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.
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.