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WLI’s Guide to the World of Credit Cards

credit card points travel hacking why young people need credit cards

(Image from The Points Guy, who is unbeatably helpful when it comes to learning anything and everything about credit cards and the benefits they can bring you.)


64% of Millennials in America do not own a credit card. While it may seem like a responsible or frugal decision to stick to debit cards and cash, neglecting credit can be harmful for years to come. We’ve provided you with a comprehensive but understandable guide to credit cards that will kickstart your (hopefully lucrative) credit journey. We recommend bookmarking this page so that you can refer back to the helpful links and nuggets of information!


(For a brief, inspiring summary of what we cover in this article, scroll to the bullets at the bottom of the page!)

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How do credit cards work?


Let’s get one thing clear: though the term is often misused, a credit card isn’t any plastic card you swipe in a store to pay for an item. A credit card is an instant loan mechanism: when you swipe a credit card for a $2.69 iced coffee at Dunkin Donuts, the credit card company pays for it for you. At the end of the month, the lender (Chase, Capital One, Discover, etc.) tells you how much you spent, a.k.a. how much you owe them for paying on your behalf. For this reason, credit cards are a popular (but also dangerous) way to buy things that you can’t afford right away.


If you pay back the credit card company by the deadline- usually about three weeks after your end-of-the-month bill-  you’ll pay no interest to the card company on the money you (they) spent. However, if you buy a $1,000 laptop with a credit card and take one year to pay it off, the company will charge you interest on the money you spent. If the interest rate on your card is 20%, which is the case for countless cards, you’ll end up paying $1,200 for a $1,000 laptop. (For simplicity’s sake, we are assuming you made no monthly payments for one year, and then paid off the purchase in full.)


You benefit by enjoying the ownership and use of the laptop before you’ve actually paid for it. The benefit for the credit card company is the extra interest you pay them: they spent $1,000 for you, you paid them back $1,200; they made $200. 


Lenders hope that you’ll carry a balance, i.e. that you won’t pay off your card in full each month and will therefore pay interest on your purchases. Smart, responsible consumers who pay off their card in full each month (those who don’t carry a balance) can reap enormous benefits from credit card companies without paying a single cent of interest.


Credit Cards and Credit Scores


Credit cards are great for building one’s credit score. A credit score, which 90% of the time is a FICO Score, to be technical, is a number between 300 and 850 that represents the trustworthiness of a consumer. When insurance agencies set your rate, when banks decide how much interest to charge you, when banks decide whether they should lend money to you, and when landlords determine whether to rent an apartment to you, your credit report (from which your credit score is derived) will demonstrate whether you are a responsible consumer.


Credit reports/scores track what types of credit accounts you have open, the average age of those accounts, your history of on-time payments, your credit utilization ratio (how much of your available credit you’re actually using), and the number of both recent inquiries into your account and new credit accounts opened. Each category is weighted differently, but these are the elements that affect your score.


Because the most trustworthy consumers are the ones who have long, positive credit histories, it is important to begin building a credit score as early as possible. When so many aspects of life depend on credit history (47% of potential employers run credit checks on job applicants), credit cards provide a solid avenue to a strong credit report and score. College grads entering the adult world with no credit history are at a severe financial and lifestyle disadvantage to their peers with years-long, positive credit histories.


The Lucrative World of Points, Miles, and Sign-Up Bonuses


Owning and consistently using a credit card come with almost countless monetary benefits. Usually, these come as sign-up bonuses and points (or miles) earned per dollar spent on the card. Read on for some basic details!


Intro Cards: like the BankAmericard Better Balance Rewards Card, are designed for people with minimal, poor, or no credit history. This card and others like it are considered beginner’s cards because they don’t only approve applicants with impressive credit scores. They help you in your quest to build a good credit score, don’t normally charge an annual fee, and don’t usually offer especially lucrative awards.


In the case of this particular card, Bank of America will actually pay you $100 per year just for using the card each month and paying off more than the minimum required payment on each bill. You’ll get even more, $120 per year, if you meet that requirement and also own a Bank of America checking or savings account.


This is free money. You can use the card to buy things you would’ve purchased anyway, pay the card off in full each month, and earn $120 per year ($30 each quarter). That’s enough to cover a Netflix subscription! We recommend this card to nearly anyone.


If you’re just starting down the road of building your credit score, it’s an ideal card that is not only accessible but actually brings a substantial monetary benefit. If you’re an experienced consumer with a well-developed credit history, it’s a card that you can keep in a drawer somewhere covering a single automated bill each month; you’ll make up to $120 a year for doing almost nothing.


Middle Tier Cards: are usually cards that award you a point or a mile, sometimes more, for every dollar that you spend on the card. They also tend to come with lucrative sign-up bonuses and other perks such as automatic travel insurance and hotel room upgrades.


Generally, you can value points at one cent apiece, though branded airline rewards cards have their own complex system for point redemptions for flights that often value points at much more than one cent. Credit card companies will also often let points be worth more than a cent when you redeem them for sponsored items like an airline ticket, an Amazon gift card, a hotel room, etc.. Popular choices for cards that earn points are the Capital One Venture Card and the Chase Sapphire Preferred Card, which are quite lucrative but require excellent credit scores from card applicants.


The sign-up bonus for these cards usually goes something like this: If you spend $3,000 on the credit card within the first 3 months of card ownership, you will earn 40,000 bonus points, which are redeemable for $400 in travel expenses. For individuals who don’t spend more than around $10,000 per year with credit cards, the sign-up bonus is often the most important and most lucrative feature of a card.


