What You Need To Know About Credit Cards

My first credit card — and my fraught relationship with it —  sparked my interest in personal finance. I was resistant to using a credit card in the first place: I didn’t want to go into debt to build credit. My very first card, which I got after moving to New York, had a $300 limit, which I used to float myself between paychecks. 

The card made me mad. I didn’t like using it, but I needed to because I wasn’t great at budgeting and I wasn’t making a lot of money. So I started doing research and began reading a ton about personal finance. A year or so later, She Spends was born. 

I haven’t covered credit cards in the newsletter since the early days, so I thought it would be cool to revisit the topic. This piece covers the history and importance of credit cards, as well as how to sign up for one. At the end, you’ll find some thoughts on rewards points and credit card churning. 

A Brief History
At their most basic, credit cards are small pieces of plastic issued by banks or businesses. A cardholder can use a credit card to buy something without paying for it immediately. Instead, a bank or business fronts the bill, which the cardholder is expected to pay back later. The bank or business then charges interest or fees on late payments. 

The concept of buying now and paying later is not unique to the modern era. Charge coins, developed in the late 19th century, were presented to retailers instead of cash. A retailer marked down the amount owed, which a customer would eventually pay.

In the United States today, the credit card industry is huge. “Credit cards are central to the financial lives of nearly 170 million American consumers,” according to a 2019 report from the Consumer Financial Protection Bureau, which shows that by the end of 2018, total credit card balances were around $900 billion, a record high. 

According to the CFPB, credit card usage has increased rapidly among Americans in recent years. The good news? Balances carried on the cards — the money that hasn’t been paid back by its due date — has not grown nearly as quickly. 

It’s important to note here that the system of credit in the United States restricts access to consumers of color. Lisa Rice, president of the National Fair Housing Alliance, provided testimony on this subject to the U.S. Committee on Financial Services last year on this matter, which you can check out for further reading. 

Credit Cards Are Important
For many of us, especially as unemployment has surged during the coronavirus pandemic, credit cards are necessary tools to keep our personal finances afloat. 

A credit card can help someone get by while they await a freelance check or unemployment. It can also cover an emergency, like a big hospital bill or car repairs. Of course, in an ideal world, a robust emergency fund could handle any of these issues. But that simply isn’t the reality for many folks, which is why access to credit is important. 

Credit cards are also a tool used to improve a credit score — as long as you pay the balance off every month. A higher credit score can open the door to better loan terms and insurance premiums while having a credit score itself is often necessary to sign a lease, access a cell phone plan, and get a mortgage. Experian has a deeper dive into how credit card utilization affects your score. 

Okay Cool, I’m Ready To Sign Up For A Card. What Do I Do? 
Make. A. Plan. Check in with yourself: why do you want to sign up for a credit card? Are you struggling to make ends meet? Do you plan to take a trip when this pandemic ends, and want to take advantage of points? Or are you just starting out? 

Knowing the answer to this question can help you to guide the decision-making process. I have found Nerdwallet to be one of the most helpful websites for comparing credit card options (we’re not sponsored by them or anything!). 

Check out the APY and APR. APY, or annual percentage yield, is a card’s interest rate compounded annually (think: the interest on the interest). APR, or annual percentage rate, is the interest rate charged over a year. Other things to look at include fees, rewards, and bonuses. 

Once you choose a card, fill out the application, and await the response. When you apply for a credit card, the issuer does what’s called a hard inquiry into your credit. This shows up on your credit score report: applying for too many credit cards at a time can lower your score. 

You may receive mail-in offers for credit cards. These may be a good option for you, as they are based on “soft inquiries” into your credit. In other words, you may be more likely to be approved for these offers. That said, do your research and make sure the terms fit in with your goals. 

Churning & The Reward Points Complex
When I first learned about r/churning, a Reddit forum dedicated to profiting from credit card sign up offers, I was fascinated. Users essentially try to game the credit inquiry and rewards system to make money. A quick scroll of the subreddit reveals that doing this consistently requires quite a bit of effort, which led me to abandon any dreams of profiting this way. 

But I did, in a way, use this mentality when I started planning a trip to New Mexico last year. I priced out flights and AirBNBs. Using that information, I looked at credit cards that had sign up bonuses and rewards for travel. I signed up for a card and got in the habit of using it for almost all of my spending to maximize the rewards for my trip. 

It worked, but I found that I felt really disconnected from my purchases. Here’s why: when you pay your credit card bill, you’re using this month’s earnings to pay for last month’s purchases. It can be easy to forget about larger expenses when they don’t immediately pull money from your bank account.

This isn’t a unique experience, which I learned from my work as a financial coach at Brooklyn Plans and She Spends community discussions. 

Rewards programs gamify using credit cards, making it more attractive to spend using them over cash or a debit card. The more you use your credit card, the more likely you are to miss a monthly payment, incurring fees or interest payments, which benefits the bank.

This is not to say that spending using a credit card is a bad choice (I still use mine sometimes!). But I think it’s important to interrogate how rewards programs affect our credit card usage, and whether any of it is detrimental to our spending habits. 

I’d love to know what you think. Are you a points devotee? Or do you stick to cash? There’s no right or wrong answer here (the joy of personal finance!). 

- Alicia McElhaney