If you are a young person with a very small income, it might seem like a good idea to simply avoid all types of credit. After all, without credit there is no risk of overspending and ending up in a debt trap.
However, because of the way the consumer market works in the United States, staying away from credit cards and other types of credit while young is not necessarily the best choice. Below, you will see a few reasons for why it can be a good idea to obtain a credit card and maybe also – responsibly! – use a few other forms of suitable credit options even if you are a young person on a small income.
In some countries, you will have a great credit score as long as you don’t squander it by paying late, defaulting on loans, filing for bankruptcy, etc. To put it simply, you start out on top. If you don’t use any form of credit, you can’t ruin your credit record. It will remain untarnished and ready for use when you decide that you do want to apply for credit.
This is not the situation in the United States, where a lack of credit history can actually be worse for your perceived creditworthiness than a few late payments. The dominant credit record for consumer credit in the United States is managed by FICO and FICO will take your history of actually using and managing credit into account when your FICO score is calculated. If you have no credit history at all, you will end up with a rather low FICO score, and this can be a problem for you in various situations.
For a young person in the United States, it is therefore a good idea to start using credit early and create a record of responsible credit management.
Examples of situations where a high FICO score can be important:
By managing credit in a responsible way, you can build a credit score that will help you in the future. This doesn’t mean that you should instantly apply for 10 credit cards and pay all your furniture with installments. There are smart and non-costly ways of establishing a high credit score and you can read more about them in our article “Building a high credit score while you’re still young”.
There are quite a lot of businesses that only cater to those willing and able to provide the business with credit card details. You may for instance find it difficult to rent a car without letting the rental agency have your credit card details on file, and the same goes for quite a lot of hotels – both in the United States and abroad. Some hotels will not just require a credit card when you book in advance, they will actually not allow you to check in without a credit card even if you show up in the lobby with cash in hand.
Even if you are a young person with a very small income, you might find yourself in unforeseen circumstances where being able to check into a hotel for a night or rent transportation to get home can be of imperative importance. So, even if your normal life hardly consists of driving around in rented cars or checking into four star hotels, it is still a good idea to make sure that you have the possibility of doing this if you’re ever in a pinch.
Many credit cards come with pretty nice insurance policies. You may for instance get your purchases online insured against fraud, theft and injured goods. Also, make sure to check out the details regarding travel insurance. There are several credit cards that will provide you with complimentary travel insurance if you pay your tickets using the credit card. Car rental is another situation where you can save money by not having to pay for that extra insurance package that the rental place will try to sell you.
Always check the details of your particular credit card to find out exactly what your insurance coverage is.
Many credit cards have a cash back program that will give you a certain percentage back on purchases made using the credit card. Of course, if you do not pay your bill in full each month, the interest you pay will quickly be larger than any cash back. But if you are living within you means and pay the bill in full each time, you will come out on top and the cash back will actually contribute to your economy. In this sense, purchasing with a credit card will be more frugal than making a cash or check purchase.
Make sure to pick a credit card where the cash back program fits your lifestyle. If you have no car, a credit card offering you 2% cash back on gas and 0.5% cash back on all other purchases will probably not be ideal.
Many youngsters are students. If you are one of them, you might want to check out the various credit cards that will reward good grades with various perks.