Teach Me How to Money

Credit cards can be valuable financial tools, if you know how to use them correctly. They can also get you into serious trouble if you don’t.

Learning the difference between healthy and unhealthy credit card use is key to having a strong financial life. And since credit cards often offer rewards and points that can be redeemed for travel miles or cash back, if you’re diligent, they can help you get the things you want, as well as  build your credit.

Brianna McGurran*, a contributor to the financial site Nerdwallet, teaches us how to use credit cards properly so that they work for, not against us.

The following are excerpts from McGurran’s recent conversation on Stash’s “Teach Me How To Money” podcast, with our editorial director Lindsay Goldwert, edited for clarity.

1. You should understand why credit is important.

Credit is the thing that lenders look at before they issue you a loan or a credit card. It's your financial history--it's who you are as a person, in the financial world…[And determines] whether or not you can be trusted to borrow money or to pay something back on time.

You [need credit] for anything from getting a mortgage to getting a credit card.

You need credit history in order to get [a travel rewards credit card]. You also need credit, sometimes, to rent an apartment...Landlords will check your credit history, as it's sort of this proxy for how responsible you are.

2. Closing a credit card may not actually help you.

Unfortunately, what happens when you close an account [is that] your average length of credit history goes down. Suddenly, all the history that you built up with that account goes away. So, your [credit history is] starting from the first day of your next oldest account opening.

Also, say you have a credit limit of $2,000 on [the] card you closed, but the card you keep open has a credit limit of $1,000, and you have $300 of debt outstanding. Your credit utilization ratio now becomes higher because you have $300 in debt on a $1000 credit limit, instead of a $2000 credit limit...That ends up actually making it look like you have more debt compared to your credit line[s].

3. Applying for credit will likely impact your credit score.

There is a penalty if you apply for credit cards. A hard inquiry (when a potential lender looks at your credit history) on your credit report will affect your credit.

Applying for a lot of credit cards over the course of a long period of time, you're just going to get dinged over and over...there's really no reason to [do it].

4. There may not be a “best” credit card--so, look for the right card for you and your goals.

We all get so many offers, letters, and ads...My advice is usually to ignore the offers and the letters, and only search for [a card] when you're ready for it. When you are ready to get a financial product, you are more likely to actually apply wisely and find something that is good for you.

Think about your goals. If you're the type of person who travels a lot, a travel credit card that gets you rewards based on your spending could be right for you. If you're the type of person who, even if you travel a lot but you just can't be bothered with tracking rewards or knowing how the credit card works, a cashback [card] might be better. Or, if you really need to build credit, there are certain credit cards that are good for that.

5. Don’t forget about fees.

It's important to see what fees are associated with every credit card, and every financial product in general. If you are interested in a rewards card, but it comes with an annual fee, you have to do the math to make sure that...