Principles: One Credit Card
This is a highly debated topic in the world of financial education. People will argue both sides to the death. Some will say debt is a great tool that can give you leverage. Others will say it is toxic and should be avoided at all costs.
Excessive debt is a huge burden facing many people today. Between student loans, credit cards and other lines of credit, the average American is facing down just under 93,000 dollars debt. Quite the handicap for anyone trying to achieve financial stability.
It has become normalized to hand out lines of credit to kids barely 18 years old without thoroughly explaining to them the contract they are signing. And we wonder why so many people are dealing with debt problems.
First of all, it is very important to understand that lines of credit are not your money. Credit cards are essentially very short term loans with extremely high interest rates. Interest is the cost to borrow that money, usually expressed as a percentage of the total borrowed.
You are then assigned a credit limit, which is the maximum amount you are allowed to borrow on the account. This is an amount that the lender has deemed safe to risk on you as a borrower and usually still enough to get you into trouble if you use up the whole thing.
While there is a limit assigned to how much you can borrow on a single card, there usually is not a limit to how many cards you can have. Do you see where I'm going with this? So it is easy to understand how people get into holes before they even cross the starting line.
Credit cards tend to build poor spending habits as well. Since using a credit card doesn't actually deplete your bank account when you use it, it doesn't actually feel like your money in the moment. You see something you want but don't really want to spend the money. Oh just throw it on the credit card and worry about it later. Do this 3-4 times a month and next thing you know your budget has gone out the window.
Credit Card Companies will try to sell you on all these fancy reward programs. Points, cash back, exclusive offers, yada yada yada. The reality is though, the rewards require an extremely high amount of points, usually encouraging over spending to get “the points”. The cash back is usually only 1-2%, think of this as like a coupon for 1-2% off on everything you buy, which in our opinion is not worth the hassle of all the other risks. Lastly, you never really find yourself using the exclusive offers because they are still extremely expensive and probably frivolous.
That's not to say it's all bad though. Credit Cards can be useful. However, it can only be so if you understand the game and its rules. The problem is not with debt itself, it is with the culture surrounding the credit industry that essentially walks people into bad decisions.
Everybody has a credit score. A rating assigned to you that grades your quality as a borrower. It is a number that ranges from 300 to 850, the higher the number the better. A lot of factors can affect this number. How many lines of credit you have, paying on time, how much available credit you have vs how much you use, etc. etc. This little number can be very important as it is looked at whenever you want to make major financial moves like take out a mortgage or rent an apartment, buy a car, whatever.
Having a credit card is a great way to steadily build your credit. As long as you do it right. In our opinion, the right way is to have one credit card and that's it. Use it moderately, and pay it off in full every month. If you pay off your balance in full at the end of the month, you won't be charged interest and you still build credit.
Having too many credit cards, however, can be detrimental. You get into a habit of sticking everything you buy onto a different card and can easily lose track of your spending. For every credit card you own; that's a different balance, different interest rate, different payment and different due date.
Limiting yourself to just one card can give you optimal exposure to the benefit of a line of credit, while keeping things manageable and organized.
You don't need several lines of credit to build up a good credit score. It can easily be done with just a single card. In fact, effectively managing one line of credit will do more for you than having several lines and mismanaging just one of them, even if only a few times.
Most people have the perfect amount of recurring expenses to optimize a single card. Think of your regular bills: Phone, car insurance, internet, netflix, spotify, water, electricity, and more depending on who you are. These bills are probably going to land you somewhere in the 300 - 500 a month range, loose figure. Most, if not all of these will also have some sort of auto pay as well. You can set these up on your credit card and just pay off one lump sum at the end of the month, creating a consistent, credit building system.
This is perfect because a line of credit will probably be around 3500 dollars for your average Joe. So you have a bunch of expenses that have to be paid, you can set them up to automatically charge to you credit card so you never miss a payment, then all you have to do is make one payment at the end of the month, which remember, will be interest free since you do not get charged interest for paying off your balance every month.
The other nice thing is that this will typically not come close to maxing out your credit line so you'll stay in a good debt range to be building credit. These are things you were going to be paying for anyways. You can easily budget for them. They also will be a good introduction to creating good habits around credit card use.
Holding only one card simplifies your finances. Your wallet trims down and you only end up carrying 2-3 cards. Your personal debit card, your personal credit card and perhaps a third. Maybe a business account card, a health savings account card, joint debit card with your partner, whatever. But the point is, you streamline your wallet, making it easier to track where your money is going and limiting the ways you can incur more credit card debt.
It builds credit, encourages responsibility, limits excessive spending and over the long term contributes to an overall lifestyle of wealth building.
Now, if you're going to have just one credit card, which one do you pick? Well, it's going to be different for everyone but there are a few things we think you should look for.
- Airline miles. Everyone loves to travel and most people are going to have to travel at some point. As well, airline credit cards usually come with a ton of bonus miles when you sign up. This is probably the most useful and best bang for your buck rewards program on the market.
- Widely Accepted, Zero Forgein Exchange Fees. If you travel or plan on traveling, a good credit card will be widely accepted globally and offer free forgein exchange fees. Preferably Visa or Mastercard. This can be extremely helpful if you run out of local currency or just want to travel light. It's not a benefit used often, but having it when you need it is well worth it.
- Double points items. Every credit card will try to sell you on the items that will earn you “Double Points” But we know the truth, they are just trying to encourage you to spend on stuff you don't need. However, some cards offer double points on purchases that could make sense if you regularly go on a credit card once you build up good habits. We look for things like gas, or groceries. Things that are regular purchases and are things you will always need to be budgeting for anyways. Dining out is NOT one of these. Do not get confused. Gas and groceries are necessities. Going out to dinner is not.
If you can find a card that rolls all these benefits into one, that's probably the best bet you are going to find. People will ask us “But what about the interest rate?” Well, to be honest we don't care about the interest rate because we never plan on paying it. The number one habit is pay it off at the end of the month in full. If you can't create spending habits that allow you to do that then you should not have a credit card.