OT - First Credit Card
Off season. Ignore if you want.
So, trying to figure out my first credit card. Been doing some research and have put together some options, but I wanted to get some feedback because I'm sure several people on the board are/were recently in a similar situation as me.
Recent finished grad school - 2011.
Never had a credit card (only check card).
Beginning year 2 of real-person status.
Have steady job, living comfortably.
Paying well over the minimums on student loans, currently, so I think my credit score would be better than a normal person that's never had a card.
Would pay full balance of card monthly.
The only reason I'm getting one is because it's one of those things you have to do. I'm of the opinion that if I don't have the money to buy something, I have to wait until I do. I'm just looking to build credit. Should I look at a credit card through a gas station? I've read I should ignore the sexy reward programs. Any anecdotes out there? Anyone really like their decision? Anyone really not like their decision?
I've had the Starwood AmEx for years now, and basically haven't paid for a hotel room in a major city in years as a result and get Starwood Gold status based on the amount spent on the card. Since I don't have a car, the car rental insurance part of the AmEx has basically paid for my card fee every year before I even get to the hotel stays and the upgrades I've gotten out of having the Gold status. Actually, since my wife hit something with a Zipcar and the AmEx insurance covered the money we would have otherwise had to pay out of pocket for the repairs, the card really has paid for itself.
But if you don't plan on using the card much and whatever the extras are don't do much for you (be it gas credits, airline miles, the car insurance thing, hotel points, etc), just get something that doesn't have an annual fee. The annual fee is really only worth something if you're getting something out of the card worth more significantly more than the fee.
Personally, I put damn near everything on a card with rewards and pay it off every month. You're buying the stuff anyway, may as well get something out of it. However, if you don't have the discipline to use the credit card exactly as you would a debit card, don't do that.
If you don't have a credit card don't get one. If you do cut it up.
Credit cards, and especially rewards programs, exist for one simple reason and that is to get you to spend more. Even if you pay off every month you will end up spending more than if you paid cash for everything as you go.
Cash has always been King and always will be King.
Save, save and then save some more. The only way to financial freedom and peace of mind is to save and be debt free. Credit scores are meaningless unless you want to incur debt. If you don't have the cash you don't need it!!!!!
Be wise as you are still young.
Take it from a guy who had to turn to Credit Cards to pay for food and clothing while putting myself through college, stay away from them if possible, they are the devil.
If you don't have $10k stashed away in a rainy day fund, get one and lock it in a safe as an emergency only tool. That is the only way I'd consider getting one. Save Save save, and you'll never need one. You'll also feel a lot more free later in life. Instead of being on the debt treadmill.
Living in the 21st century without a credit card is pretty damn inconvenient - you cant even get a hotel room or set up utilities without one, unless you're willing to drop a deposit.
Just be disciplined and treat it like a debit card you need to pay off. At that point the rewards are basically free money you'd be silly not o take. If you're not disciplined enough to do that, not getting a credit card won't save you - you'll find a way pnspend too much either way.
My advice: get a card from whatever bank your direct deposit paychecks go to. Usually you'll be able to pay off your card, and check your balance, from the same website you manage your other accounts. This is really convenient and helps you be a bit more disciplined (at least you won't be surprised by a big statement at the end of the month).
"Even if you pay off every month you will end up spending more than if you paid cash for everything as you go."
This isn't even remotely true. I'd argue it's insane NOT to pay via credit card and get the rewards. If I'm going to get 1-3% back on my purchases because other people are unable to control themselves and run balances, then I'm damn well taking the free money.
Additionally, a credit card is substantially better fraud protection than a debit card. If someone steals your debit card, money gone and the bank shrugs. If someone steals your credit card, well, you just dispute and don't pay, your money isn't gone.
The rest of your advice is reasonable, given that you can avoid debt and credit scores only matter if you want to incur debt. However, you can have the cash, save money, pay via CC, reap the 1-3% cashback, have fraud protection +whatever other card benefits there are (I prefer AMEX for the extended warranties, purchase protection, and travel insurance), without ever running up a balance. Just be smart, that's what matters.
Do you really believe getting your own money back is FREE money?
You are choosing to ignore the science of spending. People who purchase with credit cards spend more than they would if they used cash (not a debit card). The increased spending outweighs the rewards benefits. The main underlying reason for the differences in spending is, at least, partly due to differences in the pain of paying. This is why casinos use chips versus cash at the tables.