To enjoy these wonderful perks, middle-tier cardholders typically must pay annual fees that typically sit somewhere between $50 and $100. You should always make sure that the annual fee is equal to or less than the benefits you reap from using the card. These cards require the applicant to have trustworthy credit histories and high credit scores.


Usually, a card’s annual fee is waived for the first year, so many individuals– often called credit card churners– will sign up for the card, earn the lucrative sign-up bonus, and then cancel the card after about 10 months of use (more on this strategy below).


Elite Cards: With cards like the American Express Platinum Card or the Citi Prestige Card, you pay enormous sums of money to have and use the cards: anywhere from $495 to $2,500 per year. These cards are often made of titanium or steel, are extremely selective, and come with extravagant benefits.


The benefits tend to include access to luxury airport lounges, worldwide hotel upgrades, first class seat upgrades, high-value promotions from corporate partners, comprehensive insurance policies, discounted or free memberships in other rewards programs, free applications for TSA Pre-Check, and countless other benefits. These cards require you to not only have a high credit score and pay the exorbitant annual fee but to spend tens or hundreds of thousands of dollars on the card each year.


Elite cards are the right choice for very few individuals, but the benefits are extensive. A business owner with tens or hundreds of thousands of dollars of expenses that can be paid on a credit card could reap the points and fly all around the world for free at his or her leisure (and many, many do).


Credit Card Churning and Travel Hacking


There is an entire world of people who have discovered how to ‘hack’ credit card reward systems to travel the world in luxury for extremely low prices or even for free. Though the term travel hacking is often used, there is nothing dishonest about doing it and it’s not a complicated skill. The money you earn through these strategies doesn’t always have to be spent on travel, either.


We’ve given you the overview of the credit card point system. The card companies can value the points more or less, depending on what type of spending they are encouraging you to do. However, before you earn your first honest points, you will often have a shot at a sign-up bonus. Recently, Capital One offered 45,000 points, worth $450 in travel expenses, to new cardholders who spent $3,000 in the first three months of having the Venture Card. This is an extremely common version of a sign-up bonus.


A college student who’s had an intro-level credit card for a year or two could be approved for the Venture Card, have it mailed to his parents, and ask them to pay some bills and expenses with the card for a few months. Once $3,000 is spent, the student’s card would be credited with 45,000 points, which could be redeemed for $450 toward a plane ticket. It takes a little effort, but the payoff is fantastic.


As we mentioned earlier, many people register for a card, earn the sign-up bonus, then cancel the card before the annual fee kicks in after the first free year of use. There are a lot of opinions on this subject, but it’s important to know that the act of applying for a credit card will temporarily lower your credit score. Canceling a card will decrease the amount of credit available to you, which will increase your credit utilization ratio. This will also temporarily lower your score. Canceling your older credit cards will eventually shorten your credit history which (you guessed it) will temporarily lower your credit score. In an upcoming article, we will provide strategies on how to avoid damaging your credit score when churning credit cards.


How to Choose a Credit Card


To choose wisely, you will need to evaluate what kind of consumer you are, how much you spend, and what you spend money on. Then, you’ll apply for a card that fits your needs, is in your reach, and will offer the greatest financial benefit for your spending abilities. If you have no credit history, then signing up for a basic, introductory credit card is great, as is becoming an authorized user on a trusted parent’s account.


When choosing a card, you’ve gotta use NerdWallet. NerdWallet is without competition in free and fun credit card information websites. It has every compare/contrast article and graph that you could ever dream of. It’s constantly being updated and improved and provides the perfect amount of detail. Please also feel free to email us with questions!


A Final Thought


You know yourself better than anyone. Never apply for a credit card if you do not feel confident that you can refrain from spending beyond your means. Many credit cards will be issued with automatic credit lines of $10,000, even for young people with limited credit history! If you suspect, even a little bit deep down, that you may overspend when provided with such financial power, don’t apply for a credit card. 


Similarly, do not spend more just to earn a sign-up bonus. That is not a financially sound strategy: if you can meet the sign-up bonus spending requirements with dollars that would have been spent no matter what, go for it. If not, it’s OK. Money is, after all, just money. Money will not improve you essentially, as a human being, and money-making schemes will exist forever, one way or another. Being financially secure can be a powerful stress-reliever, but being in debt, or being financially extended outside of your comfort zone, can bring ten times the stress that money could ever relieve.


Sorry to get serious, but these are powerful financial strategies. When they are misused, the lessons learned are just as powerful, but not in a pleasant way.


Recap and Conclusion


  • Building a credit score is a real-life necessity. The sooner you begin demonstrating to the adult world that you can be trusted, the better off you’ll be later in life when you’re at the mercy of a bank, an insurance company, or a potential employer, among other things.


  • The best way to begin building a score is to apply for a credit card, use a credit card, and pay off a credit card in full every month. If this isn’t a possibility for you, then consider becoming an authorized user of a trustworthy parent’s credit card account.


  • Credit cards don’t only build your credit score and protect you from fraudulent purchases or even identity theft, they carry enormous monetary benefits and awards. From earning points-per-dollar-spent and airline-miles-per-dollar-spent to sign-up bonuses worth hundreds of dollars and hotel room upgrades, credit cards are valuable tools for making extra money!


  • We have ignored mentioning interest rates here because we believe that if you aren’t going to pay off your balance in full every month, you shouldn’t have a credit card unless it is literally your only option. And we are using literally literally. Know what we mean?


Tell us about your credit card journey in the comments section below! If you have your own strategies or tips, please share them! As always, we’re reachable by email.


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