There are many reasons Grownups should consider establishing a credit history. Blogger Joanna Nesbit explains how to do so effectively and responsibly.
Last spring, when my husband was stranded at the airport because of high winds, he missed his connection to meet up with our college-age daughter for their California backpacking trip. She had to handle getting to the hotel on her own in the middle of the night, which wasn’t a big deal for her, but the hotel required room payment, in full, with her credit card. That credit card provided a certain security and convenience for all involved, and we were grateful she had one. (We paid her back.)
Many Grownups these days shun credit cards because they’re afraid of them, even though the economy and job prospects have improved. According to a recent Bankrate survey, just 33 percent of Millennials between ages 18 to 29 have one, in part because they saw how debt affected their families—or themselves—during the recession.
But a credit card is one of the quickest ways to build credit history, and it doesn’t automatically bestow debt. If you think of it as a tool, not a source of cash, there’s really nothing to fear. A solid credit history gives you all kinds of freedom as a Grownup that you don’t gain from a debit card, whether applying for an apartment, an auto loan, a job, or even for a good deal on a cell phone. Of course, credit cards aren’t the only means to building credit, and it’s possible to establish yourself without one, but a credit card serves as an easy gateway and offers other conveniences, too. It’s totally worth having. But yes, it will take discipline.
Here are the key reasons to consider a credit card.
It helps establish credit history. The sooner you start building credit references, the sooner you’ll establish a credit history to build a strong score (and a debit card won’t help). Using a credit card allows you to demonstrate good payment behavior and show you’re a good credit risk to landlords, utility companies, insurance agents, and banks, the very institutions that contribute further to your credit history. But you need to prove yourself to them first—a credit card is like an entry-level job in this way.
If you’re concerned about your ability to be disciplined, request a low limit, maybe $500, and keep your purchases to 20 or 30 percent of the limit (or lower) to avoid a high “debt usage” ratio. Debt usage compares your balance to the card limit, and a low debt usage ratio makes you look responsible. Use the card for a regular purchase—perhaps a monthly bill so you’re not tempted into miscellaneous, unnecessary spending—and pay it off every month. Contrary to what people think, carrying a balance doesn’t improve your credit score.
Good credit can lower insurance rates. I discovered recently that credit scores are a factor in determining your insurance rates, including auto, homeowners, and life insurance. A good credit score may lower your auto insurance rate with certain providers. (Who doesn’t want lower premiums?)
It helps you qualify for an auto loan. Owning a car is a necessity for many Grownups. Unless you have enough cash or plan to borrow from your parents, you’ll need to demonstrate a good credit history to qualify for a car loan. Your credit score will determine how much you can borrow and at what interest rate. The better the score, the lower the interest rate.
It helps secure an apartment and cheaper utilities. Any credible landlord will check potential tenants’ credit histories to determine a good risk before renting to them. With poor or no credit, you’re unlikely to land a decent living space without your parents’ help. Utility companies also like a good risk and will offer favorable terms if you have good credit (or require a deposit if you don’t).
It takes the hassle out of vacations. Reservations and car rentals often require a credit card—even if you don’t pay with that card. If a hotel adds a temporary “incidental charges” line item to your bill, it’s typically refunded to your credit card without you even noticing, but it may take several days to be refunded to your checking account if you use a debit card.
It streamlines work travel. If you travel for a job, you need a good credit history to qualify for a corporate card that enables you to take clients to dinner, book hotels, and rent a car. The majority of work cards are personal credit cards that your company reimburses. You’ll be able to meet with a client and take charge of wining and dining like a Grownup.
It bails you out in emergencies. If there’s a family emergency while you’re across the country and you don’t have enough money in your account for a high-priced airline ticket, a credit card allows you to get home hassle-free. Being able to pull out a card when you’re worried and overwhelmed makes everything easier. (Just make sure you make your minimum payments on time post-emergency!)
Be a Smart Credit Card Manager
- For easier tracking, sign up for just one card.
- Budget to pay the bill in full every month.
- Make sure you don’t charge more than 20 to 30 percent of your credit limit to avoid a high debt usage ratio. A low debt usage ratio is key.
- Plan to make online payments so you don’t risk missing a snail mail bill (especially if you move frequently).
- Create electronic notifications via a smartphone app or email so you don’t miss a payment due notice.
- Establish auto pay for a minimum monthly payment. This way, the minimum gets paid even if you miss paying the full bill.
- To monitor credit history, obtain a free credit report at Annualcreditreport.com once a year.
Grownups, you simply need to educate yourself about how credit works. It’s not scary—and credit won’t ruin you if you use it wisely.