Credit Cards, how should you start out?
By Oliver Rahman
If you're like me, chances are when you turned 18 you had little understanding of how a credit card really worked. And yet, it is one of the most important things you will ever have in your adult life! Use it wrong, and you will be eternally in debt and be very limited financially. Use it right, and you can prosper and achieve financial stability (among other things!)
So, How should you start?
To start off, I would recommend getting a general credit card when you turn 18. The credit card I personally use is the Discover it® Student Cash Back as it has 5% cash back on items that rotate every 3 months and cashback match (which they give out every year). The card also offers 1-2% cashback on everyday items. Considering most students spend lots of money on things online, discover would be the best option for students. The discover card is also usually in the top 3 for NerdWallet rankings for students. Other cards, like Capital One Savor Student Cash Rewards Credit Card are also a good choice if you are a college student like me. However, be sure to do your own research and make sure you are financially responsible. If you are not responsible or don't think you want to have a credit card yet, stick with a debit card so you don't go into debt.
2-3 years down the line (~21 years old)
By 21, if you're paying IN FULL your credit payments each month, you should have a pretty awesome credit score! For those of you who don't know, a credit score is basically a rating credit agency give you to determine how good you are at paying back what you owe. In other words, if you pay your entire bill in full each month, you'll be fine. Most credit scores for young people are generally bad since they don't have a large credit history/spend more recklessly than full adults. Credit scores are based off of 5 things:
Credit history: How long you have used your cards (averaged from combined credit cards).
Credit score: This is if you had previous cards, or your current credit cards score. Basically, how you use your one or multiple cards will affect your total score.
Debt-to-income ratio: - This compares your monthly debt payments to your income. A lower DTI makes you a more attractive borrower.
Income and Employment History: If you have stable income and consistent employment your credit score will rise.
Collateral (sometimes): Some credit cards require collateral, or things you can give to the bank if you can't pay your debt back. This makes you seem "safer" to have a credit card.
This is why it's important to build you credit early and make smart financial choices. A good credit score can save you HUNDEREDS of thousands over your lifespan, which can help your life extremely no matter your circumstances.
When should I get my second card?
Getting a second credit card, again, all depends on your spending habits and how useful getting a second one is. If you're going to get one, make sure to do your own research beforehand to know the pros and cons. I'll give you some of the major perks and cons to getting an extra credit card after a few years (assuming you are financially responsible)
Pros: Can increase credit score faster in the long run; makes you seem like a "safer" borrower to banks. Opens you up to potential savings from each of the cards.
Cons: Temporary hit to your credit score, could put you into debt, could becoming confusing.
Adding a new credit card will decrease the average age of all your accounts, meaning your credit score (if young) could go down a bit for a year or two. However, in the long run could help your credit score increase as 2 credit cards show how you spend in different areas more than one. This is also a reason why cancelling a credit card hurts your score; if you cancel a credit card, the average age of all your credit cards decreases
Sometimes people also run the risk of getting into debt, or even more debt as individuals think a new credit card is a "fresh start", or more free money. Make sure you remember to never recklessly spend, as missing payments incur huge penalties. Lots of credit cards have over 10% APR, meaning if you missed a payment for $100, you need to pay back $110 the next month and so on!
Should you go for a specific second card?
You may have seen credit cards offered by companies like Costco, Amazon, or Sam's club. These cards are best used if you shop there. For example, amazon offers a 5% cash back on any items purchased on their site with their own credit card. Personally, if you already have a general credit card, try and go with a credit card at a place you shop frequently. This will help with overall savings if you shop there already!
For me, personally, I'm thinking of getting the Ollie's Bargain credit card for my second card. I'm a big Ollies fan, mainly I love the company and their business model, and plan to shop there frequently for the next few summers in college and for my apartment in a year or two's time. Getting an Ollie's card would make the most sense for me because I would purchase from there many times, allowing me to increase my points and savings on the other card, and boost my overall credit score in the long run!
You could also get a second general card, like a Capital one and a discover credit card. But if you're getting two general credit cards it makes it more redundant in most cases, as you wouldn't be getting any special deals anywhere.
You could also get a second general card, like a Capital one and a discover credit card. But if you're getting two general credit cards it makes it more redundant in most cases, as you wouldn't be getting any special deals anywhere.
Conclusion
I hope that I opened you all to what credit cards are and what a credit score is, and a general guideline to make sure your credit score increases with time. Again, I want to say that you should make sure to do your own research as I don't know everyone's specific financial circumstances. Sometimes a credit card is not the best way to improve your finances. I am also not a financial advisor, make sure to read my Disclaimer page. I do hope you learned a thing or two and can become a Finance Master!
If you've done your research and want to get a Student Discover credit card, you can use this link to sign up! Clicking this link will help me directly and give you $100 of statement credit when you sign up through a referral program, so thank you! Click here
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