Moving From a Debit Card to Credit Card
Changing your mindset and systems to rack up rewards, not debt
I try to make every purchase on a credit card.
There are plenty of reasons to use a credit card instead of a debit card (purchase security, warranties, credit score), but the only one I really care about is CASHBACK.
Getting a credit card can seem scary because of uncertainty and all the stories of credit card debt.
All the fears aren’t applicable as long as you abide by two rules:
1. Never spend more than you can pay off in ONE MONTH.
2. Pay the FULL BALANCE of your card from the previous month. (AKA never carry a balance!)
I think these rules are generally known but no one talks about the mental shifts and changes in systems that you have to make when moving from a debit card to credit card.
Debit Cards
Your debit card pulls money directly from your bank so it’s like spending cash.
That balance hits $0 and you know you’re done for the month.
This way of thinking about balances is especially easier when you’re a student or in a situation where you don’t know the minimum amount of money you will have month to month.
When I was in college, I would open my debit card app almost every other day to see how much spending power I had.
I had to shift from this mindset when I got my first credit card in college.
Credit Cards
With a credit card, your spending power is up to your credit limit (which is generally much higher than what you would typically spend in a month).
DO NOT USE YOUR CREDIT LIMIT AS A MEASURE OF HOW MUCH YOU CAN SPEND.
With a credit card, you will have a closing date and a payment due date.
When you first get your card, you will begin spending. Each transaction is added to your Current Balance.
You can view the closing date as the time that the credit card takes a snapshot of your spending for the last 30 days (your last statement period). This is called your Statement Balance.
An example:
Let’s say your closing date is on October 15.
Your transactions look like this:
- $20 dinner on October 1st
- $100 pair of shoes on October 7th
- $30 on a birthday present on October 9th
- $50 on a used textbook on October 13th
- $15 dinner on October 14th
On your closing date, October 15, your credit card will add together your Posted Transactions and the sum becomes your Statement Balance.
Credit card transactions usually take at least a day to go from “pending” to “posted” so your $15 dinner on the 14th likely won’t be added to this month’s Statement Balance.
That means that your Statement Balance will be $200 (20+100+30+50).
You will see a “Minimum Payment Due” and a “Last Statement Balance”.
DON’T YOU DARE look at the Minimum Payment Due. The Last Statement Balance is the name of the game.
By the payment due date, let’s say it’s November 10th, you have to pay the full Statement Balance.
You can pay the statement balance by linking your credit card to your checking or savings account.
Understanding “Current Balance”
This is where it can be confusing.
You come back on October 18th and your last statement balance is still $200 but your Current Balance is now $215!
That’s because you haven’t paid the $200 yet, and the $15 dinner you had has now posted to your account.
Anytime between the closing date (October 15th) and the payment due date (November 10th), you must make a payment of $200 from your bank account to pay off the credit card bill.
Any posted transactions made between October 16th and November 15th will be counted in the next “snapshot” or closing.
Calculating how much you’ve actually spent this period
THIS IS IMPORTANT
You need to subtract your Current Balance by your Last Statement Balance to understand how much you’ve spent in the current period.
Let’s say that between Oct 16 — November 2 you spend $300. Until you post the $200 payment, the Current Balance will say $500.
One way you can think about it is to create the max number in your head.
If you say you want to budget spending to $300 for October-November, add that amount to the Last Statement Balance and make that your upper limit that you can’t go past.
So from October 16 — November 15, you would limit yourself to never going above $500 in the Current Balance. As soon as your payment is credited to your account, the $200 will be subtracted from the Current Balance and the remainder is the actual amount you’ve spent in that period.
Automating Payments
If you feel comfortable that you will have enough money to cover your transactions each month, you should set up automatic payments.
Set up your automatic payments to pay the full balance each month.
Getting started: A quick overview of rewards and my card recommendations
Rewards
Here’s a quick summary of credit card reward points. In general:
- 1% cashback or 1 point or 1 mile all equals $0.01. AKA ONE CENT
- Travel cards that have points or miles usually offer a bonus if you use them to redeem travel or hotels that are specific to the card.
- Cards with annual fees aren’t worth looking into until you’re spending over $9,500 on your credit card per year.
I prefer to go with straightforward cashback cards. I can redeem the cashback as a statement balance or redeem it to my bank account.
Cards to get
For the majority of my friends, I would recommend the Wells Fargo Propel card. It has 3% back on food, 3% on hotels and flights, 3% back on gas, and 3% on streaming subscriptions like Netflix and Spotify. It has 1% back on everything else but so does every other card so that doesn’t really matter.
For people who want simplicity, the Citi Double Cash card gives you 1% when you buy and 1% when you pay. AKA 2% on everything because you WILL pay your full balance every month!!!!
Since it’s likely your first time getting a credit card and you don’t have any credit, the cards above might not approve you. For your first card, I would recommend the Capital One Quicksilver card or the Discover It.
The Quicksilver has 1.5% back on every purchase and the Discover It has 5% rotating categories and is the first card that I got (I still have it because keeping your first account open helps your credit score — because of the age of the account).
Both options are good, but I’m mostly recommending these because the companies (Capital One and Discover) have very friendly user interfaces and customer service.
Comment with any comments or suggestions you have! What helped you reframe the way you thought of credit cards?
