Using Credit Wisely

Two Faces of Credit

Credit has enabled many people to buy goods or services as part of their regular living expenses right away, rather than having to wait until they could save to make the purchase. It's more available today to a broader range of people than it was in the past.

In fact, the majority of Americans use credit in one form or another: about 60% of college students (or their parents) use loans to help them pay tuition and other expenses, about 41% of College Students have credit cards, and in 2008 50% of college students had 4+ credit cards. Wow!

But credit does have a downside. Although many people use credit wisely, most owe more than they are able to repay. It may be that you've been unrealistic about what you can afford to charge, or that you haven't realized how deeply in debt you are. Whatever the reason, the consequences are costly and put access to future credit at risk.


Using Credit for Good

Being smart about credit involves more than just picking the right card. You can be diligent about choosing a card with no annual fee, a long grace period, and the lowest annual percentage rate (APR) on the market, and still run up thousands of dollars of debt.

  • If you have an emergency, such as a car repair or a medical bill, using a credit card may help you get past the crisis.
  • Only using a maximum of 30% of your available credit limit on credit cards will help you grow your credit score.
  • Making all your payments on time helps build a good credit history which is so important to future credit.  When a creditor or lender can see that you have been responsible with your money, they are less likely to be concerned about risk if they grant you more credit, which will result in better terms, less fees, and lower interest rates.

Road to Good Credit


Debt

Credit can be Dangerous

A good rule of thumb:  Think twice before you swipe and ask yourself “Do I really need that right now?”

The biggest mistake you can make with credit is taking on too much that you cannot afford. Advertising and marketing may have caused you to think "I want it all and I want it now", but in your quest for immediate self-gratification you may be amassing a huge mountain of debt.

  • Using Credit is actually taking out a loan that you must pay back with interest.
  • If you miss a few payments it can destroy your credit score vary quickly.
  • Allows you to spend money that you can't afford, so your Expenses can become greater than your Income.

Shoppers Beware

A lot of credit card spending is done on the spur of the moment, when you haven't planned on buying, but something strikes your eye, perhaps its on sale, or it's only a pizza. Doing this regularly can really get you into trouble with credit cards.  Charging more than you're able to pay off quickly is a big no-no. Whether or not you stay on top with credit depends on how you handle some all-too-familiar situations.

If you have $1000 Credit Limit that does NOT mean you have an extra $1000 to spend.

If you find shopping hard to resist, one solution may be to leave your credit cards at home most of the time, so that they are not handy.  If you reserve using credit for those transactions you can't handle with cash, a check, or a debit card, you may find you spend less.

Shoppers Credit


The Bare Minimum Danger

What you charge each month will become clear when your monthly statement arrives and you see how much you owe.

There are basically two ways to deal with your debt:

  • You can pay all or at least a substantial portion of your balance.

  • Or you can make the minimum payment.

If you pay all or at least a substantial portion of your balance it will not cost you a thing for the convenience of using credit. Most creditors normally have a grace period where no interest is charged within that period.

However, if you only make the minimum payment, you are only paying enough to cover the interest and a small portion of the principal. While paying the minimum keeps you out of trouble with creditors, it's more costly in the long run, since you'll always be paying interest on a large amount, which doesn't decrease very rapidly.

Here's an Example:

 

Payment Made

Time to Pay off Card

Total Amount of Interest Paid

Total Amount Paid

Paying the Minimum

$20 minimum

31 months

(2.5 years)

$131.40

$631.40

Paying the Minimum plus extra

$20 minimum + $20

14 months

(1.2 years)

$57.86

$557.86

Paying off the Full Balance

$500

1 month

0

$500