There's a misconception that financially responsible people should avoid credit cards. When used correctly, a credit card can be a wonderful thing.
It's true that being in debt is a bad thing, but the reason why credit cards are often criticized is that first-time borrowers are charged as much as 25% interest on their credit card balance. Paying the minimum payment each month makes it impossible to get out of debt.
As long as you don't go crazy with credit cards, they can seriously pay off in the long run. Here are all of the benefits of having some plastic in your wallet.
1. It builds your credit history
You will need a good credit score to buy a house or get a car loan. Unfortunately, you won't get a credit score unless you borrow money, but many lenders won't lend you any money without a credit score.
To give you a mortgage, banks will want to see at least five years of established credit history, and you are far more likely to be accepted once you hit the 10-year mark. This means that you probably need to get a credit card now to be able to build your credit score high enough to qualify for a mortgage in your 30s.
I turned 18 in the summer of 2007, and it was easy for me to get my first credit card with a part-time job and zero credit score. I used it to purchase my college textbooks, and two years later, when I moved out, I had enough established credit to take out a Target store card to buy the things I needed.
The best option to start building your credit is to get a secured credit card. These cards have an annual fee and require you to give the bank money to hold as collateral.
After using this credit card and paying it off like a normal card for a while, you will have shown the bank that you are responsible and will have built a starting credit score. At this point you can get your deposit money back and apply for a regular credit card.
The goal with these beginner cards is to pay down your balance and move on to bigger and better things.
2. It diversifies your credit
In order to have the best credit score possible, you need to have diversity. Personal loans, credit cards, car loans and mortgages are all placed in different categories of debt.
Borrowing and paying off these different types of debt proves to a bank that you can handle paying back large sums of money while balancing the many different responsibilities of being a homeowner.
Also, if you think your score is going to be fine without a credit card, make sure your monthly payments are actually contributing toward building your credit score! This may sound like common sense to some people, but many young adults were never taught which bills affect their credit score and which ones don't.
If you want a good credit score with diversified debt, your best option is to open a credit card. Having multiple loans and credit cards can be a good thing, but opening too many accounts can cause problems too.
And to build good credit, you should borrow only as much as you can afford to pay back in full every month.
3. It offers purchase protection
If you make all of your purchases with your debit card, your bank will insure you for cases of theft and fraud, but if your items are damaged or missing, you're out of luck. However, credit cards often come with purchase protection.
This means if the item you bought becomes damaged, stolen or lost, you might be able to get back a new version of that item for free.
Not all credit cards offer purchase protection, so make sure to choose a card that does. Also, keep in mind that in order to use this feature, you will need to have the original receipt for the item as well as a police report to prove that your item was, in fact, stolen.
4. You can earn rewards
Rewards credit cards give you travel miles, cash back on specific kinds of purchases or points to use toward merchandise or vacations.
Once you have established your credit for a few years and have a decent income, it's common to be offered rewards credit cards with hefty sign-up bonuses of airline miles, free hotel stays, access to VIP airport lounges, first-class upgrades, cash back and more. Note that the bonuses are truly free only if you pay off your balance in full each month.
5. You'll feel more secure
Unless you have a devil-may-care personality, you may be haunted by big "what if" questions. What if your car breaks down and you can't afford to pay for the repair? What if you dropped your phone down the toilet and it wasn't insured?
There are so many things that can go wrong in life that will quickly drain your savings account. Having a credit card, even if you don't use it, is like having an extra layer of security.
If anything goes wrong, you're going to be OK. If you're independent-minded and you don't like asking your family and friends for money, a credit card will always be there to help you out when you need it.