The Millennials Guide To Using a Credit Card
For many young people, money management can be daunting. They don’t really teach it in schools and in a world where buying property is out of the question and rents are sky high, just making your cash last from month to month can prove difficult.
Credit cards may seem like an unlikely way to help improve the management of your day-to-day finances and help you in the future, but keep an open mind.
Yes, it is easy to get into credit card debt and let your spending run away but by following some simple rules and choosing the right credit card, you can not only improve your budgeting skills but increase your credit rating to put you in a better position for getting accepted for a mortgage or loan in the future.
Always pay off your monthly balance
This cannot be stressed enough. Paying your outstanding debt in full at the end of each month means you will not get hit with interest charges.
Use your credit card as a convenient way to pay for goods without the need for carrying cash around. Do not get into the habit of using it to purchase goods that you cannot afford to pay for at the end of the month.
Why not just use a debit card or pay using my smartphone?
The benefit of using a debit card or via a smartphone linked to your bank is that when you buy something, the money is immediately taken from your account. This ensures you won’t spend more than you have available (assuming you don’t have an overdraft facility).
However, unlike a credit card, using your debit card will not help you build up your credit score. Banks do not report debit card transactions to credit reporting agencies and as such you will not get the benefit of a credit score boost.
Millennials should build up a positive credit history and credit score
One of the main attractions for millennials to use a credit card is that it can really help improve your overall credit score.
Financial institutions such as banks and building societies use your credit score to assess your application for borrowing money such as for a loan or mortgage.
Your credit score is based on your credit history, which essentially is a record of how well you have managed your finances and made repayments on money borrowed, such as a credit card.
Getting a mortgage or loan may not be something you are concerned with right now but building up your credit score will at least put you in a much better position in the future if you decide to purchase a house or buy a car for example.
Making full repayments of your credit card balance on time, every month, will score a positive hit in your credit history record. Doing this shows financial providers that you can manage money properly and gives them confidence when assessing your loan or mortgage application.
You should be mindful that other factors might also influence your credit history and credit score such as mobile phone contracts and utility contracts such as energy bills. Read more about improving your credit score.
Of course, getting a credit card in the first place will mean a check on your credit history by the card company and this brings us to the next point.
Which credit card is best for millennials?
For a lot of young people, getting a credit card can prove difficult due to the fact that they do not have much, if any, credit history and may mean your application is rejected. This might sound like a chicken and egg scenario but there is a solution.
Credit Builder credit cards are designed for people with little or no credit history or who have a poor credit score due to past debts. These cards give you a small line of credit, which is perfect for managing your spending, and your history is recorded with the various credit reference agencies, which will build up your credit score.
The acceptance criteria for a credit builder credit card is usually more relaxed than a regular credit card. However, the APR interest rate is generally a lot higher than a normal card. Again, if you ensure you pay off your balance in full each month, you will not get charged interest.
Over time and by using your credit card wisely and making full repayments each month, your credit score will rise and enable you to apply for other cards with higher credit limits.
If you already have a good credit score then look for the features and benefits offered by the plethora of credit cards available. For example, a rewards credit card might give you discounts on your shopping and a cashback credit card gives you back a percentage of your spend which is credited to your account.
Applying for a credit card
Before applying for any credit card, ensure you have the right criteria to be accepted. Making too many credit card applications may have a negative impact on your credit score and set you back even further.
You can check and keep track of your credit history and credit score through a number of companies offering online tools. Use our list to compare credit score companies.
Some credit card providers may also offer a pre-application check to see if you are suitable for their card. These checks often do not affect your credit score and are a neat way for you to see if you are acceptable before making a full application.