If you’re trying to establish credit for the first time, one of the best ways to do so is by getting a credit card. Of course, you’ve probably heard the downsides of credit cards—they can tempt you to overspend then charge you exorbitant interest rates when you do. But the truth is, used the right way, credit cards are the ideal introduction to establishing a good credit history.
To learn more about the upside of credit cards, I spoke with Scott Gamm, personal finance expert and author of the new book, MORE MONEY, PLEASE: The Financial Secrets You Never Learned in School. Scott began the blog HelpSaveMyDollars.com in 2009 to present financial information in clear, easy to understand terms, and since then, he’s appeared everywhere from CNN to Oprah radio, helping people save, budget, invest, and manage their money.
Read on for his advice on using a credit card as a tool for your financial future—and, if you’ve already made some credit mistakes—a few tips getting back on track.
How are credit cards beneficial?
Credit cards are good if you know how to use them. In the book, I talk about thinking about credit cards as a tool to build good credit, not as a way to finance a fancier lifestyle.
The way people get into trouble with credit cards is by not paying the card off in full each month. There are consequences to that: You’ll pay interest charges—rates can be around 25%—and late fees, and keeping a balance on the card is going to drop your FICO score.
It’s an interesting dynamic in that sense: You need a credit card to build up credit, but at the same time you have to know how to keep out of trouble with it, or your credit score is going to suffer.
What should someone wanting to establish credit know before opening a credit card?
You don’t want to open up too many credit cards. Not only will opening too many in a short period of time drop your credit score, you also may be tempted to spend money, since each credit card increases your purchasing power. Plus, from a credit score perspective, there’s really no need to have multiple credit cards. Just start out with one and see how that goes. In a few years, if you want to apply for another one or step up to a card that has a more robust rewards program, you can.
Initially, you should use the card for small purchases—I like to say under $50 a month. That’s a manageable amount of money so that you can certainly pay the bill off in full, but it’s enough to report to the credit bureaus to show that you’re responsible.
What should someone look for when selecting that first credit card?
Look for a card with no annual fee. There is no reason to pay a fee, and there are plenty of credit cards without one. Some cards will have $80 annual fees—some might even have $500 annual fees—but those are likely to be for business travelers who want to have access to airport lounges or other perks. For the rest of us, it’s critical to have a card with no annual fee.
Credit card debt is often a symptom of a larger issue—spending above your means. What is your best budgeting tip for those living on a starter salary?
Save 10% of your income—and automate it. Just transfer that amount of money from your checking account into your savings account each month. This will boost up your savings and force you to make do with less.
Some like to have credit cards available in case of emergency—but those emergencies can also lead to credit card debt. What advice do you have for handling financial emergencies?
You can use your credit card in emergencies, but you’d probably rather have some savings. It’s recommended that you have six to nine months of expenses in an account for emergencies, but at least sock away $1,000. That’s probably not going to be entirely sufficient, but it can buy you time and save you from putting expenses on your card.
How can someone who’s gotten into trouble with credit cards in the past work to pay down that debt and repair his or her credit score?
You want to pay down as much as you can. Paying double the minimum payment, no matter how much of a balance you have, will pay off a card in about two years. But you want to try to pay as much as you can toward your debt.
Start with the card that has the highest interest rate, because that’s the one costing you the most amount of money. Throw all the money you can toward that card, while still paying the minimum payments on your other cards. Once that card’s paid off, take all the money you were paying on that card and throw it at the next card.