Credit Card Crash Course

Hey gang! I'm gonna deviate from the norm a bit today. Let's chat finance.

Throughout my twenties, I've found that many of my classmates or coworkers have been reluctant to get into credit cards for whatever reason. Some said it was because of horror stories they read online or heard from family. Others said that they were fine with their debit cards and didn't understand credit or want to mess with it.

To be honest, I understand. For most of my life, I shared these sentiments. However, as I've gotten older and realized that the goal of owning a house would take way more prep than I estimated as a kid, I've gotten into credit cards. And I've been loving it! Now I'm all about responsibly gaming the system, constantly giving unsolicited credit card advice and recommendations like a true middle-aged man.

Credit really isn't as scary as most people think. I'd like to take today's post and do a little 30 minute crash course on everything you need to know to demystify credit cards. Honestly, I'm mainly writing this so I can forward it to people whenever they ask "Hey Andrew, how do I get a Credit Card?" I've learned a lot about the nuances of the American credit system over the past few years, and hopefully by the end of this post, you will have too.

What is a credit score?

Your credit score is a numerical representation of how risky it is to lend to you. It's assigned to you by the three major credit bureaus (Experian, Equifax, and TransUnion) and is used by banks to determine whether or not they can trust that you'll pay them back in full and on time.

Your score can range from 300 (bad) to 850 (excellent). Every time you make a payment, miss a payment, apply for new credit, get approved for a new card, increase usage, etc., your credit card's bank reports this activity to the bureaus who then update your score to reflect this behavior.

There are many factors that go into determining your score, but here are a few major bullet points:

• Do you make your payments every month? If so, better score.
• How much of your credit are you using? Under 30%, better score.
• How long have you been a debtor? Longer time, better score.
• How often do you apply for credit? Under 2 times every 2 years, better score.

There's a lot more nuance involved but generally as long as you make your payments every month and are not applying for credit left and right, then your score will stay on the higher end of the spectrum.

What is a credit card?

A credit card isn't too different from the debit card you likely already have. It's a card made of plastic (or metal) that you can use to buy stuff in stores or online. The main difference between the two boils down to how/when your transactions are paid for.

With debit cards, whenever you make a transaction, the money is immediately subtracted from its associated checking account. With credit however, the charge is instead paid using money from a line of credit (i.e. the amount of money a bank allows you to use). Once a month, all of the charges from the past month are summed up into one bill, called a statement. You pay back the money that you've used, the banks give you reward points; they're happy, you're happy, everyone's happy.

So, why credit? (And not debit?)

Well, there are four main reasons why you should use a credit card instead of a debit card:

• The days of "I'll buy this next paycheck" are over. Since the money's only ever subtracted from your account when you pay your statement each month, you can effectively buy something now and then pay for it with next week's paycheck. Credit gives you more freedom in when you can spend your money. (Though, you should still only spend what you can afford.)
• Credit cards are safer to carry. With debit cards, if someone makes a fraudulent charge on your card, the money's taken out of your account immediately and it can take weeks for investigators to get you that money back. On the other hand, since credit card charges are against a line of credit, investigators have until your statement date to reverse that charge before you actually have to pay anything.
• Credit cards are a passive way to build credit. Everyone wants to own some place to live one day, right? Unless you're doing a 100% cash offer, survey says you'll have to take out a mortgage to pay for the place over time. The higher your credit score, the lower your interest payments will be. Paying off your cards in full every month is an exceptionally easy way to boost your credit score without much effort.
• Debit cards don't have many rewards anymore. Credit cards do. Credit Cards usually refund anywhere from one to three percent of money spent as points that can be redeemed for cash back, gift cards, or travel. Many cards also have additional passive benefits, like automatic warranty extensions, travel cancellation insurance, or rental car damage waivers.

There is an argument to be made that while credit cards have more risk involved– in that you have to remember to make your payments every month– the points and benefits make it far more worth your while in the long run. In fact, most financially-savvy people will put nearly every purchase on credit cards.

Do credit cards cost anything?

If you're playing the game right, then no. There's only two real conditions where it would:

1. If your card has an annual fee
2. If you keep a balance on the card month-to-month and accrue interest

You could argue that if you don't have an annual fee and you're paying the card off in full every month, then it's just a glorified debit card with benefits.

The lowest annual fee you'll probably see is $95, but higher-end cards can have fees in the several hundred dollar range. They aren't the worst, given you're using the card's benefits enough to make that fee worth your while. In fact, cards with annual fees tend to have more lucrative rewards programs than those that don't. Determining whether an annual fee is worth it basically comes down to figuring out how much you'd need to spend on that card to reimburse yourself, then predicting whether you'd spend that much in a given year.

Case Study: Amex Blue Preferred vs Blue Everyday

A good example to illustrate this point is the Amex Blue line of cards: Blue Preferred and Blue Everyday. As of writing, both cards are primarily geared towards earning cash back on groceries, offering the following rewards:

• Blue Preferred: 6% back on groceries, $95 annual fee
• Blue Everyday: 3% back on groceries, no annual fee

At face value, the Blue Preferred looks much better with double the points, however you have to consider that in order to break even, the first $95 of cash back each year needs to be set aside to reimburse the annual fee. Meanwhile, the Everyday starts earning pure profit immediately.

