This article is for everyone, but is targeted towards current University students and recent grads. This information is important for YOU as you start to become financially independent and understand why you couldn’t get a Gatorade every time you went grocery shopping with Mom.
Credit cards are tricky — usually we hear all of the bad stories via media and that one relative’s bad experience. Fluctuating between Mastercard and American Express, the payments slowly build and the penalties mount as you scramble to find a way to manage your financial situation. This leads to bad credit, which leads to high interest rates and purchase declines — a recipe for instability.
Done and managed correctly, however, credit cards can lead you to an oasis of possibility and hope! No longer will you be held captive by your own financial incompetence! ….
No, it is not that cheesy.
Really, what strong credit card management gives you is stability — instead of struggling paycheck to paycheck, credit cards can give you the opportunity to financially march ahead with your head held high. It allows you to take control, and yes even benefit, from your fiscal situation. With that being said, here are 5 ways to conquer, and benefit from, your credit card and it’s score.
1: Options, Options, Options
This is an obvious one, but I still want to include just to make sure you have all of the right information. There isn’t one “perfect” credit card; their benefits, APR, annual fees, foreign transaction fees, etc can all dictate which credit card is the best for you. Sometimes even two credit cards can be helpful (see point 3). The point is, do your research and decide which ones make the most sense for your current fiscal situation. Here are a few websites to start out with….
NerdWallet allows you to choose different options for viewing top credit cards. Make sure to check out their 2016 list for best travel credit cards:
Do you Research
A note when looking at credit cards — if this is your first one, you must look at entry level credit cards. If you try to apply for “nicer” credit cards, you will get denied (bad/no credit) and being denied further hurts your credit score. Rather than repeatedly getting denied for cards you can’t get, settle for an entry level card and build credit – sometimes all it takes is 6 months – and then apply for a more “friendly” credit card.
2: Take Advantage of the Technology
Even though 11 year olds shouldn’t really have credit cards, they do have the opportunity to effectively manage them. We all have this mini laptop in our pockets that gives us the ability to learn and find anything. While the knowledge is there, we need to get better with using it. One perfect way to illustrate this is Bank Apps.
Every major bank/credit card company has their own app by now (and if yours does not, you may want to do some shopping) that gives you the ability to see your transactions in real time and manage your account(s). Specifically with the credit card apps, you can link your checking/savings account to your credit card account. This gives you not only the ability to make seamless transfers from your bank to your credit card, but you can also set up an automatic direct deposit function and not even need to trigger that transfer. Literally, you can make it so your credit cards’ monthly payment is made automatically without any remembering or alarms being set. You are free from responsibility! Well, more like you are taking control of your responsibility without letting it take control of you. Because you have this ability to effectively manage different apps from your phone, doing #3 is quite manageable…
3: Have more than One credit card
Now, I really only advise to take this step if you are also taking step 2. The more credit cards you have, the easier it is to mismanage them and rack up penalties.
If you feel confident about managing them, however, then it really is beneficial to have more than one card. Each card has different perks, so being able to take advantage of perks by juggling more than one card is quite helpful.
In addition, the more credit lines you have open, the stronger your credit score is. If you have multiple lines of credit open and never miss a payment, your credit score improves – simple math using averages. Now, no one needs 7 credit cards, but managing 3 or even 4 is a realistic possibility. This leads to the 4th point….
4: Old credit is good credit – avoid closing credit cards
Once a reward is “used” for a credit card, people tend to try and cancel the credit card. Unless that credit card has an annual fee (which you can sometimes get waived if you threaten to cancel), always keep your credit cards open.
Now, it is important to make note of a credit card that you do not want to use anymore – simply writing ‘Don’t Use” in sharpie and keep it in your home desk will suffice. But there really isn’t any need to close the credit card. If you do not have any automatic payments attached to it, it will not accrue fees for simply being “unused”.
By closing a credit card, you indicate to your credit score that you could no longer “manage” that card and had to get rid of it. This will negatively affect your credit score. On the opposite side, by having more credit cards open, you gain more “points” and drive your credit score up (hinted in #3).
So, if I am advised to have multiple credit cards, never close them, and always have to manage them, where and how does the actual “benefit” happen?…
5: The Benefits
Every card has their own benefits, and as I have mentioned repeatedly, you will need to do your research on this! How to utilize multiple benefits, however, is something I want to highlight for you — specifically, one main scenario that will allow you to use benefits without changing your daily expenses (because you have to pay this).
Paying student loans
So you are in undergrad, or just graduated, and are currently in this beautiful period called The Grace Period. It is here that you are not required to make monthly payments (although your interest still accrues) and you have the ability to save money. What you should be doing is saving little by little so you can be prepared to make a large payment the moment you enter repayment.
When you are ready to make this large payment, make sure to apply for a credit card that gives a bonus for 3,000k purchase(s) in the first 3 months. Then, use your newly applied credit card to make a 3k payment, pay it off right away with the money you have been saving, and reap the benefit. You don’t even need to spend another 1$ on that credit card — you simply get the reward by strategically paying off your loan.
For example, if you (or if your parents help) save 70$ a month starting your first month of Undergraduate for the next 4 years ((70×12)x4) = 3,600 — going above what we asked for! And if you do this, you will qualify for 40K bonus miles from Capital One Venture Card. That would could help you plan quite the graduation trip!
Or, if 3k is too much, Chase Freedom rewards you with free money for making 500$ worth of purchases in the first 3 months.
At the very least, you should look into the Discover Cash Back credit card. While there is not an initial sign up bonus, it will match all rewards accumulated throughout the year (1% on all spending, 5% on special categories). If you plan on making many large purchases that year, this is a great card to start with!
The main way to utilize your benefits is by lining up your monthly/yearly payments appropriately with certain rewards. Since you already need to make the payments, line it properly so you can benefit from it!
Lastly, while the monetary benefits are great, the real benefit is something you cannot see everyday: your credit score.
Credit score is a very important thing to build as you meander your way through your 20s. Credit score dictates what you can/can’t buy or borrow and how much interest you have to pay on it. Better credit score = lower interest, but visa versa does exist. Using credit cards wisely and effectively allows you to build credit score and accumulate benefits without needing to drastically change your spending habits. Follow these steps and you will be on your way!