bad Idea?
Sometimes, a credit card really isn’t the best option. Even though credit cards are worth it for the average consumer, there are varying reasons that you may want to stay away from one for the time being.
If you’re someone who genuinely doesn’t believe that you will be able to resist the temptation to overspend, opening a traditional credit card could end up burying you with debt that you don’t need. It’s OK if you don’t think that you’re currently in a place where you’re financially responsible enough to have access to a line of credit — and being smart enough to recognize that is a very positive thing.
Another reason not to get a credit card is if you’re someone who knows that you won’t be able to keep your credit utilization ratio low enough for it to be worthwhile for you. If you only have one credit card, and you use it often or max it out completely, even if you’re paying the full statement balance every month, the impact of a high credit utilization ratio may actually bring your score down.
Overall, a credit card is generally worth it unless you’re someone who knows that you are not in a mental or financial position to be able to make your payments on time and pay them in full. Sometimes, things will come up that may result in you not being able to make a full payment. If you think that’s something that would happen frequently for you, it’s best to wait it out so you don’t have to deal with the stress of late fees and high interest payments as well as the strain on your credit score.