How often do you hear people say you should never get a credit card? Well, I’m here to tell you plain and simple not to listen to them! Not only are your credit cards NOT the devil, but they can actually benefit you in many ways. The key is learning about what use of good credit can afford you.
It isn’t the idea of getting a credit card that causes the problem, it’s the mismanagement and abuse of a credit card that does. It’s the same as if you’ve ever overeaten or overspent on your budget before. The excess overages can lead you down a path you don’t want. In order to manage your spending, you must take the time to research and plan.
Credit cards were never created with the intention for people to solely live off of them. However, if you have goals, such as buying a house or a car that you won’t be able to outright buy in cash, credit cards are essential for positioning you to make those purchases when you’re ready. A credit score/report simply shows how well one can manage borrowed money. Those who are masters at their finances understand how to utilize credit to their advantage. But the majority of people turn to credit cards or loans when it’s an emergency or they don’t have the funds to pay for something all at once.
Why not look at credit cards and personal loans as tools that you can utilize to leverage more opportunities?
So what particular function are you trying to carry out? Having financial freedom and becoming a master of your credit and finances, that’s what! Below, we’ll dig deeper and discuss 3 keys to making credit work for you.
Understanding how your credit score breaks down:
The 5 Factors of a Credit Score are:
- 35% Payment History – Do you always pay your bills on time?
- 30% Utilization Ratio – How much of your available credit have you used?
- 15% Age of File – When did you first start building the history on your report?
- 10% Diversification – How many different types of accounts do you have?
- 10% Inquiries – How many times has your report been pulled by a company recently?
As an example, on a regular scale of a 300-850 credit score, there is a total of 550 points that you have at your disposal! How well you do in each of the previously mentioned categories will determine how your credit score is factored.
Knowing your credit strengths or weaknesses will give you a better idea of how your score is calculated. For example, if you always pay your bills on time, you have a total of 192.5 points working in your favor for payment history. If you have different types of accounts on your report (credit cards, car note, mortgage, personal loan, etc), then you’ll have a total of 55 points working in your favor for diversification.
Now, when thinking of how a new purchase, or late payment, closing an account, or opening a new one will impact your score, you’ll make better short-term decisions that can affect you in the long run.
The lower the interest, the more you save
The second key is understanding that a good or bad interest rate (when applying for a home, car, credit card, etc.) is determined by how well you’ve managed your other accounts in the past.
If you can show that you pay your bills on time or that you don’t max out your credit cards, then it’s safe to say that you might be a good manager of your credit. Creditors look at those with credit issues as high-risk clients, therefore the cost of doing business with them is charging higher interest rates on purchases. By being a good manager of your credit, you will slowly but surely see your scores start to rise. A low score can mean a difference of $100’s on your monthly car note or more money in your pocket.
Lastly, credit cards can be leveraged for many opportunities. My favorite cards are those that offer 0% annual percentage rate introductory rates. There are many “good credit” perks for different types of cards such as rewards, travel points, cash back, plus more.
When you apply for your next credit card, think about the benefits that card has to offer. Think about the card as a tool that you can leverage to get you in front of the next opportunity. There are plenty of cards out there that will give you anywhere from 10,000-50,000 bonus travel miles within the first 90 days of having your card. Be sure to read the fine print and take the credit card companies up on their offers. You may just get a free trip out of it!
All in all, unless you’re at a financial level where you no longer need credit to make a major purchase, then you should familiarize yourself with the information above.
It’s imperative that you become a good manager of your credit if one of your goals is to eventually finance big ticket items that you can’t buy with cash. Since stable credit is the foundation of financial prosperity, learning and understanding their role is important. Credit cards can definitely help in obtaining some of your financial goals if you start to think of them as a tool rather than a backup plan.