Fraud protection? Consumer liability for debt and credit cards is limited to $50 if the fraud is reported, period! It can even be $0 for debit cards if you have the right bank. Fraud protection offered by debit cards versus credit cards is identicle as mandated by law and common practice.
I'd like you to address our concerns with your comment "credit scores are meaningless."
I'll hang up and listen.
This is exactly the point. Debt allows you to leverage your current cash value based on expected future cash value. You spend more because you have more. Your argument ignores the fact that the cash spent is translated into goods and services which have value. It's not like the money is being flushed down the toilet ... though if you let debt get out of control it can. If you're smart about it, debt is a useful tool to grow personal assets. If you're stupid about it, either by spending money on frivolous things or getting ensnared in debt, then it is harmful.
Naturally, there is risk associated with the uncertainty of expected cash value -- so everyone has their own gauge of how much debt is acceptable, based on how much risk they are willing to accept. A position as extreme as yours seems completely unwilling to accept any level of uncertainty, which is unrealistic and I would argue is also harmful due to opportunity loss. It's about striking a good balance, as with all things.
You're right mostly, but credit cards are usually used to purchase items that depreciate rapidly, so credit card debt rarely builds wealth.
On the other hand, a credit card can smooth out your spending over the month since you pay off the card at the end of the month (as opposed to focusing your spending around pay day).
ou are choosing to ignore the science of spending. People who purchase with credit cards spend more than they would if they used cash (not a debit card). The increased spending outweighs the rewards benefits.
This may well apply for some people, but do not assume it's universally true. Many of us have the fiscal discipline to avoid credit-card debt. I've never thought of my credit cards as giving me "free money."
a lot of folks are spending more than they earn with their credit cards and maintaining ongoing balances. From creditcards.com:
- Average credit card debt per household with credit card debt: $15,956 - Calculated by dividing the total revolving debt in the U.S. ($801.0 billion as of December 2011 data, as listed in the Federal Reserve's February 2012 report on consumer credit) by the estimated number of households carrying credit card debt (50.2 million)
- Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)
I'd suggest staying away from credit cards if at all possible. Save, wait for things, use cash. If you must insist, don't get sucked into rewards cards that you need to pay yearly fees for. Note, paying off your balance every month won't help your "credit" score - the credit card companies want you to maintain a balance and pay interest.
You are right in one very BIG way. Using a credit card MOST DEFINITELY increases you spending habits. That is the very reason we bankers encourage businesses to use merchant services. It has a proven 25-30% growth on their average ticket. There is a way around this, however. If you just put fixed bills (i.e. cable, internet and phone) on the card and have it set up for autopay, you can cut the card up and accumulate the points. This take an enormous amount of self-discipline to do (the cutting up of the card) because we all believe we spend the same with cash as with credit. It CAN BE DONE, though, if getting a little bit back and building a credit score (debt score, really) is your primary goal.
Credit scores are meaningless unless you want to incur debt.
Unless you also argue that one shouldn't by a home until they have several hundred thousand in cash lying around, this is pretty brutal advice.
Although I agree with your overall point, a lot of what you said isn't true.
Lots of places require credit cards - hotels, rental cars places, etc. A lot of times they won't accept debit cards, even though most of the time they will. It's also nice to have a back-up for when things happen to your account. My debit card didn't work one day one a business trip for an unknown reason, and if I didn't have a back up card I would have been up shit's creek. If you're responsible, credit cards are fine.
More importantly than that, credit is very important. Do you ever want to buy a house or a car? Or even rent most apartments? You need good credit. Cash is king, but most people who can afford a 30k car don't have 30k in cash lying around to spend on it. More importantly, almost no young people pay cash for their first house.
Not all debt is bad debt. I just bought a house and got a 3.875 interest rate because my wife and I have good credit. I put as little money down as I was allowed to (3.5%) because I could earn more than 3.875% on that money by keeping it. If I had bad credit, I'd either be paying a higher interest rate, be forced to put way more money down (possibly more than I had) or I'd have to rent. I'd also be forced to drive a shitty used car.
I agree that saving is great, and having as little unattached debt as possible is as well. But telling someone that they don't need good credit because they can pay cash for everything for the rest of their life is old-fashioned at best, but really just bad advice. As long as you don't rack up credit card debt you're in good shape.
All debit cards act in the same manner as either the Mastercard or Visa. That's why their logos are on your debit card. You can use them to make reservations just like a credit card. If you have the money to pay the credit card than you have the cash to use the debit card in exactly the same manner.
