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How much cash back are people actually getting from their credit cards? Who charges the most money to their card, boomers or Gen Z? Does having a credit card mean you’re more likely to have good credit compared to someone who doesn’t?

These questions, and many more, are what we set out to answer in our study on cash-back credit card users*.

We surveyed a total of 1,205 people—802 who use cash-back credit cards to pay for most expenses and 403 who primarily use a debit card, cash, or money app (such as Venmo). By analyzing and comparing the two groups, we were able to learn more about how preferred payment methods can affect spending and budgeting habits.

Read on for the 18 most interesting findings from our research.

Notes: Percentages are rounded to the nearest whole number, so some data sets may not add up to 100%.

*We focused on cash-back rewards because they are the most popular type of credit card perk.

    1. $50 was the median amount people made in cash-back rewards in a month.

Our study found that $50 was the median amount people earned in cash-back rewards in a month.

But certain age groups may be more savvy about racking up their rewards than others.

The median cash-back amount by generation was:

•  Boomers: $20

•  Gen X: $40

•  Millennials: $50

•  Gen Z: $59.50

Because boomers are likely to have higher earnings and more savings than the other age groups, they may be less concerned about maxing out their cash-back rewards. And Gen Z respondents, who may have smaller salaries and bank accounts, might have learned to be savvy with their cash-back rewards card out of financial necessity.

    2. Three-quarters of cash-back credit card users save up their rewards over time.

75% of all cash-back credit card users prefer to save their rewards versus cashing them out every month.

Respondents may have long-term goals in mind for their cash-back credit card. By accruing the cash they can use it for a larger purchase.

    3. A majority of cash-back credit card users have “Very Good” or “Excellent” credit.

Our study found that a majority (58%) of cash-back credit card users have “very good” or “excellent” credit (meaning a score of 740 or above).

In fact, people who use a cash-back credit card are more than twice as likely to have “excellent” credit (a score of 800-850) compared to those who used a debit card, cash, or money-transfer app to make most of their purchases (23% vs. 9%).

Debit, cash, and money app users were five times more likely to have “poor” credit (a score of 579 or below) than cash-back rewards cardholders (15% vs. 3%).

Breaking down the data by age we discovered:

•  71% of boomers who use cash-back credit cards have “very good” or “excellent” credit.

•  55% of Gen Xers who use cash-back credit cards have “very good” or “excellent” credit.

•  53% of millennials who use cash-back credit cards have “very good” or “excellent” credit.

•  48% of Gen Zers who use cash-back credit cards have “very good” or “excellent” credit.

Older credit card users may have better credit because they’ve had more time to build their credit history.

    4. The amount of money spent by cash-back credit card users in a month was 67% greater than the amount spent by debit, cash, and money app users.

The difference is significant: Our study found that the money cash-back credit card users spent in a month was 67% more than the amount of money that debit, cash, and money app users spent.

The median spending amount for:

•  Cash-back credit card users was $1,000.

•  Debit card, cash, and money app users was $600.

Cash-back credit cardholders may feel incentivized to spend money since they know they’ll earn rewards on their purchases. Credit cards also allow for greater financial flexibility compared to debit cards.

Consider this: If the group who primarily uses a debit card, cash, or money app were to use a 2% cash-back credit card, they could potentially earn an extra $144 in a year (2% x $600/month x12 months = $144). If they were to use a 3% cash-back credit card, they would potentially pocket over $200 in a year, just in rewards (3% x $600/month x 12 months = $216).

    5. Gen Zers are the most conservative credit card spenders compared to other age groups.

Surprisingly, Gen Zers are the most frugal credit card spenders compared to all other age groups.

The median spending amount for Gen Z cash-back credit card holders was half that of Gen Xers and millennials.

Cash-back cards spending by generation:

•  Boomers: $700

•  Gen X: $1,000

•  Millennials: $1,000

•  Gen Z: $500

Gen Xers and millennials spent the most ($1,000), which could be because these groups are more likely to have growing families and more expenses. Gen Zers spent $500; contributing factors could be lower credit limits, financial support from their parents, and fewer financial obligations.

