I've been in a committed relationship since January of 2013.
It was love at first sight, we travel together, and he calls every time I have fraudulent charges on my account.
Let's back up. You know how important a credit score is, right? It determines your interest rate for loans and whether or not you are able to borrow money. It will come into play when you try to buy a car, apply for a credit card, and eventually make the decision to purchase a house.
The higher your credit score, the better. This informs someone that you are reliable and have paid back money that you have previously borrowed. Having a decent credit score will save you thousands. It's important, I promise.
So how do you build credit?
You have to borrow money and then pay it back. It might seem a little silly, but I'll teach you how. It doesn't have to be as extreme as buying a car or a house, that's much farther down the road.
Keep an open mind. How often do you use your debit card? At least 5 times a week, unless you are still in the stone age and pay with cash everywhere you go. What if I told you there are companies out there that will pay you to do that exact same thing, but with a different card?
When using your debit card, you are pulling money directly from your checking account and essentially giving it to the company you are purchasing from. You receive no rewards. But, this is a great way to start out learning the basics of plastic money and how not to overspend, or in some cases… spend what you don’t have. However, if you can show self-control and continue to limit yourself on spending, you'll benefit more from a credit card.
A credit card is a very simple way to build credit when done correctly. Switching your debit card out for a credit card is a manageable change, with little to no hassle.
With that said, a lot of people do not handle credit cards well. Most companies will give you a large limit that they know you would never be able to pay back. This is how they make money.
Every month, your bill will give you the option to pay off your balance in full, or make a minimum payment of $25 or so. When you pay it off in full, you are not charged interest, you are only charged for the purchases you made on the card. This is similar to a debit card, you are not paying anything additional for the credit card vs. the debit card.
Buuutttt....when you choose to make the minimum payment, your remaining balance then starts accruing interest at a compounding rate, and this is where people run into problems. Allow me to give you an example; my credit card balance is currently around $1,500 for the month. If I paid only the minimum payment of $25 until it was paid off, it would take me 11 years. Yes, years. Do the math; I would end up paying $3,300 for my $1,500 balance. So where does the extra $1,800 go? To the credit card company.
This may seem like a small amount for the company to care about. But imagine you have 2 or 3 credit cards each with a $10,000 limit. Without being careful, it would be easy to max each one out while continuing to apply for new cards. This is how people enter the downward spiral of debt.
With that being said, there's absolutely no reason why you can't be one of the people who DOES handle credit cards well. Here are a few helpful guidelines that I have practiced to remain debt free while using a credit card.
1. You wouldn't swipe you debit card if you didn't have the money in your checking account, right? So don't swipe your credit card unless you have the money readily available to you. This will help limit your purchases so when the bill comes at the end of each month, you'll easily be able to pay it off.
2. If you are unable to limit yourself, lower your limit. Most companies will start you off much higher than you need to be, because that's how they make money. You are allowed to lower your limit to an amount that you know you'll be able to pay off. There's nothing wrong with lowering your limit to $100 a month and proudly paying it off. You're doing this to improve your credit, not to impress your friends.
3. Get a credit card with rewards. This will give you an incentive to use it rather than your debit card. My credit card gives me 2 airline miles for every dollar I spend, I haven't touched my debit card in years. I essentially get free flights because I don't pay any fees or interest on the card. They pay me for using their services.
You can do this, I promise. Your credit score with thank you when it comes time to buy a house, take out a loan, or buy a car. You'll have years of experience building a credit score to get you the lowest possible interest rate. I know it sounds scary, but it's just adulthood, we'll take it one day at a time.