Cents and Sensibility

Give Yourself a Little Credit

Contrary to popular belief, credit cards are not evil. Even if they were, they would be a necessary evil. Beyond the “buy now, pay later” benefits of credit cards, they can really help to boost your credit score. With the right cards there are a plethora of benefits in store. You just need to know how to use them. So for the next few weeks I will be doing a series on credit cards. I’ll cover the right and wrong ways to use them, how to pick the right credit card and even how to make the most out of your credit card benefits.

Let’s start out by emphasizing how much you need to have (and use) a credit card

Living Off Your Credit Cards

With the economy and job markets being what they are (and in case you were wondering, what they are is bullocks), you might be at a point in your life when you have to live off of your credit cards. That’s okay. Being broke builds character. Look at Selina Kyle!

In all seriousness, though, if this is your situation, it’s totally fine. According to Suze Orman’s The Money Book for the Young, Fabulous & Broke:

Credit cards are a great lifeline when you don’t yet make enough money to live on, but only if you are truly committed to using the card solely for necessary expenses, not indulgences.

So budget like crazy, eat that ramen and don’t forget to make your minimum payment every single month on time.

Life is unpredictable. You might have a decent cash flow, a detailed budget and the discipline of a Tibetan monk. But if you haven’t gotten yourself in a situation that your regular checking account can’t accommodate, then you’re either very lucky or very boring. Credit cards are exactly what you need to get yourself out of a jam. And chances are you are better off using a credit card then doing a cash advance, especially if you need to pay for something that will take a while to pay off.

Your Credit Score
Your credit score is a means to determine your trustworthiness with credit and your ability to pay off debt. Whether it’s fair or not, your credit score can affect your ability to buy a car, rent an apartment and even get a job. Thus, it’s in your best interest to keep that as high as possible. Here are some ways proper use of credit cards can boost your credit score:

  • 35% of your score is your payment history. By consistently making payments on time you increase your credit score.
  • 30% of your score includes your debt to available credit ratio. If you are constantly using all your available credit it looks like you are close to maxing out your cards and can be a credit risk. So the more available credit you have to your name, the better this ratio is. Besides, if you have a credit card that you use regularly for daily life, you may need another card for emergencies anyway. However, don’t go opening up a bunch of new accounts just to significantly shrink your ratio. You’ll see why below. Just open what you truly need.
  • 15% of your credit score is the length of your credit history. If you haven’t already, open a credit card and hold onto it for as long as possible. Just be sure to make consistent payments on it. I would also advise against closing any cards you’ve had for a long time unless they have an unnecessary annual fee.
  • 10% of your credit score is the type of credit you have. Creditors want to know that you can handle a wide variety of debt. Even if you already have a credit history because of a loan, it’s a good idea to have a credit card in the mix.

Be careful, though. Improper use of credit cards can hurt your credit score like so:

  • Delinquent payments on your credit card is one of the fastest ways to drop your score. Be sure to make AT LEAST you minimum payment every single time.
  • 10% of your credit score is “new credit” which includes the number of credit inquiries you have. Each time you apply for a card, credit line increase, loan and sometimes an apartment, it shows up on your credit report. Too many inquiries in a short amount of time make it look like you are in a desperate jam and can lower your score. (This is why I said not to open too many cards earler.) Don’t apply for a credit card unless you are near-certain that you truly need it and can reasonably be approved for it.

The Rewards
Used properly, credit cards can get you a whole slew of benefits. By now, you may already be familiar with rewards cards that offer cash back or reward points for your favorite airlines or hotel chains. And if you’ve ever shopped at a department store, you’ve most likely been offered a retail credit card that offers discounts on your purchases at that store. If you’re trying to get out of debt there are credit cards that come with nifty budgeting tools or great balance transfer options. Like I said, I’ll go into more detail about this in the coming weeks. But sufficed to say, not using a credit card is like leaving money on the table.

As you can see, credit cards are both useful and necessary. Life without a credit card can make things difficult in the long run. Imagine being the most fiscally responsible person with your cash, but not being able to get a decent interest rate on a home loan because you don’t have a lengthy credit history! That would be terrible. So do yourself a favor and give yourself a little credit.

  • http://www.facebook.com/profile.php?id=721755954 Gray Deans Shelton

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  • http://www.facebook.com/profile.php?id=721755954 Gray Deans Shelton

    Ok, sorry about the blank comment….my temperamental computer. I have to disagree with you though. “…both useful and necessary…” is relative. While I agree that credit cards can provide a lifeline when you have an emergency so can proper investing and planning when things are good. For those of us who graduated from college in this horrible economy and can’t find jobs, I agree that credit can be useful. I am also sure that teaching teens to plan (if they have jobs) and invest is a wiser and safer bet. Credit cards charge almost 25 – 30% interest rates. Imagine that means you’re paying $25 for every $100 you put on a credit card. If I paid the ‘minimum’ balance every month on my credit card it would have taken me 18 years to get out from under a $4,000 credit bill (racked up in college after my ex husband split). I think if we were smarter investors and reevaluated what is a NEED and what is a WANT we would see that we DON’T “need” credit for anything.

    • http://www.facebook.com/profile.php?id=3405608 Mary Aurelia Dacuma

      I am going to respectfully disagree. You NEED a credit history and having a long standing credit card is part of that. Also, I am not sure what credit cards you are looking at. Retail cards will often charge interest rates that high, but with decent credit, or even no credit, most standard bank credit cards barely break 20%. Finally, sometimes you are at a point in your life when your paycheck can only cover so much. Depending on your situation, you can temporarily float yourself on credit cards so long as you try you best to pay as much as you can each month and stick just to the necessities until you reach a point where you can start paying it down in full.

