I didn’t get my first credit card until I was out of college. I was afraid of marketers and their promises of easy money. I liked to shop, so it was inevitable that if I had a credit card, I’d run up thousands in of debt, right? I’d heard plenty of cautionary tales. And my mum, who generally is the one I turn to for financial advice, discouraged me. She didn’t think I needed more than a debit card, and so for all of college, that’s all I used.
But all that time, I wasn’t building credit. So when I graduated and moved to New York, I didn’t have debt, but I did have a really hard time getting a credit card. I was rejected again and again, and I finally had to sign up for a card that required me to put down a cash deposit. In the years since, I’ve opened a few more cards. It turns out that even though I love to shop, I’ve never been tempted to pay credit for something that I can’t pay off in full at the end of the month.
But I’m no credit card expert. I’ve fallen for the store-card pitch (twice). A few years ago, I opened an American Express because it seemed like a sophisticated card to have in my wallet. I still cringe when I have to pay the annual fee. I’m not one of those people who knows how to take advantage of the points system to get free airfare. I have a pretty passive relationship with my cards. I use them to pay for everyday purchases and don’t think much about them beyond that.
But in my job, I inevitably end up talking with a lot of women about their money. And I was surprised to learn that many of you aren’t using credit cards at all. You’re using debit cards instead, much for the same reason that I did in college — because credit card debt seems terrifying.
While debt is bad, and I admire all of you for not taking it on, it’s also bad to not build credit. So I chatted with Priya Malani, our Refinery29 financial expert, and together we put together this handy credit-card primer.
Thankfully, credit cards aren’t very complicated. Sure, there are some weird terms (APR, APY), and for some people, the risk of abusing your credit privileges and going into debt is a very real problem (and for these people, it's better not to use credit cards). But for the rest of us, the plastic rectangles are essential for building credit (should you want to buy a home or a car one day) and make paying for day-to-day items a whole lot easier.
One important thing to note from Priya: Your credit card is not your emergency fund. Your emergency fund is your emergency fund, so if you make sure to have one, you’re not dependent on credit whenever you get into a pinch. That will help ensure that you don’t go into credit card debt, either.
Ahead, Priya and I walk you through everything you need to know about credit cards — the good, the bad, and the confusing.
First things first: Put away your debit card. You shouldn’t be using that piece of plastic for anything except to take out cash at the cashpoint. There are no advantages to using your debit card for everyday purchases. You’re not building credit and you're not earning points.
I like to pay for everything with my credit card, down to a packet of chewing gum — so I don’t have to carry a ton of cash, and I don’t end up walking around with a bunch of change. And, as I said in the intro, I pay my card off in full at the end of every month. If you’re worried you’re overspending when you use a credit card, set up alerts that inform you daily of your bank balance and credit card balance. With just a little bit of vigilance, you can ensure that you’re not regularly racking up unnecessary debt.
Illustrated by Eliot Salazar.
Why does Priya make a big deal out of using a credit card for everyday purchases rather than a debit card? Because using your debit card doesn’t help your credit score, but using a credit card does. First, Priya says, it’s important to understand the concept of credit. Credit really boils down to trust. When you charge something on a credit card, you are making an arrangement that allows you to have something now but pay for it later. When you pay off your balance in full and on time, you prove you are trustworthy as a borrower.
Your credit score is essentially the metric that rates how trustworthy you are. The higher your credit score, the more trustworthy you are deemed. And the more trustworthy you are, the less risky you are considered — and so you are rewarded with lower interest rates when you go to borrow for bigger things, like a house or a car.
Having a high credit score is essential for almost all the big transactions you’ll make in your life: applying for a flat lease, a car loan, or a mortgage. Sometimes, jobs even look at your credit score when they consider hiring you. You can keep track of your credit score on free sites such as Noddle and Experian. And an easy way to get a higher score is to regularly use and pay off your credit card.
Illustrated by Eliot Salazar.
