You’ve heard the term being thrown around. You probably see your parents or friends using it. All major stores offer to accept it as a method of payment….. Credit cards.
But why are there such differing opinions about them? Why do some people advocate so strongly for this little piece of plastic while others are so vehemently against it? The sentiment from some is “stay as far away from credit cards as possible.” Others say “they are the key to building wealth and can be used to your advantage.” But which one is it?
The answer is, they’re both right, but for different reasons. Before we dive into that, it’s important to understand: what is a credit card?
What is a Credit Card?
Put simply, a credit card is a little piece of plastic (much like your driver’s license or student card) which lets you borrow money which you need to pay back later. These are mostly issued by banks like TD, RBC, and BMO, with the actual credit card company being a financial services business (Mastercard, American Express).
It’s basically a glorified IOU. You go to Starbucks and buy a $5 Iced Latte. When you need to pay, you take out your credit card. You put it into the terminal thing that the barista gives you and punch in a pin. Now you owe the credit card company $5. You drive home sipping on your latte. When you arrive, you log into your online banking and pay the balance of $5 on your credit card. You no longer owe the credit card company. Easy peasy.
However, if you were to lend out money to a friend, you wouldn’t want to wait forever to get it back right? Of course not! You want to get your money back as soon as possible. To reinforce this, you might start charging penalties if your friend takes longer than say, a month to return the money. In a very similar way, if you don’t pay back your credit card balance within a month, you will get penalized and need to pay back even more money than you borrowed.
This is how credit card companies make money, and this is the rat poison part about credit cards.
Credit Cards: The Rat Poison
Going back to the example of lending money to a friend, the penalty I might impose would be maybe $10 extra for every month that they didn’t pay back the money. Credit card companies are not that friendly.
Most credit card companies have interest rates of around 20% compounded. This means that every year 20% of the balance that you owe gets ADDED to the balance you owe. Let’s say you use a credit card to buy an iPhone that costs $1000. If you don’t pay that balance, in one year you’ll owe $1200. In two years you’ll owe not $1400 but $1440. Why? Because the interest is charged on the current balance, not the original balance.
In just 5 years of not paying your credit card balance, you will owe around $2500. That’s $1500 more than the cost of the actual iPhone you bought!
Now, credit card companies won’t actually let you pay no money for 5 years, but they DO have something called a “minimum payment.” This is the minimum amount of money you need to pay every month for them not to raise your interest rate even MORE. The “minimum payment” is a trap. It makes you feel productive by paying money back when in reality, just paying that and not the full balance will cost you TONS down the road.
The total consumer (credit card) debt in the United States is $13.8 trillion and the average household debt is over $8000. This is why so many families struggle financially: credit card debt is compounding and inescapable.
Always, always, always pay the full balance of your credit card. If you don’t, your interest could very easily spiral out of control and you could be owing more money in interest than you borrowed in the first place.
Why Use a Credit Card Then?
You’re probably thinking: “credit cards sound scary AF and can cost me a ton of money… why can’t I just use cash or my regular debit card?” You absolutely can and should if you can’t control the urge to impulse buy with a credit card. But, using cash and debit cards don’t help to build your credit score.
Your credit score is a unique number from 300-850 that is assigned to you and you alone. This number tells banks and other institutions how trustworthy you are with money. There are different ways to quantify good and bad scores. One commonly accepted way of interpreting scores is anything above 700 is good and anything below 600 is not good.
With a good score, banks are more willing to lend you money for important things you might want to buy in the future: a car or even a house. With a bad score, banks will charge very high rates on loans (you need to pay more money) or they won’t give you a loan at all.
One of the easiest ways to build your credit score is to use your credit card responsibly. Responsibly means paying back your FULL balance by the end of every month and not owing anything.
Credit Cards: The Key to the Good Life
Imagine this. You have two friends, Jim and Bob, who both want to borrow your car. They are both well-known, need it for the same week, and have similar commutes every day. Your car, however, is your prized possession and you aren’t that eager to give it away.
While going through the decision process of who to lend it to, you think back to prior interactions with Jim and Bob. Jim has already borrowed your bike on numerous occasions and every single time, he returns it in pristine conditions. Bob, on the other hand, borrowed a few books from you. He lost one of them, returned the others with dog-ears, and one of them even had a coffee stain on a page.