This creates a fun little chart which shows that you'd actually be earning less with the Preferred each year unless you're spending over $3166.67 annually. Shocker!

Most cards with an annual fee usually have a no fee alternative, and the comparison between the two is something that should always be considered before applying. If you don't spend enough to make the fee worth your while, always opt for the free version.

Where most people tend to rack up the money is interest. The way most cards work, you're given around four weeks after each statement date to pay off all the purchases on that statement. If you have a non-zero balance after those four weeks are up, then you start accruing interest. DAILY.

The banks take whatever APR your card has, divide it by 365, then multiply your balance by that amount every day. And if there's one thing you should've taken away from your high school econ class, it's that compound interest like this is NOT your friend.

In order to prevent any interest from growing, you should aim to pay off your card in full every month. No questions asked. As long as you don't spend more than you afford, then you'll be fine.

There are a couple other ways that you can get a fee on your card, such as cash advance fees (i.e. using a credit card at an ATM) or foreign transaction fees, but people don't ever really do the former and the latter is starting to be phased out on most major cards.

TL;DR: As long as you're aware of annual fees/interest and you avoid them wherever possible, then there is no additional cost.

If credit cards don't cost anything, how do the banks make money off them?

Interchange fees. I promise this isn't a "too good to be true" situation.

Every time you make a purchase with a credit card, your credit card processor will take a small percentage of your transaction as a fee. This amount depends on the processor your bank uses and the tier of card you have. (i.e. Visa Standard, Signature, or Infinite)

While these percentages might seem small, the money adds up quickly in economies of scale. In 2023, Visa processed $12.3 trillion dollars of transactions, which earned them around $185 billion from these fees alone! This money is then split between the processor, the bank that issued your card, and any middlemen that handled your transaction. (i.e. Square, Stripe, etc.)

Notably, interchange fees differ from sales taxes in that they're not an extra charge to the consumer, but rather paid by the merchant for each transaction. This is why some small businesses will give you a discount if you pay in cash. It's also why some businesses don't accept Amex, as they have the highest fee.

Banks also make money off interest. But if you're paying your card off every month, this isn't a concern.

What's the recommended number of cards to have?

The answer to this is a balancing act that's determined by you alone. There's multiple factors to consider here. With the more cards you have:

• Your overall credit limit will be higher, so you can spend more and still stay under the recommended 30% utilization rate.
• You'll have access to more rewards systems, so you can maximize your cash back.
• You'll have to keep track of making more payments every month.
• The average age of your accounts may go down and affect your credit.

In order to keep your score high, the bureaus suggest having five forms of credit active which can be any mix of credit cards and loans. Since I've paid off my car in full and am renting, I have 5 cards out right now to hit that suggestion. But honestly, beginners don't have to have that many. Maintaining a good long-term record with one or two cards will probably keep you around the 700s.

Just please remember to not miss a payment. In fact, I highly suggest that you set up autopay on all of your cards to pay the full statement balance every month from a savings account, just in case you forget to manually pay from checking earlier that month. You won't be billed twice with this setup, don't worry.

How often can I apply for a credit card?

Two times every two years. Every time you apply for a new line of credit, you credit record gets a "hard pull" placed on it, which simply shows a bank accessed your information. These pulls stay on record for two years before expiring. Having more than two of these on your file at any time can have a big negative effect on your credit score.

If you apply for a card, get a hard pull on your record, then get accepted for the card, the increased credit and lower utilization will usually offset the hit from the pull within a few months. On the other hand, getting a hard pull then and then being rejected will only lower your score. Avoid biting off more than you can chew.

Now, there are ways to get nicer cards without having to suffer a hard pull. Namely, by upgrading an existing card or building upon prior relationships.

For many banks, If you've had a card with them for at least a year and meet the credit requirements for a nicer card they offer, you can call your bank's customer support line and request an upgrade. If approved, this will convert your existing card into the new one without the pull, and they'll mail you an updated card within a week or so. (You can also downgrade this way too.) In some cases, you'll even start earning the benefits of the new card immediately. However, it is important to note that by upgrading, you waive any sign-up bonuses that you would have earned had you applied for the card directly.

Additionally, banks like maintaining long-lasting relationships with debtors and will sometimes bend the rules for them. For instance: some banks will forego a hard pull if you use are in good standing with one of their other cards. (This is how I got my Amex Blue Preferred without a pull.) This is also one of the reasons why I suggest your first card be with a reputable bank you plan on using for decades. Think: Amex, Chase, Discover, Capital One, etc.

Alright, how do I get started?

Either have a partner/family member add you as an authorized user on their card, apply for a student card, or take out a secured card. Generally, which of these paths you should take will depend on your current financial and living situations.

