But first, let learn the basic: what is credit card, how to get one, and how to build credit score? If you take nothing else away from this post, then just remember this: start using credit card as early as you can. I. WHY USE CREDIT CARD?
In simple terms, credit card is something that allows you to borrow money from banks on a regular basis (i.e. every day). Credit means trust, trust that you build with the financial institutions. Banks lend you money based on the premise that you will return the money to them later. Now you ask, why not just use the money I have in the bank (through debit cards), why having to borrow money through credit cards? There are a lot of reasons, and I will name the 3 most important ones in my opinion: 1. Safety: when you use a debit card to make a purchase, the money from your checking account is gone right away. Whereas when you use a credit card, even though it’s true that the credit card issuer (the bank) makes the payment for you right away, it’s technically not the money you own in your checking account that is gone. Why is this important? Say, if a thief uses your credit card to spend, you can notify the credit card company of the fraud and don’t pay for the transactions you didn't make while the bank resolves the matter. Similarly, if you pay a vendor for a service or good and later on find out that the service is rather not fulfilling what it has promised, then you can also dispute with the credit card company and they will withhold the fund while settling with the vendor. 2. Building credit: as mentioned earlier, credit is trust and the level of which is expressed through a score called credit score. Credit score ranges from 300-850, with 720 or above being generally considered excellent. Your credit score is recorded by 3 main credit bureaus (Experian, Equifax, TransUnion). Not only banks but other lenders will also be interested in knowing your score when they decide whether to lend you something and the interest rate. For example, whenever you rent an apartment, lease a car, buy a house, apply for a new credit card, they all will look into your credit score by making a request to the credit bureaus (by the way, this is hard inquiry). The bottom line is: try to maintain a good if not excellent credit score. 3. Credit card benefits: credit cards have many benefits that debit cards don’t have. For example, you may get a sign-on bonus (aka free money) when you get a new credit card. Afterward, you build up reward points from using the credit card. These reward points can be used to pay for flights, hotels, shop online, or even return cash back to you. This is one of my main reasons for using credit cards and I have been able to travel many times for free or shop on Amazon using the reward points I have. Another big benefit of most credit cards is insurance, which a lot of people don’t know about. Credit cards usually offer rental car insurance, travel insurance or product warranties when you pay using these credit cards. Lastly, credit cards that bank develop with other businesses, for example airline credit cards, or hotel credit cards, also offer very nice benefits. Airline credit cards may offer free upgrade to business class, first checked bag free, priority board, etc. Hotel credit cards may offer a few nights of stay for free every year. I will explain more about how to maximize and take advantage of all these benefits later, but let’s cover the second basic first: how to apply for a credit card and which one to apply? II. APPLY FOR CREDIT CARD When choosing a credit card, these are the ones that I recommend:
I categorize 3 different levels based on: how many credit score you have currently, how well have you been managing your money (i.e. paying bills on time), how much you can and want to make out of using a credit card (if you spend a lot of money or travel a lot then a more expensive card that offers more benefits may be worth it). In general, I recommend to start using credit card as soon as you can, ideally right when you start college (I didn’t do that because I didn’t know about credit cards). In case you haven’t had a credit card before, it’s likely the only option for you are secured card or student card. These cards don’t have fancy benefits because they intend to help starters establish credit score. After you have a good history and score, then you can apply for fancier cards. Each of these credit cards have different benefits, for example: Discover it offers 5% cash back, meaning that if you spend $100, you can get $5 back, however there is a limit to how much in total you can get back. Chase freedom unlimited offers unlimited 1.5% cash back, and a $150 bonus after you spend $500 in the first 3 months of opening the card. Chase Sapphire Reserve has so many benefits that I can’t even list them all, but in my opinion, this is the best credit card in the market, and if you travel a lot, definitely get this one.
Now, a tip to help you applying for credit cards successfully: I’ve learned that when you apply online, there’s a higher chance of getting rejected, either because they don’t trust the information you provide, especially if your credit score is low. I recommend going to a bank and meet with a banker in person. It makes you look more real and sincere. Try to make them like you: ask them about their job, their family, their weekend, etc. If they like you, they’ll more likely approve. After you successfully get a credit card, here are 2 important numbers you need to know: 1. Annual fee. Most cards have an annual fee. Some don’t charge a fee the first year but start in the second year. Generally, the more benefits a card offers, the higher fee it charges. For example, Chase Sapphire Reserve (the best one) has an annual fee of $450. This is a lot! BUT, there’s a trick. Remember this card offers a $300 travel credit? That technically reduces the annual fee down to $150/year. Another trick I recommend is to use this card with another person (someone you trust). In this case, one person applies for the card and be the main holder, then add the other person as an authorized user. When adding an authorized user, there is an additional annual fee of $75, so the total fee for 2 people is $225 or $112.5/person, cheaper than $150/person. If you still think it’s expensive, you can get Chase Sapphire Preferred, a very good alternative. Both of these cards have no international transaction fees, and the physical cards feel very premium when you hold them on your hands. 2. APR: what is APR - annual percentage rate? This is basically how the credit card companies make money besides charging you the annual fee. The credit card companies lend you money and they are saying that if you don’t pay back what you owe by the due date, then they will charge an interest (usually pretty high, as high as 30%) on the amount you still owe them. Good thing is you can avoid this APR if you pay off your card’s balance (balance = how much you have spent or how much you currently owe them) completely before the due date. Cards usually have an option of minimum payment. Use this option when you can’t afford to pay off everything. For example, let’s say your balance is $1,000 and the minimum payment is $500. You can only afford $400, then the remaining $600 will carry over to the next payment period and they will charge an interest on this $600 (they don’t tell you but that’s how they make money). Worse, since you can’t even pay the minimum requirement before the due date, there will also be a late fee (usually $20-$40). If you pay $500 before due date, there’s no late fee, but there is still an interest on the $500 carry over. In a nutshell, to avoid late fee, pay at least minimum requirement or better, pay full amount before the due date. To avoid APR, pay full amount before the due date. III. BUILD GOOD CREDIT SCORE To build a good and excellent credit score, remember these 2 rules: 1. Utilization: my rule of thumb is not to use over 30% of your credit line. 2. Pay off full amount every time Credit line is the max you can spend on your credit card. If your credit line is $10,000, it’s good to not spend over $3,000 a month (utilization of 30%). If you need to spend more than $3,000, pay off that $3,000 first, then continue using the card. A lot of people don’t know, but you can increase your credit line by asking the bank. You can do it by applying on the bank portal, but again, I recommend meeting with a banker in person or talking to them on the phone. Monitor your credit score closely. All banks allow you to see your credit score report for fee and as many times as you wish on their banking portal (these are called soft inquiry). I like to use Credit Karma (https://www.creditkarma.com/) to check my credit score. If your credit score is lowered for some reasons you don’t agree with, send your disputes to https://www.consumerfinance.gov/ so they can fix your credit score. Comments are closed.
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