    6. More than half of respondents use their card to pay for mortgage, rent, and/or utilities.

More than half of people who regularly use a cash-back credit card (57%) used it to pay for their mortgage, rent, and/or utilities in March 2022. With living expenses on the rise, and the potential to earn considerable points, it makes sense that people would put these bills on their cash-back card.

There are some gender and age differences. We discovered that 65% of men used their cash-back card to pay for mortgage, rent, and/or utilities, compared to 47% of women. Millennials and Gen Zers were the age groups most likely to put these expenses on their credit card, and Boomers were the least likely.

Percentage of cash-back credit card users who paid for mortgage, rent, and/or utilities with their card:

•  Boomers: 41%

•  Gen X: 49%

•  Millennials: 64%

•  Gen Z: 62%

    7. More than one in 10 respondents spent over $500 on gas in March alone.

According to our study, 12% of cash-back credit card users spent over $500 on gas in the month of March. That means the amount of money these respondents spent on gas was more than the average monthly car payment for a used vehicle ($488).

Method of payment didn’t affect how much respondents spent on gas overall. We found that 10% of debit card, cash, and money app users spent over $500 on gas. The big difference: These consumers were not able to earn cash back on their petrol purchases the way cash-back credit card users were.

    8. Debit card, cash, and money app users may have a harder time saving compared to credit card users.

Over the course of a month, we found that:

•  33% of debit card, cash, and money app users were not able to put any money into savings.

•  15% of cash-back credit card users were not able to put anything into savings.

This means debit card, cash, and money app users are more than twice as likely to be unable to contribute to their savings compared to cash-back credit card users.

Looking at respondents who put at least $100 into savings in a month, we discovered that 72% of cash-back credit card users were able to do so, compared to 52% of debit card, cash, and money app users.

    9. Millennials may be the best savers of all the age groups.

Based on the results of our survey, millennials were the star savers. The median amount they put into savings monthly was $300.

Gen X and Gen Z save $250 and $287 monthly, respectively.

Boomers had the lowest median monthly savings amount at $100. One possible reason: Since they likely have some savings built up, they may not need to contribute as much to their nest egg as the younger generations.

    10. People in relationships were able to save three times as much as single people.

Being in a relationship may lead to fiscal stability. According to our survey, respondents who were married or living with a partner were able to save three times as much as those who were single, widowed, or divorced.

The monthly median savings amount for people who are:

•  Married or living with a partner was $300.

•  Single, widowed, or divorced was $100.

Those who are married or living with a partner had a median monthly spending amount of $1,000—meaning they save $0.30 for every $1 they spend. Those who are single, widowed, or divorced had a monthly median spending amount of $800, so they save about $0.13 for every $1 they spend.

    11. Men are twice as likely to spoil their pets compared to women.

Dogs really are man’s best friend: Men are more than twice as likely as women to spend a significant sum on their pets.

Overall, 9% of all cash-back credit card users spent over $500 on their pet in a month.

Breaking down the numbers, we found that:

•  12% of men spent over $500 on their pets in a month.

•  6% of women spent over $500 on their pets in a month.

Money can’t buy love, but it can buy toys and treats.

    12. More than one in 10 people spent over $500 on restaurants in a month.

Our survey found that 14% of cash-back credit card users spent over $500 on restaurants and bars. More specifically, 17% of men spent over $500 in a month versus 10% of women.

Millennials are most likely to spend a lot of money on restaurants and bars. This age group had nine times the percentage of respondents who spent over $500 compared to boomers.

Respondents who spent over $500 on restaurants in a month by generation:

•  Boomers – 2%

•  Gen X – 12%

•  Millennials – 18%

•  Gen Z – 13%

Debit card, cash, and money app users were not far behind—12% of these consumers spent over $500 on restaurants in a month. If they used a rotating rewards card that offered 5% back on dining instead, they would potentially earn $25 in rewards in a month, or $300 a year!

    13. Gen Z spent the most on clothes and shoes.

According to our survey, 20% of Gen Zers spent over $500 in a month on outfits and shoes.

