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How to use credit wisely

At a glance:

  • How to use credit wisely

  • Why you don’t want bad credit

Credit is a very tempting risk. As soon as you have all that available money at your disposal, all kinds of impulses can take hold of you.

How to use credit wisely

Stories abound of people getting numerous credit cards and going on spending sprees. Only after the bills come to their mailboxes do they feel the hangover … and if it's bad enough, they can feel it for many, many years.

If you are one of them, you can be denied credit in the future, and you can even lose employment opportunities. You can be denied other loans, such as car and home loans. Such are the costs of abusing credit. With this in mind, here are some simple tips for wise use of that little plastic card:

  • Never think of credit as free money. Credit is not free money. You have to pay it back, often with interest.

  • Understand what your credit history is made of. Your credit history is made up of several factors. It is 35% payment history, 30% amount owed, 15% length of your credit history, 10% new credit, and 10% type of credit used. As you can see, payment history factors in the most. A detailed explanation of each of these factors can be found here.

  • Be patient. Building good credit takes years. It is a lifestyle made up of responsible money habits. Give it time.

  • Use your card regularly. Using your credit card regularly helps build up your credit history.

  • Pay your balance fully each month. As you use your card regularly, it is wise to charge small amounts and pay them off each month. That way, you build up a payment history, and you also avoid interest charges.

  • Pay your bills on time. The largest component of your credit score is payment history.

  • Don't use too much credit. Avoid this temptation. If you can use cash instead, do that.

  • Don't use it frivolously. Again, charge only small amounts.

  • Use it for things you already have money for. This will help ensure that you pay your balance in full each month. But more importantly, it is an easy way to help you build a credit record.

To quote the great comedian Bob Hope: "A bank is a place that will lend you money if you can prove that you don't need it."

This paradox is resolved when you see it from the bank's point of view. It loans you money out of its vault so that it can earn money in return. It's a business. Those who do not need credit are therefore the most likely to be able to pay the bank back.

Why you don’t want bad credit

Having bad credit can be bad enough. It can be the result of poor financial decision-making, or it can be the result of something you can't control. In any case, fortune is often not on your side and the only way out is to slowly crawl back up.

Should you even get a card?

Credit cards are not just very convenient, but sometimes very helpful in a bind. If you have an emergency, such as being stuck for a few days in a strange locale, a card can be a godsend. Also, they are helpful if you want to build up a good credit history. Further, you may need one in order to rent a car or hotel, or do online buying.

But if these are not an issue for you, can you wait a while before getting a card? This may be a time to devote to building up savings, cutting expenses in your life, and learning to handle your finances. Your daily expenses are best paid for with cash during this stage of your credit-rebuilding. The last thing you want to do is end up in the same boat you were in earlier.

Credit cards are not on favorable terms

Some credit cards target those with bad credit. These cards tend to have very high interest rates, high fees for late payments and going over the credit limit, and a variety of other fees for things like setting up the account, getting a credit limit increase, and simply for having the card (the annual fee). Those who are not careful can find themselves back in the same situation they were in earlier.

Ideally, you want your credit card to report your payment status to the credit bureaus. Some of these cards do not do that; it is important to find out before you get one that it does indeed report to the bureaus. Otherwise, it will not help you rebuild your credit.

You might be tempted to try prepaid credit cards. While they can be useful at times, they do not report to credit bureaus because they are not credit products, so your efforts at building up your credit with these cards will come to nil.

You're being marketed to by scammers

Scammers target those with bad credit in hopes that they will act out of desperation and without doing the necessary homework. They might promise you a guaranteed loan without checking your credit history or income, and they might charge you a fee to "process" the guaranteed loan—and then they'll disappear if you actually send the money to them. In reality, it is illegal to promise you money in exchange for a fee.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Credit cards section

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