Who are you letting borrow your car?
Using credit cards is like borrowing a bike or a book. It helps you build up credibility with financial institutions so you can borrow money for big stuff. They show whether you can handle a little bit of money and responsibility. If you can’t handle a $20 loan for a sandwich, you probably can’t handle a $200,000 loan for a house.
The best thing to do with credit cards is to get one, use it a few times every month for small purchases that you can afford, and immediately pay back any balance on it. Do this, and eventually you will have a shining credit score.
Real Life Example
Let’s say you wanted to buy a car. You find a good one that you like which costs $30,000. You only have $5000 but you really want to get the car, so you go to the bank to borrow $25,000.
If you have a good credit score (700+), the bank will probably offer you a loan with around a 5% interest rate. If you have a bad credit score, you’ll probably get an interest rate of about 10%.
This might not sound like such a big difference, but if you pay $400 every month towards the loan with a 5% interest rate, you’ll end up paying back $4000 in interest. If you have a 10% interest rate on your loan and pay back the same $400 every month, you’ll end up paying back more than $10,000 in interest… $10,000! That’s more than DOUBLE the amount of money you would pay with a 5% interest rate.
Having a good credit score can save you real hard earned cash.
Key Things to Note About Credit Cards
At this point you might be a little overwhelmed so here are a few key takeaways:
- Never use your credit card to buy something you don’t have money to pay for
- Credit card debt is one of the worst forms of debt possible with skyscraper rates (20% a year is insane!!!)
- Always check your bank accounts before buying something with a credit card and make sure you have enough money to pay it back immediately
- Do not just pay the minimum payment, pay the full balance
- Despite all the scary stuff about credit cards, definitely get one so you can start building your credit score
- Make small purchases that you can afford every month and immediately pay off the balance (the FULL balance)
How to Apply For a Credit Card
There are so so many different credit cards and very different perks and benefits for each one. Some give you cashback rewards for using them. Others give you points which can help with travel costs. It might be hard to choose, but if you’re a student and just starting out, I recommend going for credit cards that have a $0 annual fee. Don’t worry too much about the interest rates on the credit card, because you will be paying off the full balance anyways 😉
The steps to getting a credit card are pretty straightforward. You can either a)
- Go to your bank in person and ask them to help you with applying for a credit card
- Search up on Google “(insert bank name) apply for student credit card”
- Go to their website
- Pick one (that ideally has no annual fee)
- Follow the steps for the application
- Call your bank’s phone number
- Tell the service representative “I want to apply for a student credit card”
- Follow the steps they provide
It might seem scary or tedious, but remember, your bank works for you and is there to support you through the process.
So Credit Cards… Key to Good Life or Rat Poison?
Like most things in life, credit cards are not binary. It’s not inherently good or bad. By itself, a credit card is just a piece of plastic that you can use to buy stuff with. You can either use it to your advantage or to your ruin.
To answer the titular question, I would say that credit cards are the key to the good life in the sense that they can significantly lower the interest rates on your future loans if used correctly, but they are rat poison when use them to buy things you can’t afford and spiral into debt.
Normally I end my posts with a call to action, and that’s not going to change, but I do want to provide a disclaimer. If you are the type of person who impulse buys and can’t control your money, be very very careful with a credit card. Again, don’t buy anything with a credit card that you can’t afford (unless the thing you bought gives you a GUARANTEED return on cash of over 20% a year.) That being said, if you think you can handle one, get out there, get a credit card, and start building your credit score! Future you will thank you.
Thanks for reading through the post! I hope you learned a bit about credit cards. For more content about being rich, head over to this post. Also, if you’re a teen and want to learn more about personal finance, check out Teen Financial Freedom, a blog made by teens for teens which provides insightful content from a different perspective! Finally, if you want to follow along with my journey, drop your email in the “get updates” box (would mean a lot to me)! Let me know your thoughts and suggestions in the comments!
Jeff is a Harvard 2025 student passionate about making smart financial decisions both in school and in the workplace so that he can spend more time doing what he loves (like playing golf, spending time with family, and travelling). He has experience working in the financial industry and enjoys sharing all things personal finance, academic, and golf-related. Outside of blogging, he loves to cook, read, and golf in his spare time.