3 reasons millennials need to switch from debit to credit
When it comes to managing money, millennials set themselves apart from previous generations in more ways than one. They prefer online banks to the brick-and-mortar ones, they're comfortable with using mobile apps like Venmo and PayPal and according to recent reports, the majority of them would rather use a prepaid debit card instead of a credit card.
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But millennials can miss out on some serious benefits by dodging credit cards completely. If you're in your 20s and you're still credit card-free, here are some reasons to consider adding one to your wallet.
1. It Can Help Build Your Credit Score
Millennials have the lowest credit scores on average of any generation according to Experian. But that's not necessarily because they're careless with credit. In many cases, young adults are stuck with lower scores because they're not taking steps to establish their credit history. That's where a credit card can be a huge help.
Thirty-five percent of your FICO score (the score lenders most often use for credit decisions) is based on your payment history. When you're using a prepaid or bank-issued debit card to make purchases, you're just spending your own money. That's not doing anything for your credit. With a credit card however, you can build your credit score by charging on a regular basis and making on-time payments in full every month.
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2. Credit Cards Offer Better Protection Against Theft
Loading hundreds or even thousands of dollars onto a prepaid debit card or keeping all of your cash in your checking account may not seem like a big deal. But it's more dangerous than you think. If your prepaid card is stolen, you're pretty much out of luck when it comes to recovering the money.
When a thief makes off with your debit card information, they can use it to make fraudulent purchases without your knowledge. Reporting the theft right away limits what you're responsible for but if you wait too long, you could be on the hook for any unauthorized purchases.
With a credit card, your total liability for any fraudulent charges is limited to $50 under federal law. Many card issuers offer a $0 liability guarantee, so even if someone uses your card to finance a $10,000 shopping spree, you wouldn't be held accountable for paying that money back. Considering how savvy hackers have become about stealing banking information, that extra layer of protection could be worth it.
3. Making the Switch May Save You Money
If you're in your 20s or early 30s and you're not making a lot of money, finding ways to save money could be one of your top priorities. A rewards credit card can help you do that if you're smart about how you use it.
For example, let's say you spend $500 a month on groceries. If you get a credit card that pays you 3% cash back on supermarket purchases, you'd earn $180 back over the course of a year. While a handful of banks still offer checking account rewards programs, they generally don't offer as many incentives as credit card rewards programs.
Related Article: How to Choose a Rewards Credit Card
Getting a credit card in your 20s can be helpful in more ways than one. But you have to be selective about the one you choose. It's a good idea to steer clear of cards with high annual fees or steep interest rates whenever possible.
Once you've got a credit card, be mindful of what you spend each month and how timely you are in making payments. Keeping your balance low and paying your bills on time and in full are the best ways to improve your credit score.
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