Getting Proper Credit when Credit is Due

Way back when, if you walked in a store and didn’t have enough cash in your pocket to buy that new TV, you walked out empty handed. But then along came credit cards, and suddenly, everything was yours for the taking. The problem is, just as TVs have gotten bigger over the years, so has the nation’s credit card debt. Learning how to manage your credit wisely is one of the greatest financial fitness skills you can acquire.  

For starters – what IS credit? 

Let’s start off with dispelling the biggest myth about credit – it isn’t free money. Credit is a short-term loan. Credit is convenient (swiping a card is way easier than writing a personal check at the cash register). Credit is safe (an easily cancelled card with theft protections is way safer than carrying around big wads of cash). But with these conveniences comes responsibility. If you pay off your card every month before the statement is due, you pay nothing more than the purchase price for the things you bought – and in many cases, can earn cash back for every dollar spent. But if you roll that balance, the cost of that loan can spiral out of control rather quickly.  

Your ability to pay a loan back on time steadily builds your credit score (this includes credit card bills, car payments, utility bills and more). The three major credit bureaus (Experian, Equifax and TransUnion) keep tabs on all of your accounts. As you pay off credit card statements and other bills on time, and you pay off new appliances and cars, your credit score steadily rises. Your credit score determines the interest rate you pay for future car loans, home loans or other credit cards. Over the life of a loan, a high interest rate can often double or triple the cost of the item you buy.  

Which brings up another credit card myth – the minimum payment. 

Paying the minimum payment does not dent the amount of money you owe – it only covers the convenience fee for rolling the debt. Let’s say you buy that TV for $1000. Pay it off, and the total you paid was $1000 – or $990 if you used a 1% cash back card. Now if you only pay the minimum – let's say, $20 – the interest that started kicking in on the day you bought the TV is added to next month’s bill. Based on your interest rate, the total amount you owe JUST FOR THE TV might spike to $1260. A month later, you’ll be looking at $1500 and before you know it, that $1000 TV just cost you $2000 or more. Now if you paid down $500 the first month, the interest rate only calculates on your balance. But still, it can add up fast. Bottom line, if you don’t have the cash now, save up until you do. Its way easier to throw $100/month into a “pot” to buy the TV, than to pay off a constantly compounding credit card bill. 

A similar dilemma is caused by payday lenders. What appears to be a simple “advance payment” of your next paycheck is often a short-term loan at rates that would make even the priciest credit cards blush.  

How to develop and maintain healthy credit habits: 

The best way to develop and maintain healthy credit habits is to manage debt responsibly.  Improving your credit score takes time, so it is important you build healthy habits from the beginning.   

Ways to improve your credit score: 

• Check your credit report annually, and correct any errors 

  • Often, someone else’s accounts (or debts) might get attached to your score by mistake 

  • Your annual credit card report will also alert you to accounts taken out in your name 

  • Don’t fall for bait and switch credit reports that claim to be free – use the official government service: AnnualCreditReport.com 

• Apply for a credit card, buy some things you can afford, and pay it off – every month 

  • Once you establish a good track record, it’s easier to get more credit and lower rates 

• Pay all of your bills on-time. 

  • Set up payment reminders or autopay if necessary 

• Keep credit card balances low 

• Only open new credit card account when necessary 

  • If you already have several credit cards, ignore those cash discount offers at the cash register for opening a new “store card” 

• Have a couple of credit cards (revolving credit) and loans (installment credit) 

What may be causing a lowered credit score? 

• Paying bills late 

• Having credit card balances near your maximum spending limit or over your spending limit 

• Applying for new credit cards frequently 

• Closing accounts that have been open for a long time 

• Opening and closing accounts with each new credit card offer you receive 

Ways to work on your credit: 

• Consider using a secured credit card 

  • These cards require a security deposit equal to the credit line.  For example, if your deposit is $500, your credit line will be $500. Remember, using this type of card is way safer than carrying around $500 in cash.  

  • Unlike prepaid debit/credit cards, all activity will be reported to the major credit bureaus 

• Invest in proper health, home and auto insurance 

  • Nothing can wipe out your credit (and bank account) like an accident or unanticipated illness or injury. You may feel young and invincible, but that can all change in an instant – not only to pay off your medical expenses – but the damages to others in case you get sued. 

  • Even if you’re unemployed or self-employed, if you are no longer covered by your parents’ policy, invest in your own and factor that into your monthly budget. Learn more about Monthly Budgets here.