Why on earth would you borrow $30K to buy a car? Buy a beater car and then when you have saved up enough cash for the $30K car go ahead if thats what you wish. Cars are one of the fastest depreciating assets there are where the car quickly becomes worth much less than the money owed. Why is that a good thing again?
If you don't have a 20% down payment (or more) you don't need and can't afford a house. The foreclosures today aren't the result of people who put down large down payments. It's those who relied on their "Credit Rating" and borrowed with little or nothing down and then values declined.
I didn't buy my first house until I was 39 because I didn't have the money to put down a large down payment. 15 years later I have no mortgage because I focused more on paying off the mortgage early than earning rewards points.
It's not rocket science folks.
I bought a 30k car because (other than "I can afford it") I have a young son and I want him to have a safe and reliable car that can transport all of his big things. Because VW pays for my maintenance for 3 years and because my son cries less when he can watch a DVD on long-ish car rides (which happen all the time in LA traffic). Do I need all of those? No, but we have good jobs and it makes life easier. Because my credit is good, I pay 1.25% on my brand new minivan, which is almost free. If I didn't care about my credit like you, I'd have to take 30k out of something making far more than 1.25% which would be a poor investment on my part.
Also - with bad credit you can't buy a house nowadays even with 20% down. Just because you made the decision to rent until you were 39 doesn't mean it's a good idea, I bought a home at 27 and will have my payment locked in until I move. That's a good financial decision for me and it woudln't have been possible without good credit.
If you had a good mortgage rate and focused more on putting money into accounts making more interest than you were paying on your mortgage, you'd have more money than you have today. Paying off low-interest debt is not always the best financial decision for an individual.
Explain to me again how putting little or nothing down is better than having a smaller mortgage or no mortgage payment at all? If you had bought your house five years ago you would be somewhere between 20-50% underwater, oh yea but you would still be getting more interest on the money you didn't put down. The point is no one has a crystal ball and a conservative approach to managing ones finances is always the best approach.
A wise man once said "In life live like no one else so later on in life you can live like no one else".
Having employed this logic I'm going fishing tomorrow, then the next day and the next day after that. Not becuase I'm rich but because I don't owe anybody anything and I can now live my life on my terms and not the terms of a loan or credit agreement.
If anyone out there thinks debt is the way to financial freedom best of luck to you.
Look - I'm not telling you that your way is wrong. It's fine for some people. But you're saying that my way isn't smart. Just because something is of higher risk doesn't mean it isn't smart. Do you think people should shove money under their mattress instead of putting into their 401k or IRA? Because you can lose money when investing in the market - so why risk it, right?
Let's say you want to buy a house for 400k (which I just did - trust me, that's not a lot in California). To put 20% down you need $80,000, liquid, plus the reserves you need to qualify for the loan, and anything else you need for moving expenses, upgrades, whatever. A lot of people don't have 100k or so in the bank to make that happen. Because I have good credit, my mortgage payment isn't any higher than the rent I was paying for a smaller place before I purchased, so I'm saving money on a monthly basis without needing to shell out big dollars.
And I'll never overpay on my mortgage because I can make more long term money by putting that same overpayment into my retirement account or college savings account than I'd be saving by overpaying my mortgage.
Try this. We each have $5k per year of purely expendable income. I take out a small loan to buy a fishing boat. Instead of spending $20k up front, I spend $5k per year for five years. I pay more for the boat, but I also get five years of fishing. You spend four years saving your $5k and pay for an equivalent boat in cash. You lose out on four years of fishing. That has value. Talk amongst yourselves.
Similarly (from a purely financial perspective), we both have 20K in cash, and we both need a 20k car. You pay for your car in cash and have no car payment, while I put nothing down and finance 20k at 1.25% (because I have good credit) for 5 years and invest my 20K making 5% over the same period. Who's in better shape 5 years later?
Sometimes having debt is good.
And on a house, there's an even bigger cost to saving up a huge pile of cash before you buy, since you have to live somewhere - and living in a crappy house in a crappy neighborhood to save a few bucks is a much bigger drag on your quality of life than buying a used car.