To put it into perspective, here’s the percentage of cash-back credit card users in different age groups who spent over $500 on clothing and shoes in a month:

•  Boomers: 4%

•  Gen X: 10%

•  Millennials:18%

•  Gen Z: 20%

Boomers are the most frugal when it comes to new clothes. More than one-third spent $0 on clothing and shoes in a month.

Percentage of cash-back credit card users who spent nothing on clothing and shoes in a month:

•  Boomers: 35%

•  Gen X: 22%

•  Millennials: 16%

•  Gen Z: 11%

    14. Gas was the most regretted purchase for all respondents, regardless of payment method.

When asked what purchase respondents regretted most, gas rose to the top, regardless of payment method.

Here are a few other notable answers we received for most regrettable purchase:

•  A puppy my son said he would take care of and didn’t

•  A plane ticket and then forgetting what day the flight was

•  A ticket to a bad movie

•  I got scammed trying to buy an NFT

•  Crypto futures

•  A book shelf that fell apart two days after I put it together

•  A $1,000 pair of shoes

•  The wrong kind of ice cream

•  A gym membership I didn’t use

    15. Groceries and food purchases bring people the most joy.

When we asked cash-back credit card users what purchase brought them the most joy, we expected answers like vacations or special clothing. Instead, food and groceries were the most common responses.

We also discovered that people were happiest with purchases that involved a family member or pet, as illustrated by these responses:

•  Birthday present for my mom

•  Dinner with the wife for date night

•  My dog getting her tooth/mouth fixed as she wasn’t in pain any longer

•  A new bike for my daughter

•  Dog’s birthday gifts

•  My wedding dress

•  Gifts for my grandchildren

•  Catnip and wet food

•  Lunch for my dad on his birthday

•  A video game that me and my daughter play

•  Taking care of my dog at the emergency vet because her life was saved

•  Anniversary vacation with my wife

•  My heart surgery

    16. Men are more than twice as likely to spend over $500 on entertainment compared to women.

In one month, 15% of men who use cash-back credit cards spent over $500 on entertainment* compared to just 6% of women.

Of those men:

•  21% used a rotating-reward cash-back credit card.

•  11% used a flat-rate cash-back credit card.

That means men who have a rotating rewards cash-back card are almost twice as likely to spend over $500 on entertainment compared to men who use a flat-rate cash-back credit card.

*”Entertainment” was defined as “sports, concerts, etc.”

    17. Millennials were the biggest travelers, but Gen Z isn’t far behind.

Traveling can be an amazing experience, and being able to do so now is a sign that life is returning to normal. So who is going places? Looking at travel expenditures by age group, we found millennials to be the biggest travelers, with Gen Z right behind them.

Percentage of cash-back card users who spent over $500 on travel in a month:

•  Boomers: 5%

•  Gen X: 15%

•  Millennials: 21%

•  Gen Z: 18%

These numbers may speak to a greater travel trend, which predicts that Gen Z will overtake millennials in travel spending this year. According to Travel Pulse, 72% of Gen Zers are planning to splurge on a vacation in 2022, while 68% or millennials plan to do the same.

    18. Men are more likely to spend a lot of money on home decor compared to women.

In our study, we found that 16% of all men who have cash-back credit cards spent over $500 on home-related expenses (furniture, decor, repairs), compared to 10% of women.

Of these men, 13% were single, divorced, or widowed, and 16% were married. Looking at the women who spent over $500 using their cash-back rewards card, 10% were married and lived with their partner, and 9% were single, divorced, or widowed.

The Takeaway

Our survey found that payment method, gender, and age can all affect a person’s spending and savings. For instance, men tend to spend more on their pets and home furnishings than women. Gen Zers accrue the most credit card rewards; boomers the least. And the majority of cash-back credit card users have “very good” or “excellent” credit scores.

In addition, cash-back credit card users are more likely to be able to put money into savings compared to people who use a debit card, cash, or money app to pay for most of their purchases. Perhaps the money they get in rewards goes into their nest egg.

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New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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A letter of credit is a business-to-business document guaranteeing that the provider of goods or services to a buyer will receive payment. As part of a sales agreement, a seller may require the buyer to deliver a letter of credit before a deal takes place.