Yes, you need a credit card to build your credit score, but you should also be paying that card off every month. Priya and I have both met a number of women who’ve talked about carrying a balance on their cards each month just because. It’s not that they can’t afford to pay it off; they thought it was the right thing to do.
When you carry a balance, you pay an interest rate on that debt, which means you pay more money for whatever you bought with credit. A credit card is great — as long as you’re paying off your balance each month.
Priya loves to talk about being a deadbeat — that’s the term the credit industry uses to describe customers who don’t carry a balance on their cards. Essentially, you are worthless to the credit card companies; they aren’t making any money off of you. And, that's a good thing.
Illustrated by Eliot Salazar.
If you’re just starting out, it's a good idea to build your credit sooner rather than later. Part of your credit score is made up of your credit history (basically, how long you’ve been building credit — when you visit Credit Karma, it shows you how long your history is). If you have no credit past, it can be hard to get a credit card, and it’s even harder to get a loan. There are three ways to sign up for a credit card when you’re just starting out:
1) Secured Cards: This is what I did way back in the day when I was first trying to establish credit. With a secured card, you get to set aside a few hundred dollars into a savings account that becomes collateral for the credit card company. This amount dictates your credit limit, and if you don't make a payment, the credit card company can access those funds to cover your balance. It sounds like a debit card, but this little piece of plastic is actually helping you build credit.
2) Have A Family Member Co-Sign: A lot of people ask an older sibling or parent to co-sign on their first card, because it shows the credit card company that you’ve got someone who has your back, financially. One thing to keep in mind when you have a family member co-sign: It puts the co-signer’s credit score on the line, so you’ll want to be extra careful to pay the bills off in full and on time.
3) Low-Limit Cards: You might not be able to book a luxury vacation on one of these cards, but they will help you build your credit. (And likely, if you haven’t built any credit yet, you don’t really have the money for that expensive trip anyway.) Usually, if you pay your bill consistently with these cards for six to eight months, the credit card companies will automatically raise your credit limit (or you can put in a call and ask them to raise it as well).
Illustrated by Eliot Salazar.
The number-one reason to get a credit card and use it regularly is so you can build your credit history. Priya and I can’t emphasise this enough. But there’s another reason, and that’s reward points. Credit card companies want your business, and so they are eager to offer incentives to customers. Points can be used for all different kinds of things: travel, cash-back, and other rewards. These days, you can even hook up your points to your Amazon account and just use them, almost like cash, to make purchases.
There’s been a lot written about maximising your credit card points. Every year, sites like MoneySuperMarket.com offer advice on the best points cards. I’ll admit, I’m terrible with this game. I’ve never used the points I’ve earned to buy a plane ticket, and I feel a little overwhelmed by the whole process. But for people who’ve mastered the system, it can be very lucrative.
At the very least, you should be using these points regularly, because most cards have a use-it or lose-it policy, and if your points expire, that’s almost like throwing away free money.
Illustrated by Eliot Salazar.
Okay, you understand that points are good, but how do you choose the best rewards card for your lifestyle? This is an individual decision based on what you value. If you travel a lot, travel rewards make sense. If you don’t, then cash-back might be a better option.
The truth is, Priya says, there has been compression over the years on the exchange rate of rewards points. It used to be that airline deals were the best way to cash in your rewards. For most cards, you earn a point for every dollar you charge, and points generally have an exchange rate of 10,000 points for £100. So if you can get a £400 plane ticket for 25,000 points, that’s a better deal than getting cash rewards. But that happens less and less frequently. Airlines institute strict blackout dates, and often it costs more points to buy a ticket than it would to simply pay cash. So more and more people are opting for cash-back cards, because they like being able to reap the benefits more quickly.
Illustrated by Eliot Salazar.
So how many cards do you really need to have in your wallet? Priya recommends two — three max. If you’re applying for a loan or renting an apartment, it’s important for companies to see you have access to credit.
