Should I open a credit card?

<div class="user-question">Hi Frich! I just finished my freshman year at university and I'm considering to get a credit card but I'm not sure if I should do it. Is it too soon? I'm afraid to make a mistake since I've never had a credit card before!!</div>

Thank you for writing in! You're doing the right thing by carefully thinking through before applying for a credit card👏

I remember when I first got my credit card I knew NOTHING about the risks of owning one, the rules that should be followed, or credit card debt. All I wanted was the cash bonus and perks that opening the card would get me (like 15% off my first purchase at Victoria’s Secret).

Before I knew it, I had 8 different credit cards,.. A few for each store I shopped at (like Victoria’s Secret and JCrew) and a few that charged high annual fees.

All that to say - learn from my mistakes!! Before opening a credit card it's essential to do your homework and ensure you're making informed decisions.

The MOST important thing you can do BEFORE opening your credit card is to truly understand your financial situation. Take a close look at your income, expenses, and existing debts.

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I typically wouldn't open a credit card if:

1️⃣ I didn’t have at least 1-3 months cash savings. 1-3 months in cash savings is basically an emergency fund. Just in case you lose your job, have a hefty medical bill, or COVID-19 happens all over again and you cannot work or leave your home, having cash liquidity for 1-3 months is one of the most important financial habits you should have. Think: how much do you need for basic survival like rent, bills & food?

<div class="frich-tip">Frich tip: Here's our favorite HYSA!</div>

2️⃣ I didn’t have a steady income. Income is important when it comes to controlling debt because you typically should not be spending more than you earn. If you accidentally spend more than you make (let’s say you hit the max limit on your credit card and that max limit is more than your income) you could snowball into never-ending credit card debt due to compound interest.

Here's a simple example of how compounding works. If you owed $5,000 at a 17% interest rate, about $2.32 would accrue on day one. The next day, the interest wouldn't be charged on $5,000. It would be charged on a $5,002.32 balance. So the next day you would owe $2.33. Then the third day you would be charged on cumulative interest of the first two days on top of the principal amount which would add up to $5,004.65. While $4 for a few days doesn't seem like a lot, 6 months down the road this compounded cumulative interest will add up to be more than $5,500, and 1 year down the road, this debt will compound up to over $6,100 so now you’re paying over $1,000 in interest!

3️⃣ I had existing high-interest debt. If I had personal loans, business loans, or any high-interest debt (anything above 8%), it would be very risky to open a credit card because it could snowball into more debt. Not all debt is bad - some loans can be considered an investment into your future like a mortgage for a home or student loans for your education. But having high-interest debt can be dangerous if not controlled (like a personal loan, a business loan, or existing credit card debt).

4️⃣ If my expenses outweigh my income. If you are spending more than you are making, then you are not growing your wealth nor are you being financially responsible. If you add a credit card to that bad mix, then you could be entering a slippery slope of getting caught into more debt. Look at your Frich App and see how your spending compares to the average users in your city.

Below is a screenshot of what I spend in a month based on the Frich categories. Now, although I may overspend in other areas, my overall spending is less than that of an average New Yorker.  If you are paying more $$ in rent, Uber, food, or other expenses AND making below the average amount, it may not be the healthiest decision to open a credit card unless you are confident you can and will pay off the full payment every month.

Many of the bullet points above talk about what to think about before getting a credit card because over 75% of Americans are in debt (with an average debt of $21,800 per person) and we do not want you to be a part of that statistic!!

However, if you do get a credit card, like 84% of Americans do, we will be making a comprehensive checklist of what to do once you get that shiny piece of plastic (or metal!) in your wallet to safeguard yourself against debt, fraud, and risk.

Take your time to go through these points and make the best decision for you! And message us to let us know which card you choose (or if you want help with that too☺️)

xxx, Kristina

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Btw - here's how others are doing👀

Scrolling through social media, we might be left thinking that every single person and their neighbour has a platinum Amex that they use to fly around the world in first class seats for free. But what's the reality??

How many credit cards do you have?

💳Average answer: 1

Are you able to keep up with your credit card payments?

🫨13% I just pay the minimum

👏61% I pay in full every month!

🫣26% I pay more than the minimum, but still have a balance