More specifically, letters of credit are often vital in international trade where the two parties involved are not yet familiar with one another. Letters of credit facilitate new trade and prompt payments.

Read on to learn more, including:

•   What a letter of credit is

•   How a letter of credit works

•   What the different types of letters of credit are

•   The pros and cons of letters of credit

•   How to get a letter of credit.

What Is a Letter of Credit in Banking?

Here’s what a letter of credit in banking is: It’s a document that a bank issues to a seller that guarantees payment from their customer for an order or service. The bank where the buyer’s business account is held usually assumes responsibility for the payment for the goods. However, the conditions laid out in the letter of credit must be fulfilled. The bank or financial institution charges the buyer a fee for guaranteeing the payment and issuing the letter.

Letters of credit are common in international trade situations because various factors can affect cross-border transactions. It’s not necessarily a matter of the buyer having a bad credit score. Rather, the deal may involve different legal frameworks, a lack of familiarity between the parties involved, and geographic distance.

How a Letter of Credit Works

When used properly, letters of credit can work to minimize credit risk and smooth international trade. A vendor selling products or services overseas may want assurance that a buyer of their products or services will pay. Perhaps the buyer is new to them or just a new business, period.

So how does a letter of credit work? It serves as a guarantee from a bank that it will pay the vendor once the requirements are met. The letter lays out the conditions of payment, such as the amount, the timing of the payment, and the delivery specifications. The letter can help the business placing the order build their credit, too.

The bank charges the buyer a fee for issuing a letter of credit (often around 0.75% to 1.5% of the amount of the deal), but it also does the due diligence to assure creditworthiness. The bank requires collateral or security from the buyer for the payment guarantee. In essence, the bank acts as a third party facilitating the deal.

Recommended: Why is Having a Good Credit Score Important?

Types of Letters of Credit

The following are four types of letters of credit.

•   Commercial Letter of Credit: The issuing bank pays the seller directly. For a stand-by letter of credit, the bank only pays the seller if the buyer cannot transfer funds.

•   Revolving Letter of Credit: The bank guarantees payment for a number of transactions within a set period.

•   Traveler’s Letter of Credit: Travelers can make withdrawals in a foreign country. The issuing bank guarantees to honor any withdrawals.

•   Confirmed Letter of Credit: A seller using a confirmed letter of credit involves a secondary bank, typically the seller’s bank. They guarantee payment if the first bank fails to pay.

You may also hear an irrevocable letter of credit mentioned; this is a letter of credit that can’t be changed or canceled unless all parties agree.

There is also a stand-by letter of credit which may be used when deal requirements are not initially met; see below for more details.

Letter of Credit Example

Here’s an example of a letter of credit: Wells Fargo provides commercial letters of credit and stand-by letters of credit within two weeks. The funds are secured through deposits at Wells Fargo, and the terms are renewable. These documents can help reassure parties doing business internationally, with new-to-them businesses or clients who have recently started a business.

The Money Behind a Letter of Credit

When it comes to letters of credit, you may wonder, Where do the payment funds for a letter of credit originate? The party paying for the goods or services typically deposits funds in advance to the bank that issues the letter of credit to cover the payment. Alternatively, the amount might be frozen in the payer’s account or the payer might borrow from the bank using a line of credit.

When Does Payment Happen?

Payment usually occurs when the seller has completed all the stipulations in the letter of credit. For example, the seller might have to deliver the goods to a specific address or onto a ship for transportation in the case of international trade. In the latter case, shipping documents would serve as proof that the requirements for payment have been fulfilled. They might trigger the payment transaction.

What to Watch Out for

Here are some common mistakes sellers may make when relying on a letter of credit for payment.

•   Failing to check all of the requirements in the letter of credit.

•   Failing to understand the documents required for the deal.

•   Failing to confirm whether the time limits for delivery and payment are reasonable.

•   Failing to meet the time limits.

•   Failing to get the necessary proof of delivery documents to the bank.

Letters of Credit Terminology

Here are some terms and phrases to know if you may be using letters of credit.

•   Advising bank: This is the bank that informs the seller that the letter of credit has been completed. The advising bank is also called the notifying bank.

•   Applicant: The party or the acquirer of products or services who applies for the letter of credit from the bank.

