Like me, you may have been warned all your life about the perils of plastic. But the truth is that building a good credit history is vital if you ever want a bank loan, cell phone contract or even an apartment lease. The good news is that you can use that credit card to your advantage without giving it a chance to accumulate interest.
Back in the early eighties, I was sent to New York for a month-long training period required by the company I was working for in Puerto Rico. It was my first time in the Big Apple, and I was given a bank check to cover my expenses. That first afternoon I shopped till I was ready to drop, and entered my swanky hotel wanting nothing more than to get into my room and take a hot bath.
So you can imagine my annoyance when I couldn’t gain entry to my room. The reason? I had no credit card on record. My company had only given me a check, and I didn’t own any plastic myself. After two and a half hours, I was apologetically ushered into my room, and it dawned on me just how central a role credit cards had taken in the U.S. It had become routine to verify that hotel guests had sufficient funds to pay their bills merely by swiping a card that granted immediate access to their financial info. Credit cards provided entry, not only to hotel rooms, but to American society. As soon as I returned to Puerto Rico, I naturally signed up for one.
I know I’m not alone in my experience. Many of us were raised to believe cash is the preferred method of payment. But this can dramatically limit your options in terms of what you can buy (ie. online purchases). Getting a credit card, even a store credit card, can prove an important way to build up credit, giving you a credit score that might enable you to take advantage of necessary services like cell phone contracts. Without credit, it’s as if you don’t fully exist in the marketplace, or even as a full-functioning member of society. Similar to a Social Security number, credit is one way to create your own identity.
Why had I waited so long?
Like many of you I’m sure, my parents had instilled in me the dangers of living beyond my means. So even when forced to get a credit card, I was sure to never miss a payment, nor did I make any extravagant purchases with it.
But I’m now seeing a lot of young people falling under the sway of credit card marketing without being careful. Many of my friends, for example, have seen their kids enter college only to become instant targets for credit card providers. Some of these parents simply weren’t exposed to this sort of thing when they were young, so they didn’t know to caution their children about the seductiveness of credit card marketing. The allure for students is understandable. College is often more expensive than anticipated, and student loans and sponsorships don’t always cover costs. So the offer of an extra $500 or $1000 courtesy of a new credit card naturally proves appealing to students. The problem is that what can seem like free money turns out to be anything but.
Building credit, and your reputation, from scratch – without falling into debt
Many major banks offer secured credit cards specifically aimed at people looking to build credit from scratch. You may be required to purchase a Certificate of Deposit, a kind of bank product that you’ll get back after a fixed period (say, two years) along with any accrued interest.* A typical amount could be just $200, which would fund the line of credit in the same amount on your new card.
Once you are issued such a card, it’s a good idea to use it every month, and most importantly, to pay your monthly bill both in full and on time. That way, you’ll slowly build up a good credit rating, allowing you to eventually sign up for that cell phone contract. Paying the minimum means interest will accrue on the unpaid amount.
Though using plastic instead of cash may feel uncomfortable for some of us, borrowing on credit has become an unavoidable way to build a reputation and status in a credit-centered society. Just be smart about it – and raise your children to do the same.
* CDs are intended to be held to maturity and typically have a fixed interest rate. Withdrawals before maturity can be subject to a substantial penalty.