The good news: Banks have lately made it a bit easier to get a credit card.
The bad news: Banks have lately made it a bit easier to get a credit card.
According to the Federal Reserve’s new quarterly survey of bank senior loan officers, nearly 15 percent of large banks and 25 percent of other banks have eased the required minimum credit score in the fourth quarter of 2021. This trend is likely to continue in 2022.
Notice that not all banks are doing this. Notice, too, that I said it’s both good and bad news.
The relaxing of standards could help people who don’t currently qualify for credit, or who qualify only for cards with lousy interest rates and lots of fees. Getting a legitimate card and using it carefully can help them build their credit history. Without a solid credit history, you’ll pay more than you must for things like car loans, vehicles and insurance.
The idea is to get the best possible card and, more important, to have a plan to build credit, not create debt. That’s the “bad news” part: Being able finally to get a card could harm someone who doesn’t have a plan in place. A credit card is not the ticket to the good life, with zero consequences attached. It’s a tool, and like any tool it can be used for good or for ill.
Some frugality experts think that credit is a terrible idea. I am not among them. As noted above, if you have little or no credit history you’ll pay a lot more interest throughout your lifetime.
Those blowing the “Cash is king!” trumpet generally do so from a position of privilege. They can afford to pretend that the current credit scoring system doesn’t exist because they’re wealthy enough to pay cash and/or they already have all the credit cards/loans/mortgages they need.
They may also harrumph questions like, “Why do people take out such huge mortgages?” and “I don’t know why today’s college students graduate with so much debt.” That is, they haven’t checked the way the world currently works, or they make the mistake of assuming everyone looks like them.
Used right, a credit card can help
Would it be optimal not to have to borrow money for a car or a house? Well, sure. But someone with student loans and a starter salary needs that vehicle to get to work right now. Unless she has a generous relative willing to lend the many thousands needed even for a reliable used car, she doesn’t have the option of saving for several years and paying cash.
Ditto a place to live. If you decide at age 30 to quit renting and buy your own place, you’ve likely had anywhere from eight to 12 years of work. Maybe your line of work is super-lucrative and maybe you didn’t need to take out educational loans. Lucky you! But if not, you probably don’t have enough cash in hand to buy a home outright.
So you finance the car or take out a mortgage – and again, without a good credit score you’re going to pay more in interest. Maybe lots more.
Oh, and potential employers, lenders and even landlords might also be looking at that score. Still think it doesn’t matter?
How to learn credit basics
If you don’t know much (or anything) about how credit works, here are a few good resources:
The Consumer Financial Protection Bureau. Start with their “Using Credit” page and work your way through.
Nerdwallet’s credit articles. “What is credit and why do you need it?” is a good start, and you can move on to other linked articles.
Books. “Get a Financial Life in Your 20s and 30s” by Beth Kobliner; “Confessions of a Credit Junkie” by Beverly Harzog; anything by Liz Weston. (Pro tip: If your local library doesn’t have these titles, ask for an inter-library loan. You can always buy your own copy later and use a highlighter on it.)
Podcasts. Soooo many of them out there. I’ll just list a handful: “Money! with Stacy Johnson,” “Stacking Benjamins,” “The Mental Wealth Show,” “So Money,” “Brown Ambition,” “BiggerPockets Money Podcast” and “Planet Money.”
Yes, the current reporting system is a de facto penalization of those who chose to pay cash on the barrelhead and those who had serious illnesses or other problems that caused debt (or maybe bankruptcy). But opting out of credit is like acting as your own attorney because you think lawyers charge too much.
The cost of making that stand is way too high. A savvy consumer will learn to work within the current system.
Related reading:
- Free weekly credit reports offer extended
- How are credit scores calculated?
- Credit score myths that will. not. die.
Another benefit to having a credit card is that you can automate payments. Nearly all of my utilities, HOA fee, and similar are auto-paid on the cc that I use for online purchases so there’s never a worry about missing payments. While you can do this with a checking account too, I personally prefer not giving access to that if there’s another option.
That’s one way I keep my oldest credit card up and running: by automating my phone/Internet bill on it.
I normally don’t use my credit card, but used it recently to purchase replacement appliances. Paid off immediately. This week I got an email from my credit union titled “did we do something wrong?”. It went on to encourage me to use the card at other places to enjoy the “perks”. I doubt if I’m their focus customer, I just don’t spend money like I used to. Thank telework.
I always think of credit cards as tool that is similar to a chainsaw. Very useful to have if you know what you are doing, but the potential for great harm is significant!