The benefits of RESPONSIBLE credit card usage
Posted 02-03-2015 at 11:05 AM by HappyinCali
Here is the biggest Catch 22 in personal credit. In order to obtain cheap credit, you need to have a good credit history. But no one will give you cheap credit if you don’t have a credit history. So, the best way to build a credit history is by using more expensive means of credit (i.e. credit cards), but use them in such a way that you never actually pay the costs.
So, let’s talk about responsible credit card use now and why credit cards are actually a good thing in my view. I will say it again - when used correctly, credit cards are the easiest and most efficient way to build up a great credit history and score, demonstrating to banks that you are a responsible adult.
The reason I say that is because the only way to demonstrate to banks that you are someone worth lending to is by always paying your other loans on time. Credit cards are one of the easiest ways to obtain financing – it is easy, because it is expensive. The hurdles you have to clear to get a credit card are much lower than those for a car loan, consumer loan, or a mortgage. In fact, having a history of on-time credit card payments is sometimes a pre-requisite for a car loan, consumer loan, or a mortgage.
Selecting the right credit card is a topic for another blog post, which I am planning on doing down the road. For the time being, I want to focus on what to do once you have the card.
Let’s say you receive one of those generic pre-approval credit card offers in your first month on campus. Everyone else will, too. You are really not special. Credit card companies will send these to everyone and hope that 10% respond and of all those 20%, 20% will carry balances at 18% APR and the companies will make a lot of $$$. Don’t be that 4%! Here are some rules
If you pay your balance in full every month, credit cards become a substitute for cash instead of a borrowing tool. The key is to spend only money you have and not to borrow. You have $500 in your checking account? Spend only $500, then. Do not spend $600. Keep your $500 in your checking account, don’t touch it and when the credit card bill is due, just write a check or pay online. You will owe nothing and the cashier doesn’t really care if the card they are swiping is a credit or a debit card.
And this is really the key point of this whole post. Prudent credit card use is basically a substitute for cash YOU HAVE, not a way to access consumer credit. Instead of going to an ATM and taking out cash, or using your debit card, you just use a credit card and then pay off what you owe in full at end of the billing period. You just have to be disciplined and realize that this is the only purpose a car should serve 98% of the time. The other 2% are reserved for an emergency and in those cases, the goal should be to pay off this EXPENSIVE way of financing ASAP.
Every month you pay off a credit card on time, you will get a little check mark on your credit report. As these check marks accumulate, you credit score improves and this will enable you to save thousands of dollars on your mortgage, car payment etc. by reducing your borrowing costs.
This is why I think credit cards are ultimately a very good thing, if used correctly. They are easy to get, they come with no fees and you never need to pay interest on them. All you have to do is pay them in full and on time and watch your credit history build.
So, let’s talk about responsible credit card use now and why credit cards are actually a good thing in my view. I will say it again - when used correctly, credit cards are the easiest and most efficient way to build up a great credit history and score, demonstrating to banks that you are a responsible adult.
The reason I say that is because the only way to demonstrate to banks that you are someone worth lending to is by always paying your other loans on time. Credit cards are one of the easiest ways to obtain financing – it is easy, because it is expensive. The hurdles you have to clear to get a credit card are much lower than those for a car loan, consumer loan, or a mortgage. In fact, having a history of on-time credit card payments is sometimes a pre-requisite for a car loan, consumer loan, or a mortgage.
Selecting the right credit card is a topic for another blog post, which I am planning on doing down the road. For the time being, I want to focus on what to do once you have the card.
Let’s say you receive one of those generic pre-approval credit card offers in your first month on campus. Everyone else will, too. You are really not special. Credit card companies will send these to everyone and hope that 10% respond and of all those 20%, 20% will carry balances at 18% APR and the companies will make a lot of $$$. Don’t be that 4%! Here are some rules
- ALWAYS pay your balance in full. Let’s say your new statement period starts on March 1st. You spend $500 between 3/1 and 3/30 and load it on your credit card. You will owe the bank $500, but you have until 4/30 to pay it off. So, you can use the bank’s money for free for 2 months! However, what happens on 4/30 – you start being charged ~0.05% (18%/365 days) on whatever you have not paid off. So if you only made the minimum payment of $15 on 4/30, you will be charged interest of 0.05% on the remaining $485.00. At the end of 5/1, you will owe the bank $485.24. After 1 week, you will owe it $486.68. You get the point. So always pay your balances in full, at the end of each month.
- See rule #1
- Avoid cards with annual fees. Annual fees are a really pointless thing to have to pay. There are many great credit cards that have no annual fees. The exception to the rule are potentially airline miles cards. But in my opinion, those are only worth it if you really put a lot of spending on credit cards.
If you pay your balance in full every month, credit cards become a substitute for cash instead of a borrowing tool. The key is to spend only money you have and not to borrow. You have $500 in your checking account? Spend only $500, then. Do not spend $600. Keep your $500 in your checking account, don’t touch it and when the credit card bill is due, just write a check or pay online. You will owe nothing and the cashier doesn’t really care if the card they are swiping is a credit or a debit card.
And this is really the key point of this whole post. Prudent credit card use is basically a substitute for cash YOU HAVE, not a way to access consumer credit. Instead of going to an ATM and taking out cash, or using your debit card, you just use a credit card and then pay off what you owe in full at end of the billing period. You just have to be disciplined and realize that this is the only purpose a car should serve 98% of the time. The other 2% are reserved for an emergency and in those cases, the goal should be to pay off this EXPENSIVE way of financing ASAP.
Every month you pay off a credit card on time, you will get a little check mark on your credit report. As these check marks accumulate, you credit score improves and this will enable you to save thousands of dollars on your mortgage, car payment etc. by reducing your borrowing costs.
This is why I think credit cards are ultimately a very good thing, if used correctly. They are easy to get, they come with no fees and you never need to pay interest on them. All you have to do is pay them in full and on time and watch your credit history build.
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