If possible, have a partner or family member add you as an authorized user on one of their cards. This won't put a hard pull on your account and will give you your own card that will make charges against their line of credit. Pay off your share every month, and your score will usually settle in the 600-700 range.

If you're in college, trade school, or enrolled some other higher institution, you can skip the authorized user part and instead apply for a student-focused credit card. These cards usually have lower credit requirements but also have lower credit limits and less benefits than their non-student counterparts. Additionally, some student cards– like the Discover it Student Chrome– have no prior credit requirements as long as you can show proof of enrollment and independent income.

If you can't do either of the aforementioned routes, then you should look into getting a secured credit card to start. Secured credit cards have you put down a deposit when you open the card, which will be equal to your credit limit on that card. (I.e. Put $200 down? You get a $200 credit limit.) This deposit cannot be used to pay off the card, and you will still need to pay off your balances every month.

While using any of these cards, you should aim to make a few small purchases each month, and never exceed more than 30% usage on the card. Set up auto-pay, pay your card off in full each month, and do not– under any circumstance– forget to make your payment. Have I emphasized that part enough?

Then, just use the card! Over the next few months, use your bank's credit tracking tool to keep track of your score and monitor how it increases over time. Once your score is high enough and you can apply for another card that you like, go for it! Only up from here.

Any other miscellaneous tips?

Yeah I've got a few.

• Use bills to cover sign-up bonuses if needed. Sign up bonuses are the easily the quickest way to rack up tons of points. Gift cards don't count towards sign-up bonuses anymore, so the next best thing is rent, utilities, and internet. Sure, there's usually a higher processing fee for credit cards than eCheck/ACH, but if you have to spend $50 in fees to get $500 back in points, it's worth it.
• Sometimes banks will give you bonuses if you upgrade to a higher tier of a card you already have. Prime example of this: Delta loves pushing Blue card members to upgrade to their Gold/Platinum cards, and they'll bribe you with points to try and get you to bite. If the upgrade bonus is financially feasible: Take the offer, earn the points, use the card's benefits, then downgrade at the end of the year. Wait another year or two, and they'll probably offer again. Rinse and repeat for any card that does this.
• Use recurring purchases to prevent cards from automatically closing. If you don't use a card for a few months, it's possible the bank will decide to close that line of credit for you. This can potentially hurt your score by decreasing your average account age or overall credit limit. To prevent this, set a recurring fee (i.e. Netflix, Spotify, etc.) to be charged to the card and have the card auto-pay every month. Out of sight, out of mind, and now it won't close on you!
• Never apply for a credit card at the checkout aisle. Salespeople are trained to woo you with offers that look lucrative in the short term (i.e. 20% back on this purchase, etc.) but screw you long-term with high interest rates and restrictive benefits. Some cards are even locked to a single merchant, and won't work anywhere else (i.e. Target RedCard). Your credit score and avoiding the hard pull are worth more than any immediate value gained at checkout.
• Don't trust rewards programs that don't have a cash back value. Listen, I like the Delta cards as much as the next guy, but you're playing a risky game with them because the value of the mile is arbitrarily set by Delta. If a card doesn't have a way to redeem points as a statement credit (i.e. 1 pt. = 1¢) then the value of your points will fluctuate over time. Only get these cards for their other benefits, given you use them enough to offset the fee. (i.e. Delta Platinum's free companion ticket)

Where do I learn more?

There are several great websites that are dedicated to credit card reviews and comparisons. I also ask friends, family, and Reddit.

My personal favorite credit card website at the moment is Nerdwallet. I've used them for a while and their reviews/choices for best credit cards across their various categories have been very insightful. I'd recommend starting there. Forbes also has a pretty good credit card section. Same with Credit Karma and The Points Guy.

Surprisingly enough, one of the more interesting websites I've relied upon a lot is the r/CreditCards subreddit. Sure, Reddit is an open forum so you should take everything you see there with a grain of salt, but whenever I have a question about how to best use a card's benefits or if want a comparison between two cards, usually someone's already asked the same question and the top comments can be pretty wise. In many cases, I've found that Reddit's combined lived experience with these cards is much more useful than anything said in a reviewer's blog post.

I also have a pretty gnarly google spreadsheet that I keep updated semi-regularly and allows me to compare a bunch of cards that I have my eye on. Feel free to make a copy of it and tinker with it to find a set of cards that works best for you!

Most importantly: ask friends and family! Their experiences should probably be the most influential part in your decision making. They can tell you what cards they like, how they generate and use points, what banks to steer towards or away from, etc. Even better, many cards have referral bonuses, so if they have a card that you like, you can apply using their referral code and you'll both get a bonus.

Ultimately, credit cards aren't meant to be scary. The banks get paid by your fees, you get points back each month and a higher credit score, everyone's happy. So long as you're paying off your cards every month, you'll be fine.

I hope some of you found this post enlightening! For those of you that are still confused... Uh, just go back and read it again till it makes sense! Or just leave a comment below, and I'll do my best to reply to it.

Who knows, maybe I'll talk more about finance in the future. Questions? Concerns? Corrections? You know what to do. Till next time!