    • http://www.facebook.com/profile.php?id=3405608 Mary Aurelia Dacuma

      One other thing I forgot to address, but I think is important to mention – interest is only charged on what you don’t pay off from that month. So even if I max out my credit card (which is never wise, even if you have the money to do it). If I pay off the entire balance I spent during that pay period by the due date, I don’t get charged a cent. I couldn’t tell from your comment whether or not you knew that was the case, but I think it’s important to clarify that for you or anyone else who read that.

      It’s a pretty gross interest rate, but a 30% interest rate won’t do anything to you if you pay off your balance each month.

  • http://www.facebook.com/profile.php?id=100000180120838 Kati Ber

    I personally think, that credit cards are what ruin(ed) our economy!
    There is way more credit than there is actual money… and to me that just seems wrong!

    • http://www.facebook.com/profile.php?id=3405608 Mary Aurelia Dacuma

      That’s a severe oversimplification of how the economy was ruined. There were several factors including improper use of credit cards, dishonest financial institutions, uneducated consumers who should have known better than to use the loans and credit offered to them – regardless of how you feel about the way your credit score is graded and the value of credit cards on the economy, having a credit card is important. You just need to use it properly.

      • http://www.facebook.com/profile.php?id=100000180120838 Kati Ber

        yea, I know that I oversimplified a little…
        Its just that it just feels wrong to me to live in dept (because thats what owning a credit card would feel to me) if I don’t have to… but I guess thats because here in Austria we just don’t need credit cards, our credit history is verified differently than yours… (or at least I guess it is) when renting my apartment, noone ever asked me about credit history…
        I guess thats why I think different on that subject than most of you guys do…

  • http://www.facebook.com/profile.php?id=1597950031 Ashley McCambridge

    I would agree that there are some uses to credit cards. My fiancé has a photography business in which the need for equipment often comes more quickly than the funds we have at the time. While I had previously been suspicious of the idea of him getting a company card, after speaking to enough of the photographers he works with in Chicago, I noticed that all of them paid off their credit safely and efficiently with the pay that they would not have been able to make sans equipment. In this sense, I see them as being helpful.

    Overall, however, I do need to agree with Kati and Gray on their feelings towards owning credit cards. Money, especially with our economy, is an incredibly fickle resource. When I moved to the Chicagoland area last August, rent, grad school fees, and groceries ate up everything I’d saved within a month. Getting a job at the neighboring mall was even proving impossible. I was incredibly tempted to get a credit card to appease my survival instinct (dramatic, I know, lol). HOWEVER, though it was difficult, I found ways to make due without one. My neighbors and I organized a car pool/rent system. We planted a big garden this summer, and traded with one another. I started making my own bread rather than buying over-processed, over-priced bagged bread (not getting down on those of you who do buy it, I understand its convenience). Most of all, when we knew someone was having a rough go of it, we helped fill their needs, knowing the same would be done for us if a situation called for it. Not only do I not have to worry about unneeded debt, but now I feel safe and connected, because the hardship brought our apartment building together. It’s sappy, I get it, but it’s honest. We are all still quite hard up on funds, but none of us is scrambling because we pool our resources together, rather than attempting to converse with a credit card bill over a ramen dinner.

    In the end, I’d say credit card for business expenses = necessary. Credit card for life expenses= slow train to hell.

    End soapbox.

    • http://www.facebook.com/profile.php?id=3405608 Mary Aurelia Dacuma

      The problem with a Corporate Card that isn’t “your” card is that it’s not really helping you to build a credit history. I think it’s great that you and your neighbors pooled together to make do with what you have. But I’m not sure how that helps you to build a credit history. Credit cards aren’t just for spending money you don’t have. They serve a much larger purpose, whether you agree with the system or not.

  • http://www.facebook.com/profile.php?id=1454922751 Bre Short

    I can understand everyone’s perspective on the topic. Money is finicky, and how you spend depends on each person and their lifestyle. For me, having a credit history has proven to be helpful. I have large amounts of students loans to pay off each month, as well as a retail credit card I occasionally use and always pay off. While applying for an apartment in NYC, I needed to have a credit check. My other roommates, while they both had enough money to make rent every month, needed to have a co-signer for the apartment because they did not have proof to show they could make consistent payments. I was able to go on the lease sans co-signer because of my (good) credit history. I can definitely understand how having bad debt can be detrimental to your financial life, but having a bit of good credit can bring on a little extra independence and opportunity.

    • http://www.facebook.com/profile.php?id=3405608 Mary Aurelia Dacuma

      THANK YOU! The reason I wrote this article is because I found out a close friend of mine who is now 27 has never had a credit card in his life. He has a decent cash flow and no debt. His salary more than supports his lifestyle. But he’s also a 27 year old with no credit history. No credit history isn’t that much better than bad credit. My mom actually had to cosign for my apartments until I built up enough credit history to do it on my own.

  • http://www.facebook.com/profile.php?id=526232752 Katherine Donnelly

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  • http://www.facebook.com/profile.php?id=526232752 Katherine Donnelly

    Oops, sorry for the blank comment!

    I’m really glad this is being written! I’m 18, and realize I need to get a credit card to start building up credit history, but I had no idea where to start, what card to get, etc. Thanks for writing this, looking forward to the next few articles.

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