•   Beneficiary: The party, or seller, who will receive payment. The seller usually requests a letter of credit to guarantee payment.

•   Confirming bank: The bank that guarantees the payment of the required funds to the seller. If a third party is involved, the confirming bank is the bank most familiar to the seller.

•   Freight forwarder: A shipping company that provides the transportation documents to the seller.

•   Intermediary: These are companies that link buyers and sellers and may use letters of credit to ensure transactions are executed.

•   Issuing bank: The bank that issues the letter of credit.

•   Negotiating bank: If a third party is involved, the negotiating bank works with the beneficiary and the other banks involved. They likely determine the letter of credit requirements to complete the transaction.

•   Shipper: The transportation company that ships goods.

•   Stand-by letter of credit: A subsequent letter of credit that’s used when a deal requirement has not been met. For example, if payment does not occur within the specified timeframe, a stand-by letter of credit would then be used to help guarantee that the deal goes through.

Pros and Cons of Letters of Credit

A letter of credit provides security for both parties involved in a trade, but it can also add costs and time to business transactions.

Pros	Cons
•   Reduces the risk that payment will not be made for goods or services, thereby providing security •   Allows for additional requirements to be built into a letter of credit, such as quality control and delivery stipulations •   Provides transaction security for both the buyer and the seller •   Forges new trade relationships	•   Incurs bank fees for the letter of credit, which increases the cost of doing business •   Adds time by preparing a letter of credit; transactions can be delayed •   May require a separate letter of credit for each transaction •   Demands that the buyer usually provide collateral to the bank

How to Get a Letter of Credit

Getting a letter of credit typically requires a few steps. It’s wise to get the necessary paperwork together first. Various documents will usually be listed as requirements for a trade, such as a shipping bill of lading, a commercial invoice, insurance documents, a certificate of origin, and a certificate of inspection.

Here are the steps typically taken to obtain a letter of credit.

1.    The buyer and seller come to agreement on the sale terms and the use of a letter of credit.

2.    The buyer contacts their bank where they have a checking account and requests a letter of credit and provides necessary documents.

3.    The issuing bank prepares the letter based on the terms of the sales agreement and sends it to the confirming bank or advising bank, which is typically in the seller’s home country.

4.    The confirming bank verifies the terms and forwards the letter to the seller.

5.    The goods can then be shipped, and the exporter sends documentation to the advising or confirming bank.

6.    Document verification and settlement of payment can then occur.

When to Use a Letter of Credit

A letter of credit is beneficial for sellers entering into a new trade relationship or an international trade relationship. It can provide assurance that the seller will receive payment because the issuing bank guarantees payment once the requirements have been met. Sellers may also use the guarantee of payment to borrow capital to fulfill the buyer’s order.

The Takeaway

A letter of credit is usually requested by an exporter or seller to minimize credit risk. The buyer of the goods or services applies to a bank and requests a letter of credit based on the sales agreement. This document helps guarantee that payment will be made. It can provide priceless peace of mind when conducting international trade or doing business with a new customer.

Here’s another path to financial peace of mind: Banking with SoFi. Your money is FDIC-insured and secure, and it grows faster. Open a new bank account with direct deposit to earn a competitive APY and pay zero account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How much does a letter of credit cost?

A typical fee for a letter of credit is typically 0.75% percent to 1.5% of the amount of the deal, but the rate will vary depending on the country and other variables.

How do you apply for a letter of credit?

Once the terms of a trade are agreed upon between the buyer and the seller, a buyer contacts their bank to request a letter of credit. They then gather the required documentation and fill out an application with that bank.

Why do you need a letter of credit?

The parties involved in a trade typically use a letter of credit to minimize risk. For the seller, a letter of credit can guarantee payment for goods once certain requirements have been met and the buyer confirms their creditworthiness as a trade partner.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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To be or not to be: Hamlet’s existential question may well be applied to the question of should I get a credit card. While stories of snowballing debt can scare people away, credit cards can be valuable financial tools when used responsibly.

Before you apply, however, you should consider the reasons why to get a credit card and understand the ins and outs of using one. Read on for a rundown of when you should get a credit card, and when you might reconsider.