There are online calculators for this - the "break even" time for buying vs. renting is usually only a few years. So you're carrying risk that you lose your job or whatever and have to move before you break even, but you don't have to carry the risk very long and after that it's all profit, unless you get unlucky and hit the once in a couple generations downturn like 2008 (but then again if you bought in the early 2000s you're still even, not underwater). And unless you're stuffing your savings under a mattress (or a currently very low-yield account), your savings are carrying some risk too - and probably more risk (or at least more volatility) than your home equity.
I've lived for years without a credit card, using a debit card for everything I need a credit card for without issue. The only "catch" is that I have to have the money in the bank--that's a pretty good catch.
I disagree that someone who doesn't have 20% can't afford a house--the key is knowing one's limits. I've known a number of people who had plenty of equity in their homes that lost them anyway due to the bad economy (doesn't matter how wise you are with money, if you can't find a job for two years because unemployment in Southeastern Michigan is close to 20%, you can't pay your house payment). Others can afford a house with less of a downpayment if they get an intelligent mortgage that has a fixed rate and payments they can afford. In fact, it's more affordable than renting.
But there's nothing wrong with being smart and saving up, either.
Home ownership is smart if done right
If you're starting out and haven't had a card before and plan to pay the balance each month, then I would probably go with an American Express card - they have a few which are excellent for managing charges closely (their statements are helpful for it too) and as other mentioned, you can get into industry or interest specific rewards programs. When I was just getting into having credit cards, American Express made it pretty easy and a little less daunting.
If you get to a point where you're comfortable managing a reasonable balance some months, I would look into the Amazon Visa. The rewards are nice, particularly if you frequent Amazon.com. My wife has a Citi card and collects point which we periodically redeem in the form of gift cards and discounts on travel too, so if you have interests that do cost a little money (like my Amazon addiction), there are definitely cards out there which are worthwhile and, in the long term, will help you save money in small ways as well. You can definitely make it work for you with careful management.
If you are a Costco member or have any desire to become one, I would highly recommend the American Express Costco Card.
There is no annual fee other than your $50 Costco membership and it gives very nice rewards. I currently get 3% on gas, 2% on travel and restaurants, and 1% on everything else.
Also, you get 90 days of accidental damage protection on almost all major electronic purchases and they extend the manufacturers warranty up to an extra year.
Lastly, their customer service is second to none. Just my two cents.
Put your card on autopay. Best way to make sure you pay the balance due each month and avoid interest. Easy for real mail to get lost in junk mail.
I'm happy with Citi Mastercard. They hook in with a rewards program called Thank You Network.
Watch for credit card offers like 20K miles if you spend a grand in first 3 months. Hard to top those.
I'm told Capital One is best for overseas travel. No currency exchange fees.
Not everybody takes American Express.
Put it on autopay.
Capital One is the best for foreign travel IMO. No exchange fees and the cards are relatively easy to get. If you want to travel abroad, I'd highly recommend any CapOne card, specifically the Cash Rewards card. 1% back on everything. I believe they are linked with MasterCard, which is accepted pretty much everywhere.
I used credit cards to destroy my credit while a student at Michigan and had to work very hard to restore it. I made very poor decisions at that time. Now, 20 years later, I have a credit score over 800, no debt other than a mortgage and a nice chunk of change in savings. Anyway, the high credit score is not hard to attain. You just have to be responsible and diligent.
Currently, I use my Amazon rewards card for everything: food, gas, shopping, etc. I pay it off every week and try to have a balance of zero when my statement hits. I also have a number of other cards that I only use to keep them active: Amex, Visas from several major banks, a couple of store cards.
Here are some tips that might help you build credit:
- Visa and Amex cards from major banks (and probably Discover) have a bigger impact on your score than store cards.
- Never carry a balance.
- Never charge anything you cannot afford to buy with cash.
- Having credit from a variety of sources (car loan, mortgage, credit cards) can improve your score.
- Keeping accounts open for decades helps your score.
- Getting a number of accounts, then closing them will hurt your score.
Good luck and be responsible.
... no.
If you are trying to track your credit score, https://www.creditkarma.com/ can help a lot. They use a formula similar to the major credit buroughs to give you an estimate of your credit score, and a way to easily track the changes from month to month. There are also a lot of other tools for budgeting and managing loan debt.
