Two-thirds of the Millennials in this country have rejected the notion of owning a credit card. Over a third have never even owned one in their life. It seems that credit card use does not appear to be very important to the Gen Y set.
Yet, the reality is that it could be harmful to their financial future in the long run. Many of them have a negative opinion of credit cards for whatever reason. Thus, it is doing damage that can be tough to repair and overcome for years.
It is not all that surprising. That is because many of them came of age during one of the largest and most impactful recessions this country has seen in years. They had to contend with an extremely tough job market. The idea of borrowing money in that fiscal climate soured them on applying for a credit card.
Many could still be having issues finding work. They do not like having one more bill to pay each month hanging over their heads. It probably made a debit card a smarter and more attractive way of managing their money. As a result, millennials are risk averse when it comes to anything concerning their finances.
Though, without a credit card, it is almost impossible to determine an accurate credit score. This is a vital necessity for getting a loan, buying a home, even renting an apartment. There are so many Millennials caught in a Catch-22, where their credit history is concerned.
It is no secret that the higher your credit score, the more advantages you are given. The less you will have to spend on interest payments in order to borrow money. This is why it is so crucial to get started on building your credit early.
There is a reason for that. The protocols that determine your score concentrate on how long you have had your active accounts. It also depends on the behaviors you have shown with regard to paying your bills on time.
Credit can be a confusing topic. Many Millennials avoid it altogether. That is because there are other, less complicated and perplexing options out there. After all, Millennials are more likely to be cord-cutters.
They choose to live with their parents. They also rely on ride-sharing over owning their own automobile. Simply put, they would rather save money. They prefer to avoid the hassle they find inherent with the traditional methods of living, as their parents embraced at the same age.
Does this sound like you? If so, it does not mean you need to avoid getting a credit card. In fact, many of the major credit card issuers and networks are making strides to fit in with the lifestyles of today’s Millennials.
Growing up in tough economic times has made many 18-35-year-olds wary of taking on debt of any kind. Credit cards are one of the quickest ways to get mired in that financial trap.
That is why we have created this guide to choosing the best credit card. It is a way to debunk some of the most common myths surrounding credit cards. It separates fact from fiction about credit card use. We are also going to talk about steps to take. They will help in picking the credit card that is right for you and your particular financial situation.
It highlights many of the perks and advantages that come with many of the most popular cards on the market. One of the biggest mistakes millennials make with credit cards is selecting the wrong one from the get-go. We are going to help you avoid that entirely and. Even better perhaps, we will give you some hints on how to earn rewards for using a credit card.
A Quick Primer on Credit Cards
You need to find the best credit card for you. Thus, it is important to know just how they work and what is expected of you as a cardholder. Credit cards are basically a method of loaning money instantly. Each time you swipe your card at checkout you are borrowing from your card issuer to pay for that transaction.
It may be a $2.00 cup of coffee or a $200 dinner at a fine restaurant, but either way, you are paying for those items through borrowed funds. Your credit card statement arrives after your billing period has ended. Thus, your balance is the amount you owe your card issuer for your combined purchases.
Now it is up to you repay those loans by the determined due date on the bill. If you are able to pay it off in full you will not incur any interest charges. If you don’t pay the balance in full, you will be charged interest at rates that can be as low as around 13% and as high as 29%. It is based on a variety of factors. These include the current market rates and your credit score.
That interest is going to end up increasing the amount you have paid for everything on your balance. That includes that cheap cup of coffee and that expensive dinner. Let’s say the additional money accruing every month that isn’t paid-in-full. That is how the credit card company makes money.
You will receive your credit card statement each month. Many cards will offer you the opportunity to send in a minimum payment. Maybe it is just $15 or $25. It is easy enough to pay, right? But do not fall for it. You are only asking for trouble if you pay the minimum while running up an ever-increasing balance.
Always try to pay in full every time, because that is how you really save money. Paying off a small fraction of what you owe is only going to increase how much you owe. It will not actually bring your balance down. This way you can enjoy the convenience of owning a card. Plus, you will not be paying more for the items you purchased with the card.
As you use your credit card, you are going to build a credit history. It is based on how responsible you are (or are not) with spending and paying off the credit card bill. Your credit score is determined as a number between 300 and 850. That score is used as a representation of the risk that comes with approving you for a loan or an apartment.
