- Lack of a credit history may exclude people from renting an apartment, getting a cell phone, qualifying for lower insurance premiums and more.
- Opening a credit card account and building credit has many benefits, from fraud protection to rewards programs.
Does the thought of opening your own credit card account make you a little uneasy? You might have heard stories from friends who got carried away and piled up too many charges. Or perhaps you’re a bit wary about the idea of buying on credit as you continue to pay off student-loan debt.
It’s natural to feel this way; avoiding too much debt is smart. And you’re not alone. Two in five young people admit they are concerned about their level of debt, according to credit scoring company FICO’s latest consumer finance trend research. At the same time, your peers also said they need more advice about credit cards—acknowledging that there are downsides to rejecting prudently managed credit.
Paying with plastic doesn’t have to be scary. In fact, using credit wisely is an important part of becoming financially successful. More than just a convenient way to pay, a credit card account also offers some valuable built-in benefits and financial protections. Here are five key features.
1. Build a credit history
A 2016 report by the federal Consumer Financial Protection Bureau (CFPB) shows that people in their 20s and early 30s are more likely to be “credit invisible.” That means they either don’t have a credit history, or possess a very limited one. And that lack often excludes them from making progress in many aspects of life, such as renting an apartment, getting a cell phone, qualifying for lower insurance premiums or avoiding utility deposits.
In fact, using a credit card account responsibly can be one of the quickest ways to help you build a positive credit score. Just pay your credit card charges on time and keep the balance on your card below 30% of available credit (known as the debt utilization ratio). You’ll gain a record over time of responsible borrowing and reliable payment.
All of this will be reflected on your credit report—the financial profile maintained by the three major credit bureaus: Equifax, Experian and TransUnion. Banks, lenders, landlords and even employers often rely on these reports to make decisions on your creditworthiness. Having a strong credit profile, for instance, could mean significant savings on interest in financing larger goals down the road, like a home, a car or an advanced college degree.
You can see how credit scores impact the interest you would pay on a loan with this loan savings calculator.
2. Online shopping safety and fraud protection
When you pay with a credit card online, federal law is on your side. Because of the Fair Credit Billing Act, you can dispute charges under certain circumstances and temporarily withhold payment while the creditor investigates them. On top of that, your liability for unauthorized use of your credit card tops out at $50. And many credit card issuers automatically cut that customer liability to zero.
Debit cards don’t always share such comprehensive protections. All in all, it’s much easier to flag and reverse charges on a credit card than it is to recover money withdrawn from a bank account through fraudulent use of a debit card.
Some cards also provide additional warranty, replacement coverage, expanded return and guaranteed price protection benefits. Let’s say you did your homework to find the best price for your new laptop only to see the price drop one month later. If you paid with a credit card that has a price protection feature (and most major card issuers do), you could get a refund of the price difference. Certain exclusions, claim limits and deadlines may apply, so you’ll have to check your card’s rules.
3. Buyer protection and merchant dispute resolution
Have you ever had buyer’s remorse? You bought that cool mini Bluetooth speaker, only to find that its quality was a lot less than advertised. And now the store won’t take it back. With a credit card as your payment method, you can dispute charges for such unsatisfactory goods or services, and in most cases, seek a “chargeback” (refund) within a certain timeframe.
This added layer of protection takes effect if you made a good faith effort to resolve the dispute with the seller, if the charge is for more than $50 or if you made the purchase in your home state or within 100 miles of your current billing address. Note: Many credit card issuers waive the charge amount and geographic limit.
After you notify your card issuer in writing, the dispute must be resolved within two billing cycles or 90 days, whichever is later.
4. Rewards and cash back
A whopping 83% of credit card users today take advantage of reward programs associated with their cards, notes the American Bankers Association (ABA). Whether you’re shopping for things you buy routinely or saving for that occasional big-ticket item, the rewards essentially add up to free money.
Reward card programs come in several forms. Many allow you to accumulate points along with your purchases that can be redeemed for merchandise, gift cards, travel miles or hotel points. But so-called cash-back rewards cards are a bit more straightforward. They give you cash to spend as you like—for instance, as a credit applied toward your balance or as a rebate toward future purchases. For example, if during the course of a month, you charged $1,000 in purchases, with a 2% back credit card you would have $20 in statement credit.
Note that cards distribute points in different ways, so your best bet is usually to align rewards with your goals, habits and interests. If the bulk of your budget goes toward food and transportation, for instance, you’ll do better with a card that offers cash back at grocery stores and gas stations. On the other hand, if you travel frequently, an airline miles rewards card tied to a carrier that services your local airport may work best.
5. Emergency funding
Having a line of credit available to you through a credit card account can also offer a layer of financial security in the event of high-cost emergency situations. Let’s say your car breaks down or you need unexpected medical care. You’ll gain peace of mind knowing you have access to a secondary source of credit that can be tapped in a pinch—even if it’s just a temporary buffer until money can be moved from your savings.
Emergency funds should not consist solely of credit cards, of course. But a credit card can supplement and support a limited rainy-day fund.
Achieving credit success
As you can see, by leveraging credit appropriately, you can lay the foundation for a positive credit history, gain important buyer protections, potentially earn cash and rewards and shore up your emergency funding—all as you practice smart habits that will help you achieve future financial goals.
And remember that when choosing a credit card, three factors rise to the top, according to the ABA: a low annual percentage rate, a valuable rewards program and no annual fee.
You also can research and compare many current credit card offerings, features and rates at sites like CardRatings.com, CreditCards.com, CreditCardInsider, NerdWallet and WalletHub. And with the free Wallaby app or browser extension, you can see which rewards cards will maximize your returns for different purchases.