I similarly waited until I established myself as a contributing member of society to finally get a credit card. However, I (luckily, as I'm finding out from my newly wedded wife) escaped student loans, so I had literally zero things on my credit report. What I did was go to my bank (PNC, since I'm in Pittsburgh and PNC branches/ATMs are literally everywhere) and talk over with one of the personal finance people. I discussed my situation and the fairly substantial cash flow and savings with the bank, as I had been working at a pretty good engineering job for about 2 and a half years with almost no expenditures outside of rent/utilities. I ended up getting approved (with a $500 limit and 24.99% APR because of my lack of credit) for a PNC Points (VISA Points, essentially) credit card which I have paid off without any interest payments ever since. Because it builds points at 4 points per dollar plus bonus points (something like 25% of the points I accrue a month get doubled), and I use it basically anytime I need to pay for something, I've been able to cash in for probably $2000 in Amazon gift cards in the past 3 years. So my whole basement theater system was basically free.
Plus, since I pay it off regularly, my credit limit is now $10k and my APR is down to a more reasonable 15.99%. So it certainly has paid off to use it a lot and pay it off on time.
I'd say the #1 thing to remember in the future is to keep no more than two cards. Most people who get into serious trouble managing credit cards have more than that.
You seem to already understand the "don't live beyond your means" principle, so just keep in mind that it is not quite as easy to do as some of the posts in this thread make out. As others have said, the are things in life that even people with jobs need good credit to buy without getting screwed -- houses and cars, mainly. But if you find yourself thinking of putting something big on a credit card, thinking you are going to pay it off in a few months, or even a year -- step back and look in a mirror. Those things you see protruding from your ribs are the hooks they've got in you.
But since you're not really asking for sagely life advice, I'll also answer your question -- we keep a basic American Express card and a Visa card from a local credit union. Our mortgage and auto loan are both through Chase, where we also maintain our bank accounts. But I don't feel any loyalty toward them when it comes to the Visa card. I don't give a damn about rewards, miles, and all that -- I want a low interest rate on the Visa card so if I need it for some emergency situation for which I don't have the cash (and such responsibilities do crop up in life), I can float the balance for a while without too much angst until I get it paid off.
Good advice on limiting the number of cards. My wife keeps getting new ones that stores promote upon check out, with promos like "$40.00 off first purchase of over $200.00." We have had two cards that we've used for years (and pay off) every month, and 3 or 4 others that she uses so sporadically that I've missed payments on them because I'm not looking out for them and they get buried with the junk mail.
Yeah - store cards are almost always a terrible idea.
Exception - buying a big purchase from a place like Best Buy when the offer no interest for 12 or 18 months. Just make sure you pay it off before the no interest period ends. If you do - it's free money for a short period of time. Buying a $1000 TV over even 3 or 4 months is a lot easier than doing it all at once.
Get one with a sweet Michigan logo or something cool on it, so you feel like a badass whipping it out in public
If you're only signing up for one card, get a Visa or Mastercard - those are accepted everywhere. I also have a Discover, which I use as often as I can when I charge (for the cashback bonus) but it's not accepted in as many places, so my Visa is kind of my "safety" card.
I now have three credit cards with a total limit of $35k... I charge everything to my cards (to get the cash back rewards) and pay everything off at the end of the month to about $100 on each card, so every month I'm typically using only $300 of my $35k available.
My advice - use your cards, a lot. Pay them off almost every month (leaving a small balance helps your credit score and shows that you are able to manage.) Keep your debt to credit ratio low - below 25 percent. That will help.
I left college with a 500 credit score, now I am near 800 and get the best rates, offers etc.
Ok, so here's the scoop from an insider. I work in the banking industry. You should always look for the best spending to rewards ratio. I take advantage whenever it's possible. The banks count on people screwing up, so people who take care of their finances can cash in. There are a few really good offers out there on a regular basis, but probably the most lucrative is the Chase Ink Cash for Business. Yes, I know, you may not have a business. Believe me, it doesn't matter. The card is offering a $250 bonus if you're willing to spend $5k in the first 3 months ($100 if not) @ 0% for an introductory term of 12 billing cycles. After that, the real bonus is that the card pays the best on things like cell-phone, cable and internet-service provider purchases. If you're just looking to build credit, put those things on the card and set up autopay to ensure you never pay interest. You'll get 5% cash back on the card up to $25k/year in those categories. I personally don't like using credit cards as they are a very easy way to justify purchases you should just save for, but it sounds like you already have your bases covered in that area. If you can control your spending, this is one of the best cards out there for pure cash back. Oh, and it has no annual fee. Anyway, just my two cents. I've used pretty much everyone out there except AMEX and Chase (while an evil empire), definitely produces the best "cash-back" type cards.