What Is a Credit Card?

A credit card is a payment mechanism that can substitute for cash or a check. The credit card itself — a thin piece of plastic or metal that may be presented in physical form or saved on your phone — is usually an unsecured line of credit.

Your credit card will have a credit limit, which represents the maximum amount of money you can borrow. The average credit limit is around $30,000, but limits vary depending on credit history and credit score.

Your card will also come with an interest rate, which is the amount of interest you’ll pay on any balance remaining at the end of each billing cycle. Interest rates can range from 0% and up; a good APR for a credit card will depend on your specifics, such as your credit card, but in general, the lower the better.

Credit cards also may have rewards programs, such as travel rewards, cash back, access to events or programs and more. There may also be benefits included with a card like purchase protection and insurance offerings.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

When to Consider Getting a Credit Card

Should I apply for a credit card? The answer to this depends on a few factors. For one, you’ll want to make sure you’re getting a credit card for the right reasons. Potentially valid reasons for why to get a credit card may include:

You want to build credit. A credit card can be a great way to build your credit history. By using a credit card and then paying off the balance on time and in full each month, you practice good credit habits and help improve your credit score. A strong credit score can potentially aid you in getting approved for car loans, mortgages, apartment rentals, and more.

You’re making a large purchase. Whether it’s a laptop for school or furniture for your apartment, putting a purchase on a credit card can provide purchase protection. This includes potentially being able to get your money back if the product isn’t as expected or services aren’t rendered. Additionally, some credit cards may offer promotional deals on APR, which could allow you to spread out your payments on your big purchase without paying interest.

You want more protection for your money. While fraudulent charges can still occur on a credit card, there are more protections in place to help protect your credit and identity with a credit card as opposed to cash or a debit card. Many major credit card companies even offer zero liability protection, which means you aren’t liable for any fraudulent charges made on your card in the event of theft or fraud.

You’re planning a trip. A credit card can be a good “just in case” tool to have in your wallet if you’re traveling. Some people like using a credit card for trip planning and expenses. Credit cards also may offer travel perks, such as checked baggage at no cost, or insurance protection, depending on the card.

Recommended: What is a Charge Card

Things to Know Before Getting Your First Credit Card

A credit card can make you feel like you have financial freedom. But with freedom comes responsibility. Here are some tips to keep in mind before you get your first credit card:

Pay your bills on time. Your payment history is a large part of your overall credit score. Setting up autopay as soon as you get your card can ensure that you never accidentally miss a payment.

Understand your credit utilization ratio. Your credit utilization ratio is the amount of money you owe on your cards compared to how much money is available for you to borrow. The lower your credit utilization ratio, the better. Even if you can’t pay your balance in full, paying as much of the balance as you can is helpful in keeping your credit utilization ratio low.

Check your statement every month. Be aware of how much you’re spending on the card. Check your statements and flag any charge that seems unfamiliar. This could be a sign of fraudulent activity.

Create financial habits that stick. Some people like to use their card for automated payments each month on a standard bill, like a cell phone bill. Others like to use their card for specific purchases, like gas or groceries. There are many “right” ways to do credit cards, so it’s helpful to figure out what works for you before you start swiping.

Stay within your means. Some people are tempted to spend when they have a credit card. Make sure to stick within your means and only purchase what you would have been able to cover with cash. It isn’t easy to get credit card debt forgiveness if you take on more debt than you can handle, so you’ll want to avoid that road if possible.

Recommended: When Are Credit Card Payments Due

When Not To Consider Getting a Credit Card

You know yourself best, and you may have a sense opening a credit card may make it too tempting to go overboard. Here are some reasons to not open a credit card:

A partner or friend is pressuring you to do so. If a partner or friend needs access to money and suggests you open a credit card, this could lead to pressure to spend beyond what you can afford.

You’re still working on money management. If you’re still working on money management, sticking to debit cards or buy now, pay later arrangements may help you build up to being able to confidently use a credit card.

You want to buy something you can’t afford. It may be tempting to put a trip or a big purchase on a credit card, but this can potentially cause your finances to spiral out of control. Even if a credit card offers 0% interest, only putting what you can afford to pay off on a credit card is a good rule of thumb.