There is a method to how your score is decided. It is determined by the age of your active accounts and your payment history. Additionally, it includes any further inquiries for new credit accounts.
Plus, your credit utilization ratio is taken into account when scoring your credit report. Most of those factors are self-explanatory. However, credit utilization may require some definition.
Credit Utilization Ratio
This is a comparison between how much available credit you have and the amount that have used. In other words, your score takes into account how close you come to your credit limit each month. Using a majority of your available credit is seen as negative behavior. It can lower your score considerably.
Therefore, this is why you need to keep this ratio in mind as you spend. That is because it can have a big impact whether or not you pay on time. This ratio is determined based on all of your available credit.
Thus, it can be affected by how many open accounts you have at any one time. This is also why closing down a credit card can dramatically lower your score. That is because it reduces the amount of available credit you have. Thusly, it will adjust your ratio in a negative direction.
Most credit experts suggest you keep your ratio at around 30%. Therefore, if your credit limit is $1000, you should not spend more than $300 at any given time. Let us say that you pay it all down at once.
In that case, you will not have as much of a concern versus carrying a balance from month to month. Perhaps you carry a balance. Then, you really want to make sure it is hovering around that recommended 30%. That is regardless of your credit limit.
Credit utilization ratios and time are the two most important components for building a good credit score. That is why it is important to explore the best credit cards for recent college grads. That is so they can get started early on devoting that time toward increasing their scores.
The most trustworthy consumers can show potential lenders lengthy and positive credit histories. This makes them more likely to gain that all-important approval. This can come from the banks and lenders when it is time to apply for a car loan or a home loan. College graduates are about to step into the real world. They usually have little to no credit history. Therefore, getting a card after they graduate is a smart move.
Selecting the Best Card
In order to pick the card that is best for you, it is time to do a little thinking about your spending habits. That includes what you spend your money on the most. It also depends upon how much of it that you allocate toward those purchases and transactions.
Next, consider if you are the type of consumer who prefers to pay their bill in full. Conversely, maybe you are someone who anticipates carrying a balance on their card. Finally, how does your credit look at the moment?
If you are just starting out, you may have very little in the way of credit history. Your score may be low. That is because you are looking to own your first card. Conversely, it could be low because you have had some financial issues in your past. Hence, you are trying to rebuild.
Now, you have made this all-important self-assessment about who you are and how you spend. It is time to start doing some comparison shopping for the best credit card. Are you who have challenged credit scores because of poor behavior in your past? If so, you may find your options limited.
That is because your scores may be too low for some cards. Perhaps you are starting out fresh. There is one important factor to consider as you compare choices. It is the rewards you can earn when you use your card.
This area is where reflecting on the type of consumer you come in handy. There are so many ways to earn various different types of rewards from all of the cards on the market. Thus, finding the one that fits in with your particular spending habits is going to benefit you most.
Do you spend a good majority of your time in the car? In that case, a card that rewards you for purchases made at gas stations might be just what you are seeking. That is due to the fact that it could save you money on those transactions.
Are you a frequent traveler? Do you fly from one end of the country to another or even overseas? You may want a travel rewards card. With these cards, you can earn points or miles for every purchase and transaction you make on airline tickets and hotel rooms. When those add up, you could qualify for a free plane ticket or hotel stay.
All of these cards also come with a wealth of additional perks and advantages. These include discounts and concierge service. They even may offer early access to concert and sporting event tickets before they go on sale to the general public.
The way you can earn is based on your spend. The more of your purchases you put on the card, the more rewards you can accrue. Based on the type of card you have, that could be in the form of cash back, points, or miles.
All of these earnings have some form of cash value. They can be used to save on your transactions and/or applied to making future purchases. Some of these programs also let you redeem your rewards as credit toward your statement. It all depends on the card for which you apply and the type of program it offers. Of course, you are going to do all of your homework about that program before you apply.
Yet, there are also other ways to earn. These could also play a role in your decision-making process. Almost all rewards card have sign-up bonuses. With these, you can get a big lump sum reward upon opening your account. Then, you must spend a predetermined amount on the card in a preset time period. This is typically the initial three months of the card being active.
