The benefits of building credit and the importance of financial responsibility
The credit score company FICO revealed that the number of people aged 18 to 29 without credit cards doubled from 8% to 16% between 2010 and 2015.
This shift has earned praise from many, who view it as a wise decision by young adults. Some say the financial struggles of their parents during the recession made them wary of credit cards. Additionally, the CARD Act of 2010 makes it harder for anyone under 21 to get a credit card without a cosigner, which likely contributed to the decline.
This trend also brought down the average credit card debt per person by about $1,000, from $3,073 to $2,087. Fewer credit card users naturally spread the remaining debt over a larger population.
But applauding the move to avoid credit cards entirely may be shortsighted.
Let’s be clear: most young adults lack the discipline to manage credit cards responsibly. If using one would lead to overwhelming debt, steering clear is the better choice. However, are those the only two options?
The Importance of Building Credit History
What if there were a smarter approach – a strategy called “responsible credit card use”? Instead of steering clear of credit cards altogether, gaining the skills to use them wisely can lead to significant financial advantages. By mastering this strategy, young adults can gradually build a strong credit history while avoiding the pitfalls of debt. This balance provides a way to enjoy the benefits of credit, such as better loan options and improved financial flexibility, without the risks that often come with irresponsible use.
Credit History Builds Credit Score
A strong credit score requires a credit history. Without one, borrowing for major purchases like a home becomes difficult. Young adults who avoid credit cards have limited ways to establish credit. A car loan is one option, but without a solid credit history, the interest rates will likely be higher.
Using a credit card responsibly – treating it like a debit card, paying the balance in full each month, and avoiding interest – can significantly boost your credit score. After 12 to 18 months of responsible use, you’ll start receiving better offers, and your credit history will strengthen, improving your financial standing.
Credit Score Leads to Lower Borrowing Costs
Why is a high credit score important? Most people will need to borrow money at some point, whether for a home, a car, or even emergencies. A better credit score can mean significantly lower interest rates.
For example, the difference between a 4% and a 5% mortgage rate might not seem like much, but over a 30-year loan, it could save you tens of thousands of dollars. Similarly, only top-tier borrowers qualify for 0% APR offer on vehicles. Your credit score plays a key role in determining your borrowing costs.
Lower Borrowing Costs Lead to Greater Financial Flexibility
Lower interest rates mean keeping more of your hard-earned money.
Would you rather pay $150,000 in interest over the life of a mortgage or $125,000? Choosing the lower rate frees up money for other financial goals, like building an emergency fund, saving for a wedding, or investing in your retirement.
The math is simple: less money paid in interest means more money in your pocket. Over time, these savings compound, helping you achieve your financial milestones faster.
Irresponsible Credit Card Use is Risky
Of course, all these benefits hinge on responsible credit card use. The credit card industry thrives on those who overspend and carry balances for years, racking up interest and fees. If you treat a credit card like a free pass to spend, you’re only hurting yourself.
Think of a credit card as a tool. Used correctly, it can build your financial future. Misused, it can dig a deep financial hole. The key is to track your spending, treat the card like a debit card, and pay off the balance each month. This discipline ensures that the benefits of credit card use outweigh the risks.
Opposing Views – Risks of Credit Card Use
Critics of credit card use often argue that these financial tools are too risky, especially for young adults without experience managing debt. They cite statistics showing how quickly interest and late fees can accumulate, leading to financial stress and long-term damage to credit scores. Others believe that relying solely on debit cards and savings can foster healthier spending habits, helping individuals avoid debt entirely.
* * *
Still, proponents of credit cards point to the potential for significant financial benefits when used wisely. They highlight how young adults can leverage credit to unlock opportunities, such as better loan terms and lower insurance rates. Ultimately, the debate underscores the need for financial education and responsible decision-making.
Responsible credit card use offers young adults the chance to build credit, lower borrowing costs, and achieve greater financial security. By avoiding interest and fees while building a solid credit history, you set yourself up for financial success. Isn’t that worth considering?