ConsumerismNot too long ago folks would keep their money in coffee cans under the bed. When they needed to make a purchase, they paid cash from the can. That was when this country was not experiencing the enormous debt that it now finds itself in or the enormous cost involved just to live. What changed? One thing was the use (or perhaps the misuse) of credit.

The coffee cans were exchanged for bank accounts and the banks promoted the use of credit. Then big advertising got involved, and because we are a consumer-driven society, it resulted in the “wants have become needs” mentality. Lacking the resources to fulfill these “needs”, we have been trained to buy on time. Self-gratification dictates that we get what we want now and worry about paying later. This can be accomplished with credit. So, is credit an evil device?

No! Credit is good and credit is a necessary part of our life— when used correctly! So exactly how can credit be used to benefit your life and not cause anxiety? Here are your dos and don’ts.

Learn how to use credit cards:

For Building Credit and for Emergencies only.

Let’s discuss building your credit profile. A good credit profile is not always reflected with a good FICO score. We have had several clients who had high FICO scores but could not qualify for a bank loan or auto purchase or even a credit card. The reason is the high FICO score was predicated on not having a “history of bad credit”. But since there was no “good history” either, the lenders refused them credit.

So what is really needed for an acceptable credit profile is a history of having made timely payments on a product or service for at least a year or more. These are called “trade lines”. Your objective is to create at least three trade lines. These can be credit cards, department store cards or possibly a small loan.

Here’s the caveat and where most consumers make mistakes: The trade line is abused. How? The maximum amount of credit is borrowed and the least amount of payment is paid. This is what causes runaway debt and financial ruin.

Here are your strategies for building credit:

  1. Never Buy Extras. Use the credit card to purchase only those things you typically buy anyway. An example; say you normally purchase $100 in groceries monthly. Use your credit card to buy the groceries instead of cash or a debit card.
  2. Pay the Card off Monthly. Whenever you use your credit card, make a notation in your check balance book the amount spent. In this manner you are treating the transaction as though you are paying for it with your checking account and thus will always be in a position to pay the credit with a check at the month’s end.
  3. Maintain a 20% balance. Avoid using the entire limit that is made available to you. As an example, a credit card with a $500 limit should only have at any given time a $100 balance owed.
  4. Request a Limit Increase. Every 6 months ask the bank for an increase in your limit. Even if it’s a modest increase, in time you will have a strong trade line on your credit profile that will open many doors for you in the future.
  5. Repeat the Process. If you are starting with just one line of credit, remember, your objective is at least three trade lines. Once in the habit of performing the above, apply for another card.
  6. Never Buy a High-Ticket Item to Build Credit. Avoid the temptation to buy something really costly. When building credit for the first time interest rates are typically high, until you can be trusted (in the bank’s mind). So your strategy is to only pay high interest on small amounts. Only after your credit improves and your interest rates go down, should you consider paying on time for something that costs a great deal of money. Doing so before you are ready could easily result in paying twice the value of the purchased item.

Now let’s talk about using credit for emergencies. If you read our previous blogs, you know that some student loans where co-signers are involved can have the note called (it has to be paid off) in the event the co-signer becomes disabled, dies or files for bankruptcy.

If you have gotten into good credit habits using the above strategies, in just a short while you should have a fairly high credit amount available to you. If your student loan is called, it could be a great time to use that credit you have built up. While it is unlikely there would be enough credit to pay off a high-balance student loan, with worthy credit it may be possible to get a loan to pay off the note. Also, if you incorporate the ideas from our last blog, the collective strategies could save your day.

Other good emergency uses might be when your car breaks down, an unexpected expense involving your continued education, or perhaps an unexpected increase in cost of living and of course, there are a myriad of other life emergencies where it is prudent to use your credit card instead of cash (that may not even be available to you) or a debit card.

A summary of strategies to consider:

  1. Don’t Use Credit Cards for Perishables. You’re up all night cramming for finals and need to eat. Ah, a six pack and a pizza on the credit card sure make sense! Actually, no it doesn’t. This is so insidious and so potentially damaging that we can’t stress it enough. Do not fall into this trap. You’ll end up paying for that pizza and beer over and over again and max out the card in short time. Keep nutritious snacks available for these occasions and leave your card for emergencies!
  2. Do Use Credit Cards for Things You Have to Buy. Determine your monthly expenses. Purchase or pay for those items with your credit card whenever possible.
  3. Do List Your Credit Card Expenses in Your Check Balance Book. Treat your checking account as though you have already paid for the credit card items. In this manner your bank balance will already reflect a lower amount ensuring that you have the money necessary to pay the credit card bill when it arrives.
  4. Never Purchase a High-Ticket Item to Build Credit. An auto purchase is a poor way to build credit. The high interest rate you will pay for 60-78 months on an auto loan could cause you to pay more than double the car’s value. It’s a huge waste of money. Instead, use your credit card to purchase a small-ticket item that can be paid off within one year.
  5. Request a Higher Credit Limit. After one year of proper credit card use, request a limit increase. You’ve earned it by making timely payments and never being late. An increase in limit equates to an improved credit history.
  6. Request a Lowered Interest Rate. After one year call the card’s customer service and request and reduction in the card’s rate.

Please see our web site for credit card offers specifically for college students.