Posted on April 11, 2016 in Advice

How to Use Credit Cards for Good Instead of Evil

Are credit cards “good debt” or “bad debt”?

Conventional wisdom would have you believe the latter, and apparently, most millennials agree. According to a recent Bankrate survey, a whopping 63% of people age 18-29 don’t have a credit card, compared with only 35% of people over 30 who live without plastic.

What’s causing the generational divide? For one thing, the Credit CARD Act of 2009 made it much harder for young people to get credit cards—for example by requiring under-21 years olds to have a co-signer, and keeping credit card companies off college campuses (where they once set up shop to offer gifts in exchange for a signed application).

But the other reason millennials don’t use credit cards is because they think it’s irresponsible. “The idea with a credit card is you’re essentially putting money down that you don’t have,” said one Bankrate survey participant.  Instead, many young people prefer to use a debit card so they aren’t tempted to spend above their means.

And theres the rub.

Unfortunately, this is one of those rare cases where the “responsible” choice can actually backfire on your finances. That’s because using a credit card is one of the easiest ways to build your credit history and credit score—two things you’ll need to, say, buy a house or open a business somewhere along the road.

The truth is, credit cards aren’t good or bad—they’re simply a tool that can be used to to do good or bad things for your financial situation. The trick is learning how to use a credit card to your advantage.

One simple rule

Thinking back to when my wife and I first combined our finances and wanted to start building our credit—how did we use credit cards to accomplish our goal? Like most people, we had credit card debt leftover from college, so we focused on paying it off first. We also followed all the typical advice, like never paying late if we could help it, never missing a payment, and using a rewards card to get free airline miles in exchange for our purchases.

But most importantly, we followed one rule above all else:

We treated our credit card like a debit card.

We used our credit card regularly but tracked every transaction as though it was coming out of our checking account (using a homemade spreadsheet—although today there are tons of online tools that can help with this). Then, we paid it off in full every month.

It was that simple. Not only did this approach quickly increase our credit scores, but the credit card company also raised our limit. That second point was important later on, since it gave us more credit than we needed on a day-to-day basis (even as our expenses grew), and we had a bigger safety net in case something bad happened. It’s much harder to get a line of credit when you’ve lost a job or otherwise fallen on hard times, so it’s important to build it when things are going well.

The case for credit cards

Of course, the strategy I’m proposing takes discipline, which doesn’t come easily to everyone. If you struggle with overspending (as many people do), it’s understandable that you might want to remove the temptation by not applying for a card in the first place. Just remember that avoiding plastic means not establishing your credit history and credit score, which can hurt you somewhere down the line.

Also, most people have to rely on and responsibly use debt at some point in their lives (buying a home is a perfect example). That’s one of the reasons it’s much easier to get a credit card than qualify for a mortgage—credit cards are a good way to build your financial discipline while also building your credit, and the stakes are much lower with a small credit line than with a several hundred thousand dollar loan.

If you’re still concerned about overspending, start by addressing that behavior. Perhaps you need to get a better handle on your budget so you know what you can and can’t spend each month, or maybe you buy things for emotional reasons rather than practical ones. Whatever the cause may be, it’s better to get to the root of it now—because credit card or no credit card, overspending is a habit you’ll need to break if you want to reach your future financial goals.

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