Your credit score is also partly determined by your “debt utilisation ratio.” As Priya explains it, on a month-to-month basis, if you have access to £10,000 in credit (i.e. a £5,000 limit on two separate cards), you shouldn’t charge more than £3,000 — and you should make sure to pay the balance in full each month.
Illustrated by Eliot Salazar.
It’s hard not to fall victim to these deals. Who doesn’t want to save a little more on that purchase? I’ve worked retail; I know how hard associates push those cards on unsuspecting customers. Just say no. Those cards are meant to rope you into spending more, but they provide deals that aren’t saving you anything in the long run. And they aren’t doing your credit score any favours.
Close all your store cards ASAP. And don’t fall victim to opening up another one. Of course, there are a few exceptions; if you are making a really big purchase (buying a wedding dress, for example) and actually will save some money, go ahead and open the card. But pay the balance in full as soon as the bill comes, and then cancel the card. It won’t hurt your credit score, but you will have to actually call the credit card company. It’s not as simple as just cutting up the card.
Illustrated by Eliot Salazar.
One late payment won’t ding your credit, but you might end up with a hefty fee on your balance. Most credit card companies will waive that fee if you call them up and ask nicely.
Illustrated by Eliot Salazar.
Full-disclosure: I closed my first credit card — the one that required me to put down the deposit. I did it in part, so I could get that money back. Was my credit destroyed? No. Was it damaged? Probably.
As Priya explains, 15% of your credit score is made up of having a credit history. And having a long history is a good thing. So Priya doesn’t recommend closing your first credit card if it’s significantly older than your next oldest card.
If you don’t use that card very often, we recommend putting a small recurring payment on there (your Netflix account, for example) and paying it off monthly. You can even set up a recurring payment for your card, so you don’t forget.
Illustrated by Eliot Salazar.
When you sign up for a new card, there’s pretty much no room to negotiate fees. You get what you sign up for, Priya explains. But if you’ve racked up a lot of debt, sometimes credit card companies will lower your annual percentage rate to help you pay it off sooner. You have to be the one to pick up the phone and call. The credit card companies really aren’t looking to do you any favours unless you ask.
Illustrated by Eliot Salazar.
Like I said in the intro, I signed up for an Amex because I thought it was cool. I do not recommend this approach to choosing a card. While I don’t like the annual fee, I do like some of the benefits my card awards me, including a good rewards programme.
When you’re signing up for a new card, it’s important to review all the benefits they offer to make sure you’re getting the best card for you. It’s not as simple as Priya saying: NO FEE CARDS, ever. You need to do a little bit of analysis on your spending habits before you choose. At the end of the day, cards with annual fees usually have better rewards programs, but you’ll want to make sure you’re taking full advantage of the programmes.
Illustrated by Eliot Salazar.
I didn’t realise there was a difference between credit and charge cards until Priya and I started working on this story. My grandmother referred to her Neiman Marcus store card as a charge card, and I assumed she was just being old-fashioned and Southern. I was wrong. As Priya explains it, charge cards help you build credit, but you’re required to pay the balance in full each month. For people who are worried about charging more than they can afford to pay at the end of the month, charge cards are a failsafe option. If you miss a payment, you get hit with a big late fee, and you’re restricted from making more purchases until you pay your balance.
Illustrated by Eliot Salazar.
So you’ve got some credit card debt? Well, you’re not alone. And with cost of living so high (especially in major cities), salaries stagnant, and many of us plagued by student loan debt as well, it can be really hard to pay off your credit card debt.
One option is a balance transfer, though Priya is cautious in recommending this as a solution. You see, she explains, the only time this is beneficial is if your balance is both big enough to break even on the transfer fee but small enough to pay off during the 0% interest period (usually 15 to 18 months).
Then again, she says, there are cards that are currently offering a balance transfer with no fee, with a zero-interest period of 15 months. If you think you can pay off your balance in that time, go for it. When Priya advises her Stash clients on their debt, she advocates that 20% of your net income to go to your debt payoff.
Illustrated by Eliot Salazar.Like what you see? How about some more R29 goodness, right here?
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