Some links below are affiliate links, meaning we receive a commission if you make a purchase using the link. Phippen Tax only recommends books Xa or Patrick personally read and enjoyed, or products they personally found useful.
A no-fee credit card is the first of our Accounts You Want because it is your main tool to establish or improve your credit score in a controlled manner without taking out significant debt. Here is why you should want a no-fee credit card in your wallet:
A no-fee credit card allows you to improve your credit score without paying an annual fee. Improving your credit score affects your future rental, home ownership, and investment opportunities. Additionally, some types of transactions (for instance, renting a car or hotel room) require credit cards or involve increased costs and risks if you use a debit card or cash.
But Aren’t Credit Cards Bad?
No, credit cards are not good or bad. They can be a tool to improve your future financial opportunities or the pathway to debt with astronomical interest rates. Since credit cards can lead to debt for some folks, there are some well-known financial writers that recommend avoiding credit cards altogether. At Phippen Tax & Financial Services, we disagree since we think you are competent adults who have enough self-control and intellect to know that a credit card is a symbol for actual money leaving your possession, just like when you pay with cash, a bank card tied to a checking account, or Venmo.
The advantage of having a credit card is allowing you to establish a credit history if you are young and have no experience with credit. Having no debt does not mean having a good credit score, as strange as that sounds. If you have not had debt in the past, a lack of credit history can prevent you from getting an affordable rate on a car loan or even renting an apartment. The no-fee credit card is the solution: Just put a couple of charges on the card each month, pay it off in full each month, and you will see your credit score slowly improve as you establish a credit history without paying fees or interest.
If you have a low credit score, a no-fee credit card is a good way to improve it. Over time, on-time payments can make up for prior poor credit since your payment history is the largest single component of your credit score. If you have a lot of credit card debt, see if you are eligible to consolidate your debt on a no-fee credit card, ideally one with no APR for the first few months, providing you the time to pay off old debt.
Why a No-Fee?
Credit card fees include annual fees that just force you to keep track of another expense. If you are just starting out with a credit card, you do not need this fee to surprise you and potentially cause you to go into debt. It is also ideal to have a no-fee credit card as your oldest credit card, since you do not want to close your oldest card and shorten your credit history. (The length of your credit history comprises 15% of your credit score.) You should plan to keep that first no-fee credit card open forever. If you want to open other rewards cards with fees down the road, that is fine (and we will actually recommend and tell you how when we launch Part 4: Accounts to Have for Fun), but this comes later in your financial journey.
In the event that you do open a rewards credit card with a fee down the road, remember to keep your no-fee credit card active. This means you need to charge at least a small expense every so often to make sure the card does not close for inactivity. A good method to do this is to consistently put one expense on the card for which your rewards card does not offer rewards. For example, if you have a travel rewards card, put groceries on your no-fee credit card. If you receive 3x the points for groceries, put gas on your card. If you get cash back for gas, buy any toiletries and incidentals on the card. Just figure out a consistent expense that makes sense to put on your no-fee card instead of a rewards card. (Since I run an Etsy shop, I love to put post office shipping costs on my card since that is a consistent expense that does not offer extra points.)
Raising Your Credit Limit
The initial purpose in opening a no-fee credit card is to establish a credit history or improve your credit score, but over time, the card has other benefits. If your card does not regularly raise your credit limit, you should call and request a higher limit. In I Will Teach You to Be Rich, Ramit Sethi recommends calling to raise your credit limit every six months. (If you read the book, he also offers a precise script with how to request a higher limit.)
Even if you never intend to use more credit, raising your credit limit can improve your credit score because the second-largest factor in determining your credit score is credit utilization. Credit utilization is the percentage of your available credit that you actually use. Keeping your credit utilization low improves your credit score over time.
Improving your credit score over time is important not only for renting an apartment, or getting a car loan or mortgage. It can also be important when branching out into more fun investment opportunities, like real estate investment, in the future. Life is easier with a good credit score, so start building your credit or raising your score today.
About the Financial Accounts Series: The Financial Accounts Series is a four-part series discussing financial accounts that can improve the health of your finances. The Phippen Tax & Financial Services team will provide a deep dive on each of the accounts listed in Part 3, Accounts You Want, before releasing Part 4, “Accounts to Have for Fun.” If you missed Part 1, Accounts You Need First and Part 2, Accounts You Need Next start there! If you would like to seek additional guidance about your personal finances or the specific organization and composition of your financial accounts, please contact Patrick Phippen or complete a new client form if you have not worked with Patrick in the past.
Comments