Using Credit Wisely

When I was a freshman in college, a sorority was pushing credit card applications for JC Penney.  I applied and voila, a few weeks later I had a silver card in my hand that allowed me to spend $500 on whatever JC Penney sold.  I had power in my hand!  I marched right off to the store and used my card to buy a new outfit. (I wanted to look good for a party after all!) 

When the bill came, I did the unthinkable. I paid my bill in full.   

 

Build A Positive Credit History

A friend of mine cautioned that I wasn’t going to build my credit history by paying in full.  A common myth was that, in order to establish a good payment history, you had to pay for something with your credit card and then pay the minimum payment for at least six months.

This isn’t true.  You can prove your credit worthiness by paying the bill in full each month.  I was lucky.  My parents taught me how to be responsible with credit, so I paid the entire amount  The sad news is that many college students or first time credit holders don’t do this.

Spend Within Your Budget

It's too bad that most schools don't teach a course in credit and how to use it wisely.   The more you know about credit, the more power you have to handle credit responsibly.  This includes being able to make loan or credit payments without jeopardizing your budget.  When talking credit card payments, this doesn’t mean paying the minimum amount.  It means being able to pay off the entire balance each month, or over three months at the most.   One easy way to start your credit history is to pay for only your gas or groceries each month on a credit card and then immediately put that money aside to pay the balance in full each month. 

When looking to obtain credit, should you borrow the maximum that is granted to you?  Will that tap out your total monthly income?  Before you borrow for a big purchase, think about your total monthly obligations and strive to make sure you stay below your income.  Be sure to include periodic payments such as insurance or taxes and upcoming payments that you may have such as student loans.  Unless you do this, there will be no room for emergency savings. 

When I decided to buy my home, the lender told me I was qualified for $250,000.  I about choked!  I knew what my obligations were, factored in additional expenses like upkeep of the home and higher utility bills, and wanted to make sure I was putting money aside for emergency savings as well as retirement.  I don’t think the lender was happy when I told him I only needed $125,000.  But that was my limit and I wasn’t afraid to tell him!

Establish Credit

With the changes in the credit card laws a few years ago, it is becoming harder to establish credit or get that first credit card.  Some alternatives to getting a credit card to establish credit are the following:

  • Apply for a small loan through a credit union and have the loan payments auto deducted from your checking account.
  • Apply for a joint credit card with a parent. 
  • Get a secured credit card.  Verify that the card that you choose reports to at least one of the credit bureaus.

Be sure to check back as we explore other topics related to credit and debt.

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