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Credit cards have widely varying reputations. Some sing their praises as amazing tools that help people score free flights and cash rewards, all while building a positive credit history. Others warn that credit cards are simply vehicles of temptation that will lead to spiraling, dangerous debt.
The truth is, both sides can be true. If you don't have a credit card and are wondering whether you should get one, it's important to understand both the advantages and disadvantages of opening an account in order to protect yourself and get the most out of it. You should also evaluate your own personality and habits to make the best decision on a card and help set yourself up for success.
Why Should I Get a Credit Card?
Research shows that younger generations are becoming more likely to shun credit cards out of a strong aversion to debt. Essentially, when you buy something with a credit card, you are taking on a short-term loan.
If you pay off that loan in full at the end of a billing cycle, which is typically 30 days, you won't have to pay interest. But if you pay nothing or less than the full amount, your balance will accrue interest, which can be very expensive. It's this phenomenon that scares some consumers away—they don't want to accrue unnecessary debt.
But the truth is, credit cards have become a fact of financial life, and for most people, it's a smart idea to open at least one account. That's because using a credit card responsibly is one of the best ways to build a strong credit history—something that will help you score the most favorable rates on big loans for cars and mortgages, saving you big money in the long run. In some cases, credit cards can also help you get approved for renting an apartment or avoid utility deposits because of your payment history.
And while you don't necessarily need a credit card anymore to shop online —debit cards can be handy stand-ins these days—credit cards can offer excellent fraud and price protection, along with other consumer benefits like product insurance, extended warranties, and rewards.
If your debit card is stolen, it can be much more difficult to recoup funds that have already been withdrawn from your bank account. Federal law, on the other hand, limits your liability to $50 per credit card if it's stolen and used by an unauthorized user. Furthermore, using a debit card doesn't help you build credit.
When Should I Get a Credit Card?
The best time to get a credit card is when you have enough money to pay off any charges you might incur—and are responsible enough to pay your bills on time every month. Of course, if you don't already have a credit card, you'll likely face a confounding catch-22: You can't get a card without a credit history, and you can't build a credit history without a card. But there are several workarounds.
How Can I Get a Credit Card With No Credit History?
If you are a student, you might consider being added as an authorized user on someone who already has an account, like your parents. They could also become a cosigner with you on a new card, allowing you to build your credit history. There are a number of cards designed specifically for students.
You could also apply for a secured credit card, which is backed by a cash deposit when you open the account. They work the same way as a regular card: you make purchases, pay them off at the end of the month and accrue interest if you don't. After you have established a pattern of making your payments on time, you can usually convert that secured card into a regular one that doesn't require a deposit.
If you are a young professional with a job who is just starting out, there are certain cards available to those with limited credit history.
What Are the Pitfalls of Getting a Credit Card?
While there are numerous benefits linked to credit cards, the dangers are certainly very real too. For some people, credit cards can become a license to spend money they don't have. And when it's time to pay the monthly bill, they can't afford to pay off the full amount they charged. That's a sure way to get steep into debt, because interest rates on credit cards can be as high as 29% or more in some case, leading to fast-growing balances that can be impossible to keep up with.
Other users are absent-minded and simply forget to make payments on time, resulting in hefty late fees on top of interest. The most important factor in determining when you should get a card is if you are capable of paying your bills on time each month.
If you know that you aren't in a financial or mental place where you can make that a priority, you might not want to get a credit card right now. But if you just need a little help in making payments on time, almost all cards allow you to schedule automatic payments for either the minimum amount due or for the full statement balance, so you never have to think about it.
If you're someone who wants a credit card but you are afraid the temptation will lead you to spend more than you can afford, consider opening a card that you don't actually carry in your wallet. Instead, stick it in a drawer and simply use it to automatically pay a recurring bill, like your cell phone or cable account. Then, set up an automatic payment to pay the balance in full each month. That will keep the account active and build your credit history without tempting you to use it buy things you can't afford.
Finally, if you only have one credit card and you use it often—even if you pay it off in full every month—you could be in danger of having a high credit utilization, which is the amount of credit you use on a monthly basis relative to the amount of credit available to you.
For example, if your credit card has a $5,000 limit, and you regularly charge $2,000 a month, your credit utilization ratio is 40%. That can hurt your credit scores because most credit experts suggest that keeping your utilization higher than 30% can hurt your credit. For the best credit scores, experts recommend keeping your utilization under 10%.
So make sure you know what your credit limits across all your cards are—and try to use just 10% of that.