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That college diploma you've just earned signifies you've put in years of diligent study probably filled with cram sessions, all-nighters and more, but your education in how the world works has only just begun. Life off campus comes with a new set of expenses and financial responsibilities: paying for rent and utilities, managing your cellphone bill, and paying for a gym membership, among many other items.
Depending on how you managed your finances as a student, you may be used to paying with a debit card. But in many cases, doing so cheats you out of tangible rewards and—most importantly—the opportunity to build a credit history you'll need for life's most important purchases. Read on to discover why just having a debit card in your wallet won't cut it for life after college.
What's Wrong With Debit?
There's nothing wrong with having and using a debit card. It's a great financial tool that's simple to use and will ensure you never get in over your head with debt. But once your primary expenses stop being pizza and beer on the weekends, the limitations of a debit card quickly become apparent.
Every time you swipe your debit card, you get nothing in return aside from the goods or services you just purchased. Credit cards offer all sorts of rewards, including airline miles, cash back and points that can be redeemed for miles, hotel stays, cash or other goodies such as gift cards. Most importantly, using a credit card gives you an opportunity to build your credit score, a three-digit number that helps lenders, landlords and potential employers decide if you're financially responsible.
There's also the matter of security. Debit cards aren't necessarily risky, but if someone steals and uses your card, the money from your account is gone until you work with the bank's fraud services to resolve the issue. And you could still be liable for some of the money depending on how soon you report it.
If you report the debit card missing or stolen within two business days, you could still be held liable for up to $50. If you dont reportthe card missing until after two business days, you're on the hook for up to $500. And after 60 days, you could be responsible for the entire amount of money stolen. While banks will typically waive some of the smaller fees and will try to prevent these scenarios, the Fair Credit Billing Act gives more protections to credit card holders than debit card holders. Credit card holders can be held liable for up to $50 in fraudulent charges. In practice, though, most credit card issuers have a zero-liability policy—so you may not be liable for a single dime.
Need Credit to Get Credit
One of the most bewildering aspects about applying for a credit card is that you're likely doing so to build credit, but issuers want you to have a credit history before giving you their top-of-the-line cards.Fortunately, plenty of options exist for first-time credit card users looking to build credit.
Secured cards, for instance, work like traditional credit cards, but you'll pay a cash deposit upfront to protect the lender in case you default. These are easier to qualify for than traditional credit cards.
Another option is to become an authorized user on a credit card. Typically you would ask a trustworthy friend or relative with good credit to add you as an authorized user. You won't be legally responsible for paying the bill, but if the primary cardholder exhibits good credit behavior, it will improve your credit, too.
What to Look for in a First Card
First-time credit card users may feel overwhelmed with the options—and not to mention new terms like "APR," "annual fee" and "rewards." Choosing the right card for a beginner may seem scary, but here's a breakdown of the most important factors to help you find a card that fits your needs.
- Annual Fee Many cards, especially those offering the best rewards, charge users a fee every year. The cost of that fee depends on the card, and it can range from around $25 to more than $550. Used responsibly, these cards tend to be worth the fee considering the significant rewards they give, but issuers likely won't give cards with the best rewards to someone with little to no credit history.
- Annual Percentage Rate Commonly abbreviated as "APR," this number tells you the percentage of interest you'll have to pay if you carry a balance on your card from statement to statement. The higher this number is, the more you'll have to pay. Ideally, you'll pay off your balance in full at the end of every month to avoid paying any interest—but stuff happens, so try and get a card with the lowest APR possible. One complication to getting a card with a low APR is that issuers tend to reserve the lowest rates for individuals with a proven record of managing their credit well, which you may not have because of your short-to-nonexistent credit history. Don't get discouraged, and look at the low APR you didn't get today as incentive for building a high credit score.
- Rewards Finally, the good stuff. When trying to select a card that will provide you with the best rewards, think about how you plan to use it. Many cards offer bonuses if you spend a certain amount of money within a set period of time after opening the account. If you know you have some big purchases coming up, take advantage of that fact by selecting a card that will reward your spending.
The article, Why You Need to Graduate from Debit to Credit, originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
