Most of my cadets only use a debit card.
Good for them! They are already learning to live below their means! What clever future officers!
Or so you'd think. But here's the problem: with housing taken care of and no car until their junior year, most cadets have no way to establish a credit history. In order to do almost anything financial -- rent a car or an apartment, get a loan, buy a house -- you need a (good) credit history. There are a couple of ways to start this process, but the simplest, easiest, and most effective is to get, use, and routinely pay off a credit card.
Now, some people wait until they get the infamous cadet loan to start building their credit history. DON'T DO THIS. While timely loan payments do help develop good credit, using the cadet loan for this is a mistake for a couple of reasons. First, the payments don't start until AFTER you graduate....which means you're wasting time you could be developing credit for the last two years in school.
Secondly, waiting to apply for credit until after you get the loan can kinda screw you. Let me paint an actual nightmare scenario that has happened to more than one of my cadets. C2C Snuffy thinks she's financially savvy. Her parents taught her that debt is bad and you can avoid debt by never spending more than you earn. To enforce that rule on herself, she doesn't have a credit card, instead using her debit card for school supplies or the occasional meal out. She's excited about getting the cadet loan because she plans to use that money to buy her first car. A few weeks after taking the loan, she heads to the dealership to buy that sweet Mini Cooper she's always wanted. Except.....the dealer has bad news. She's been denied an auto loan. Worse yet, the credit card she finally applied for has rejected her, too. Now with no car and no credit card, she's stuck. She's been so careful with her finances -- how could this have happened?
The answer is surprisingly simple. Once you take on the debt of the cadet loan, most banks won't lend you any more money. Your paltry cadet salary is not enough to cover the loan payments (that's why they don't start until after you graduate) so your debt-to-income ratio, which determines what kind of loans, cards, and rates you can get, is ABYSMAL. Add in the fact that you have no credit history, and very few banks will extend you any money. And that's it. You're stuck.
However, this doesn't have to be you. Apply for a credit card NOW. Use it regularly; pay it off every month. What scares most young people off credit cards is the threat of paying high interest rates on their purchases. But you will never be charged interest if you pay the balance due every single month. Make it a goal to deny the credit card company any profit off of you: don't get cards with annual fees and never pay interest. And if you are still uncomfortable with using credit, just put something small on it every month: a Netflix subscription is perfect. It's an automatic charge that will keep your card active without risking some sky-high bill you're worried you won't be able to pay. Then set-up auto pay and leave the credit card out of your wallet.
One more note on using credit cards. Cadet life can get busy, so automatic payments are a good option if your expenses are pretty predictable: cell phone bill, Netflix, the occasional meal out. As they get more complicated, you'll want to review the statement each month to look for charges you don't recognize. Mr. FIRE and I still set our credit cards to automatically pay off the full balance each month just in case we are traveling or busy. Because we, like you, don't want to be paying more for our purchases than the asking price.
But there are other good reasons to get a credit card -- specifically, credit cards do two additional FIRE-friendly things for you. The first goes back to the idea of good credit. A "good" credit score is based on a lot of factors, but the two most influential are timely payments on debt (using auto-pay: check) and length of credit history. You don't need 12 credit cards to start developing a credit history, just 1.....that you hold onto forever. Seriously. I still have the same credit card that I got as a cadet. I never use it, because other cards have become more useful to me (see card benefits, below), but I keep it open because it is the longest term credit account that I have. And that boosts my credit score. So by waiting to get a credit card you're giving up precious time that could be increasing your credit score.
The second FIRE-friendly reason to have a credit card are the benefits. Unlike most debit cards, credit cards go out of their way to reward you for spending. The rewards usually fall into three buckets: travel, cash back, or retailer-specific rewards. A travel focused card rewards you with, well, travel: for example, points you can spend on airline tickets or cruises. A cash back card reimburses you actual cash based a percent of every dollar you spend, usually with some type of scale (think 2% on gas and restaurants, 1% on everything else). And a retailer-specific card gives you huge bonuses at that retailer. So a Banana Republic card offers discounts, specials, and deals at Banana Republic-affiliated brands. FIRE is not about not spending money, but being smart with what you spend. And what is smarter than getting some benefit off the purchases -- gas, pizza, textbooks -- that you're going to make no matter what?
The variety of benefits should now have you asking: okay, but which card should I get? I don't get paid for any endorsements, but a standard card my cadets get is the American Express Platinum card. It's a travel-focused card, giving you access to AMEX travel lounges, free Uber and airline credits, and points for travel. Since one of the more reliable aspects of cadet life is travel -- home for the holidays, Spring Break, summer trips and 60 Days -- a travel focused card makes a lot of sense. As you figure out your spending habits and benefit needs, you can acquire other cards. Mr. FIRE and I have a couple of different cards for different purposes: an Amazon card, which offers huge rewards for our near-daily Amazon shopping, a "cash back"-focused card for renovations, etc. Don't go crazy -- again, no one needs 12 credit cards and there can be some credit consequences for having too many open credit accounts.
Importantly, AMEX waives fees for active duty servicemembers, including the $550 annual fee for the platinum card (remember: don't pay fees!). So, you get all the benefits of AMEX with none of the cost. I'd also consider getting a standard card (VISA or MasterCard) with whatever bank offers your loan. Some places still don't take American Express, and there's a benefit for consolidating your accounts in a handful of banks: money transfers faster, one-stop shopping to check your finances, and sometimes an auto-debit feature that auto-pays the card in case you forget.
Whichever card you decide to get, make it make sense for you. Mr. FIRE and I don't pay any attention to the interest rates offered by credit cards, because we have no intention of ever ever ever ever ever ever ever ever ever ever ever ever (point made?) ever ever paying interest on our purchases. That makes the decision on what card to get all about the benefits -- what suits us and our lifestyle best.
Okay, so to recap: debit cards are great, but to start establishing a credit history and good credit score BEFORE you get your loan, the best bet is a credit card. Take it slow if you need to but don't get caught graduating with no bank-worthy proof of the reliable financial wizard you are!
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