Pros and Cons of Opening a Credit Card

Weighing the pros and cons of a credit card can help you assess whether or not you should get one.

Pros of Getting a Credit Card	Cons of Getting a Credit Card
Protection against theft and fraud	Temptation to spend beyond your means
Opportunity to build credit when used responsibly	Interest will accrue if you don’t pay off your balance in full
Access to perks and rewards	Potential to harm your credit score
Convenience	Fees may apply

Avoiding Credit Card Traps

As evidenced in the history of credit cards, high interest rates and the ease of spending beyond your means with a credit card can land you in debt. However, you can have a credit card and avoid these traps with these tips in mind:

•   Only spend what you can afford. One way to avoid racking up debt on your credit card is to treat your credit card as you would cash. This means only spending as much as you already have in your pocket, with other budgetary concerns still in mind.

•   Always pay your balance in full. Whenever possible, it’s important to pay your balance in full each month. This can help you from incurring interest, which can easily tip you into a debt cycle and make it more difficult to pay off your credit card balance in subsequent months.

•   Set your bill payments to autopay. You can always set the autopay to the minimum, then manually log in and pay the balance in full. This will ensure you’re always on time with your payments — an important factor in determining your credit score.

•   Check your credit card statement each month. Make sure to look over your statements every month to check for any errors or unexpected charges. This can also help you to notice your spending habits and anywhere you can potentially cut back.

•   Don’t get stuck chasing rewards. Rewards can be a helpful part of how credit cards work, but as you’re learning to use credit, simpler is better. Consider sticking to just one card in the first few years of building credit, and be careful about spending just to snag rewards.

Alternatives to Using a Credit Card

There are alternatives to credit cards, which can still give you some of the benefits that a credit card might offer.

Use Buy Now, Pay Later Loans

Loans that offer fixed payment strategies to pay off a purchase are becoming more popular. Called installment loans, these loans offer funds that cover the amount of a purchase. Many do not charge interest, but late fees may apply for missed payments.

Like credit cards, it can be easy to overspend with a buy now, pay later loan. Additionally, your creditworthiness may get checked each time you use one of these loans to cover a purchase, which could negatively impact your credit score if it’s a hard inquiry.

Become an Authorized User

As an authorized user, your name is added to someone else’s credit card account, such as that of a parent. In some cases, you may get your own card and be able to make purchases. But in other cases, the person may add you to the card without giving you access. Either way, this can help build your credit history and credit score without the responsibility of having a credit card account under your own name.

Recommended: Tips for Using a Credit Card Responsibly

Consider a Secured Credit Card

A secured credit card can be helpful for people who don’t have a credit history and may not be able to get approved for a traditional credit card. With a secured credit card, you may pay a deposit, such as $500. This then becomes your credit limit. Over time, and with good credit behavior, you may be able to switch your card to a traditional, unsecured card.

FAQ

Should I get a credit card at age 18?

You can get a credit card at age 18, but you don’t have to do so. If your parents or a relative has a good credit history, consider asking to become an authorized user on their account, which can help build your credit. Keep in mind that if you do decide to apply for a credit card at 18, you must either provide proof of income or get a cosigner.

Are there risks of having a credit card?

Risks of having a credit card include spending beyond your means. This, coupled with high interest rates, could lead to debt that is hard to pay down. By learning to use a card responsibly, you can help mitigate these risks.

How do I choose the right credit card?

The right credit card for you depends on multiple factors, including how you plan to use the card, the interest rate offered, and the perks and rewards of the card. But it’s okay to keep things simple for your first credit card and not get too into the weeds comparing rewards and perks. As you build your credit, you can potentially explore additional cards.

How can I get a credit card with no credit history?

If you have no credit history, you can become an authorized user on a relative or trusted friend’s account. Another option is to apply for a secured credit card. With a secured credit card, you’ll put down a deposit that will become your credit limit. You can then use the card to build credit. Over time, you may be able to switch your credit card from a secured credit card to an unsecured credit card as your credit grows.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Photo credit: iStock/Georgii Boronin
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