The card companies and banks know that Millennials do not always have sturdy and lengthy credit histories. Thus, they offer certain cards that are tailor-made for those who are working to build a credit history. These so-called entry cards come with low criteria for approval. Additionally, they do not often provide a lot of rewards opportunities.
They tend to focus on the sign-up bonus as a way to attract prospective new clientele. Many of them are willing to give you money as a reward. Plus, some will even pay you annually if you keep the card active. They may pay more than the minimum payments each month.
This is a way to get you started on the road to responsible credit use. Additionally, you will make a little money doing it too. There is certainly nothing wrong with free money while you work to establish yourself with the major credit reporting bureaus.
You need to get into the habit of spending responsibly and paying your bill faithfully. Then, you will get a high credit score for your dedication. Then, you can graduate to a card that has more rewards potential.
Many cards will be available to you once your score is in the good to excellent range. They will have the best rewards programs. These are the options that reward you in points and miles for each dollar spent. They also have the generous sign-up bonus options. They offer more perks. These include introductory 0% APR’s for 12-24 months. That way, you can save money on interest.
You will not pay anything on your balance for purchases or balance transfers. The savings can be pretty substantial. The redemption values on your rewards can also vary based on how you redeem them within your program. These cards have increased incentives and generous redemption options. Thus, they are going to require high credit scores in order to gain approval from the issuer.
The sign-up bonuses are often significantly more lucrative. However, they also require you to spend more within that initial 90 day period of card ownership. Be sure to think carefully whether a card like this is really worth your time.
That is because some of them only get you those bonuses and rewards when you spend a lot annually. Let us say that your financial situation can’t support higher spending routines. In that case, you should be extra careful about researching how you can earn rewards. You need to understand what your minimums will be for redeeming them on your terms.
There is another thing to keep in mind with the higher-value rewards cards. It is the annual fees that often come with them. Most cards waive the annual fee for the first year. That is another way to entice new members into joining. However, after that introductory year, it changes. You could be paying anywhere from $49 to $99 a year just to own the card.
Some cards come with a significantly higher annual fee around $495 or more. Many of these are business traveler rewards cards. That is before you pay your APR or other fees for things like foreign transactions and balance transfers. Despite needing a high credit score for these cards, that fee is still imposed. It has nothing to do with your creditworthiness.
The last form of rewards program is that in which you can get cash back on your spend. You are rewarded in the form of a percentage of the money you spend during every billing cycle. That can be anywhere from 1% to 6%. It is based on the card and the form of purchase you make. This is money is returned to you via check, direct deposit, or in the form of a credit toward paying down your balance.
The form of reward you choose should reflect how you spend and how much. Many programs come with varied earning levels. They are based on the types of purchases you make with a higher percentage.
They may offer an increased level of points for a certain category. Sometimes those categories can rotate every three months. Therefore, the rewards you can earn will change. That can be a hassle for some consumers. That is particularly true for the ones whose spending habits are mostly staid and consistent.
Remember, do not try to shoehorn your spending routines into a card’s reward program. Do your homework to identify the program that fits your habits and expectations instead.
Our Final Thoughts
The best decisions related to finance for millennials should be made only after you know all the facts. Hopefully, this guide has shed some light on those facts. Thus, now you can do your due diligence with confidence. However, keep in mind, before you apply for that card be sure it is the one you really want.
Multiple credit inquiries can actually lower your credit score. Therefore, it is best to refrain from hammering the banks and credit card companies. Do not complete one application after the next. You may be denied for a credit card simply because of the number of applications you’ve submitted in a short time. Thus, be very careful about submitting the next application too soon.
Be sure the card you are using will also report to the credit bureaus. You want your responsible use to help you build your credit. Therefore, anything less than that is a waste of your time. Above all, be sure you pay your credit card bill on time, every time.
If you are going to carry a balance, be aware of your credit utilization ratio. Keep it at the recommended 30%. If you go over that ratio, bring it down as quickly as you can. That goes for owning one card or many of them.
Finally, do not commit a millennial tax mistake. Do not use a credit card to pay off what you owe when tax time comes around. You will end up paying more than what you owe in “convenience fees” that can range anywhere from 1.87% to 2.25%. And that is on top of what you may end up paying in interest if you maintain a balance past the due date.