The current state of the economy has put Americans in a new frame of mind – one that says it isn’t fun anymore to be in debt. Some folks are even trying to go “all cash” to get away from the danger of checking overdrafts and/or identity theft.
But, you never know when you might actually need to use credit, whether you want to or not. There are times when the car engine blows up, or the furnace goes out in 10 degree weather – and you don’t have enough savings to cover repairs or replacement.
Owning and using a credit card will help keep you in a position to access credit quickly in that kind of emergency.
First, it will give you instant access to funds up to your credit limit. That might be all you need to cover the cost of a furnace repair man or a rental car to use while yours is in the shop.
But just as importantly, wise use of your credit card will help you keep your credit scores high – so if that car is beyond repair and you need a new one, you’ll not only be able to get a car loan, you’ll pay a lower interest rate.
The way you pay bills accounts for 35% of your credit score. So using your credit and paying your bills on time helps build higher credit scores.
You do have to be careful. Use the card sparingly, and pay it off when the bill arrives. Be careful never to charge over 30% of your credit limit – less than 25% is even better. Do use the card every 2- 4 months, so that you continually demonstrate your bill paying abilities – and so that you don’t get hit with an inactivity fee.
If you have to charge a higher percentage of your limit because of an emergency, and have to carry a balance, pay it down as quickly as possible.
Another big factor in your credit report is the length of time that you’ve had and used credit. So don’t wait to get a credit card until you think you might need it. Get it now. And don’t just take the first card that is offered to you. Do some research and choose the card that has the lowest fees and interest rate.
No matter how determined you are to be debt free, don’t cancel any old cards. Keep them, and use them just often enough for them to remain active.
The first step in building and maintaining your credit is to know your scores. So get your free online credit report with scores and see where you stand. Be sure to check for errors, and get them corrected if you find them. Then read the suggestions for improving your scores.
It’s very wise to stay out of debt – but it’s vital to have credit available when you actually need it.
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Mike Clover has been a Mortgage Banker for 9 years. He is also a consumer advocate for better credit education and a blogger on the CreditScoreQuick.com Blog. Mike is an expert on using credit wisely and making credit work for you to get the best interest rates.
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Protect your credit and building it is a tough task. You have to build enough credit up to be able to buy things such as house, cars, or even rent a place.
Thanks for sharing this information. I’ve had a credit card since college and have always been able to pay it off on time. Something that is key for building credit when your young.
Unfortunately this article makes little mention of savings other than to point out that you need to use credit when the bills exceeds your savings. Your point score is not a reason to incur debt. The ability to gain more credit is not a reason to incur debt.
The real solution is to establish a realistic emergency fund that will cover any conceivable emergency. Not $1,000, not $3,000, but real funds to meet the expense. You CAN pay cash for that furnace repair. You CAN pay cash for the car repair. And if you pay cash, there is no doubt you will save even more money. Either you will be able to negotiate a better deal or you will save on paying interest.
While it is not a bad idea to have one credit card and use it occasionally, using credit get credit is a circular argument.
Good point in that having an adequate emergency fund to dip into for unexpected expenses is definitely much smarter than using a credit card (unless the balance on the card can be paid off in full each month of course).
That being said, you are using the term “circular argument” improperly but I see the point that you are getting at as it seems to be a rehashed way of saying what you said in your first paragraph “The ability to gain more credit is not a reason to incur debt.”
You are right if you mean that its never smart to use a credit card and not pay off the balance in full each month simply in order to get more credit extended to you BUT it is however a smart motivation to use a credit card and pay off the balance in full each month in order to potentially get your credit limits increased and in turn help your credit utilization ratios which in turn will increase your credit score which will in turn likely make it easier to get cheaper insurance rates, lower interest rates, etc etc.
There is nothing wrong with credit cards whatsoever. I agree they are a valuable financial instrument. No one puts a gun to card holders heads and tells them to rack up tens of thousands of dollars in unnecessary purchases and then make minimum payments for decades.
It still surprises me that some people would prefer to use cash over credit cards. I would understand if they’re irresponsible with their payments, but if you’re able to stay on top of them then it only increases your credit score. And in this day and age, having a solid credit lines means everything.