Author: Conrad Belknap, Graphics: Nina Tagliabue
The BRB Bottomline
Credit Cards don’t have to be a scary black hole of potential financial ruin. With common sense and a little research, they can become extremely rewarding and worth using for nearly every purchase.
There’s a perception among college students that credit cards are to be avoided at all costs, lest one is dragged down a never-ending cycle of inescapable and crushing debt. To be honest, there’s a smidgen of truth to the horror stories circulating social media and student conversations. If one is irresponsible with their card(s), it’s quite possible to get oneself into quite a financial predicament. This doesn’t mean that one should completely disregard credit cards, however, as the potential benefits from the responsible use of credit FAR outweigh the downsides.
The Pros and Cons of Credit Card Usage
Before we get into the benefits of using credit, it’s important to actually explain how credit and credit cards work for the average person. Everyone, once they start seeking or utilizing credit, gets a “credit score,” from a low of 300 to a high of 850. This score measures your creditworthiness in the eyes of the banks and credit bureaus (one of several financial institutions that analyzes your financial activities to provide you with a credit score). It’s essentially a calculation of how risky you are perceived to be to those who would be extending you credit, based on your past payment history, the length of your credit history, use of existing credit, and credit-seeking behaviors in the past.
The credit they extend you (i.e. your credit card’s limit) is how much the bank is willing to spend on your behalf, expecting you to pay it back at some point. If you’re extended a credit line (meaning they accept your application and give you a card), a good rule of thumb is to use no more than 30% of the line of credit at any given time (for example, $300 if your credit limit is $1000), since a lower utilization rate will help boost your credit score in the long run.
While this sounds complicated, there’s a very easy way to use credit cards to bank the benefits and rewards while also avoiding spending outside of your means: simply pretend it’s a debit card. Odds are that by now, you’ve owned or generally know what a debit card is: it’s a card that’s directly linked to your checking account, withdrawing the money you spend instantly.
The difference between the two is that with credit cards, it’s not withdrawing from your checking account immediately. With a credit card, you’re essentially spending the bank’s money at first and promising to pay them back at a later date. As such, it’s important to only spend what you’d be willing to (and able to) spend with a normal debit card and pay off your credit card in full as soon as your purchases are posted. You avoid any potential interest charges (which apply if you don’t pay off your full balance after every month, unless you have a promotion for 0% interest) and avoid spending more than you can afford.
This can prove to be a dangerous pitfall for many new credit card users, who do not realize that by only paying the minimum each month that their accounts are accruing compounding interest charges that can quickly add up. It can easily be avoided by being smart with your spending and paying your full balance each month, or by taking advantage of cards with a (typically introductory and temporary) 0% interest rate. Now that we’ve talked about some common-sense measures to avoid typical mistakes a credit card novice can make, let’s get into the juicy world of credit card benefits.
Credit Card Rewards Explained
For starters, the fees that credit card issuers charge merchants are baked into most retail prices that you see at stores, which in turn is paying for the rewards that card issuers give to their customers. Credit card companies turn around and give customers a portion of the fees they collect as “rewards.” For every purchase you make, you start earning rewards points. By paying with cash or debit, you’re indirectly paying for other people’s points, even if you don’t get to collect them yourselves.
These rewards can stack up fast, even on everyday purchases. Research has shown that the average American could earn $650 per year in rewards from everyday spending. That number increases with sign-up bonuses and the smart utilization of specific cards’ rewards structures to maximize points earned.
Many credit cards, even those without any annual fees, can have sign-up bonuses or other incentives valued at hundreds of dollars. Discover cards, for example, match all the cashback you’ve earned at the end of your first year, with no limit to the amount they’ll double. Chase Freedom Flex, on the other hand, currently offers new cardmembers a cool $200.00 in points bonus when you spend a total of $500.00+ in the first 3 months. These bonuses are a super-easy way to get some extra spending money just from making everyday purchases. Compare cards to find a welcome bonus that fits your spending habits and benefits you the most here.
Depending on the card issuer, rewards earned can be used in a variety of ways, from simply reducing your statement amount, paying for food, or cashing it as a check to getting bonus points and stretching your dollar for choosing gift cards (for instance, a $50 Barnes and Noble gift card may only cost $40.00-45.00 in points from Discover). Even better, many types of rewards points can be redeemed for travel or accommodations at a higher rate than traditional cashback. Chase Ultimate Rewards, for example, is worth up to two-times their base value when transferred to travel partners for free stays or flights. Rewards can allow you to treat yourself to a variety of options, all for free!
Additional Benefits
Another little-discussed benefit of some credit cards comes in the form of purchase protection. Almost all credit card companies offer free $0 fraud liability, meaning if your card is lost or stolen, you aren’t responsible for any changes made by the thieves. This is because, with credit cards, you’re essentially spending the bank’s money initially, and they have a vested interest in preventing and resolving any losses occurring from criminal activity. The same cannot be said for debit cards, bank transfers, or any other typical forms of payment.
Additionally, many cards have extra benefits, including but not limited to: purchase protection (meaning if you purchase something that doesn’t live up to the description given by the seller, you can get a refund); price matching (find a lower price after you paid? Some cards will refund you the difference); free secondary insurance for rental cars, theft and damage protection for a certain period of time; and even cell phone protection (break your screen or drop your iPhone in the toilet within the first year? You might be covered, depending on the card). All of these benefits are often little discussed and vary by card, but they can provide extra benefits that extend far beyond any cashback or rewards. Check the card websites for specific card benefits.
Long Term Financial Effects
By simply opening a credit card, you begin to build both your credit score and credit history, even if you hardly ever use it. Credit scores are distributed by Credit Bureaus, which analyze your financial decisions to provide you with a score that measures your creditworthiness and potential risk when banks and lenders consider your application. This can’t be overstated, as a good credit score and a long credit history is hugely important down the line: with car loans, mortgages, small business loans, you can save thousands of dollars in interest payments and have financial flexibility with a good credit score since those with higher credit scores are often offered lower interest rates and better benefits.
On the other hand, if your credit score is particularly low, doors can close or become exponentially more risky and expensive. It never hurts to start early, and your future self will thank you.
Take Home Points
Overall, credit cards have the potential to add extra value to everyday expenditures, with very little effort on the part of the cardholder. By spending within your means and paying off your card each month, it’s extremely easy to get a kickback from every single purchase without any negative effects. So if you can, get yourself a starter credit card, treat it like you would a debit card, and start building credit. I’d personally recommend Discover’s Student Cashback Card as an excellent beginner’s card. Even if you have no current credit score, they’re likely to accept you. With 1-5% cashback on everything you buy, a $20.00 reward for good grades, and cashback match for your first year (meaning 2-10% back on your purchases effectively), the rewards are some of the best in the industry, especially for a starter card. You can check out the benefits and apply for the student card here. If you have a previous banking relationship with Chase, the Chase Freedom Flex is another excellent starting card, offering similar rewards to Discover’s lineup with some additional benefits and boosted earning rates at restaurants, drug stores, and more. Chase additionally offers a generous sign up bonus of $200 when you spend $500 or more within the first 3 months of card ownership, making it a valuable entry point into the overall Chase credit card ecosystem.
So go ahead, check out the world of credit cards, even if it’s just to dabble. Credit is far from your enemy. If you’re responsible and consistently pay it off (reaping the rewards as you do), it’ll quickly become a dependable friend.
*Any and all offer links provided in this article do not generate revenue for BRB or the author. Offers and card terms are subject to change without notice, depending on the card issuer. Offers current as of 7/31/21. Acceptance for any credit card not guaranteed.