Unfortunately, financial advisers have related mixed opinions when it comes to using credit cards. I say unfortunately, because there is nothing to dislike. I got my first credit card when I was 18 and have been using it since then. Not only has it earned me thousands of dollars in rewards since then, but it has added other benefits as well. Despite what people may think, using credit cards is an important action for any young adult to take. Here’s a list of reasons why you NEED TO START USING A CREDIT CARD if you are not already using one.
Reason # 1 – Build Up Your Credit
A few months ago, I accompanied my close friend to the Honda dealership to find a new car. She wasn’t interested in buying a new car, but she was looking to lease a car. My friend is almost 30 and had a good paying job. Her old car was dying and she needs reliable transportation for her job. Between that and a few other reasons, she wanted to lease. She had enough money to put money down and there was no doubt that she could pay the 2 year lease.
The only problem is that she was denied. Want to know why? Because she had never built up any credit history. (If you don’t know anything about credit, read this post about credit score and credit history, then come back to this post) She has a credit card, but it has a limit of a few hundred dollars and she never used it. Not until she got denied and I told her to start using it. She always used her debit card, not thinking that it mattered. But it does matter! Using your credit card is one of the easiest ways to build up your credit. Credit is important for these types of things. If you ever want to buy a home, a good credit score is essential. By using your credit card for 5-10 years as a young adult, you can show the companies that look at your credit score that you are a responsible person. It’s not a perfect system, but unless you can pay for a house in cash, it’s a system that you are stuck in.
Reason # 2 – Cash Back Rewards
Another great reason to use credit cards is to earn money without doing anything. Many credit cards offer 1-5% cash back on regular expenses. So, if you buy an item for $100 and your card offers 5% cashback, you will earn $5 that you can redeem from your credit card company. My wife and I use credit cards to cover most of our expenses. We don’t spend a lot of money, but just last year alone we got about $500 back in rewards. That’s money that I wouldn’t have if I bought things with my debit card or paid cash.
The thing you have to realize about credit cards is that they make their money off of people using them irresponsibly. They know this. In order to get more people using their cards (with a greater chance of earning money off of irresponsible actions like not paying off the balance each month), they provide incentives. This means that you can take advantage of the system by using a credit card for every purchase and getting a small percentage of each purchase back. Let me be clear: if you are going to use a credit card to get the rewards, you need to pay off the balance each month.
Reason #3 – Fraud Protection
Last, but definitely not least, is fraud protection. Almost every major credit card company today has a department to track and prevent credit card fraud. This means that if anyone ever uses your card illegally, you can fight it with the assistance of this department. I’ve even had my credit card company act proactively and prevent fraud charges from happening to me by issuing me a new card when there was a risk of my information being jeopardized. While I am sure there are things that this doesn’t protect you from, the important thing to realize is that using a debit card offers you no protection. Try getting your money back after someone withdraws it from an ATM.
In case it isn’t clear yet, young adults have a great opportunity to use credit cards to their advantage. By simply using 1 or 2 credit cards to pay for everything, not only can you earn a little extra money, but you can set yourself up with a great credit score/history that will help you later in life. As with everything financial, you need to think long-term. I was lucky enough to have someone tell me the benefits of using a credit card from an early age. It’s probably pretty rare for a 25 year old to have a 7 year old credit card account.
Which Card to Use?
I’ve had several readers contact me lately about which credit card to use. While most of the major credit cards are similar, I prefer to use a combination of credit cards. I typically use my Discover, Chase Freedom, and Costco American Express.