Personal Finance Advice

Congratulations.  You just received your very first credit card in the mail, and you are excited beyond belief.  This opens up a whole new world to you: The World of Credit Consumers.  Your first impulse is to run out and give the credit card a try.  You’ll only charge up a little because you just want to try it, and you’ll be sure to pay it all off when the statement comes next month.

Right?

Your first credit card is indeed a reason to celebrate.  This is the beginning of your credit history with revolving accounts, and it means that someone thought you are credit-worthy enough to merit an offer of credit.  It is exciting.  What you may not realize is that the way you handle this first credit card is going to have a huge impact on your credit history for years to come.  You’ll either look back on this as the beginning to your credit history or as a huge mistake that haunts you for many years down the road.

How can you make sure that this exciting moment doesn’t turn into a sour memory? Here are some things you need to know as you join the ever-growing group of people who utilize credit cards on a regular basis:

1.  Use it when you need it.  Your new credit card should not suddenly replace cash or your debit card as your main source of paying for purchases.  Use your card when you need to, but don’t get too liberal with it.

2.  Never, ever pay late.  You need to realize that a late payment not only results in huge fees, but the credit card company can (and probably will) raise your interest rate.  Don’t make this costly mistake.

3.  Don’t flirt with your credit limit.  You don’t want to max your card out.  You also don’t want to get so close to your limit that you don’t have much available credit at all.  This is bad for your personal finances, and bad for your credit score.

4.  It’s like a jar of pickles.  Maybe you’ve heard the saying, “It’s like a jar of pickles…once you get the first one out, the rest come out easily.”  The same can be said for credit cards.  Getting your first credit card may not have been easy, but now that you have one you’re going to get courted by other credit card companies.  Don’t make the mistake of accepting every card you receive a preapproval for.

Now is your chance to prove that you’re an adult.  Can you handle adult responsibility? Don’t allow your first credit card to become the catalyst for years of financial grief.  Instead, let it be the beginning of years of responsible credit usage.

If you have managed to achieve the much sought-after status of Debt Free, whether that means with a mortgage or without, you deserve accolades for a job well done.

Now it’s time to buckle down and maintain your status.

Becoming debt free is not a magical transformation that guarantees you will never have another credit card or loan payment in your life.  In fact, unless you chopped up all your credit cards and swore an oath against ever acquiring debt again there is a really good chance you’re going to fall right back into your old habits and wind up right back where you started: relying on credit to get the things you want.

Becoming debt free probably took a lot of hard work, but staying debt free can also be a constant struggle.  After all, you know how easy it is to get the things you want instantly by using credit. You’re aware of the ease of use associated with credit cards and loans.  Regardless of how much trouble you may have gotten into with credit in the past, it’s hard to forget how simple it is to plop a credit card down on a counter and walk out of a store with something you really want but can’t afford to buy with cash.

This is why you need to make the decision of whether or not “debt free” is going to be a permanent condition, or if you simply consider it a new starting point for a more responsible financial standing.  If your plan is to never get into debt again then you need to close all your credit accounts and never open up another account again.  Why have credit cards if you have sworn to never use them again? It makes no sense.  You might tell yourself that you want to have at least one credit card available for emergencies, but if you are debt free then you can probably build up an impressive emergency fund in a savings account quite quickly.  Why have a credit card for emergencies if you have a sufficient emergency fund in the bank?

Keep your credit accounts open and you’re playing with fire.  This is certainly not to say that everyone who pays off their debts should immediately obliterate their credit cards, but if you truly want to adopt a debt-free lifestyle then you’re going to have to get rid of these accounts.  Otherwise you’re keeping the potential open to start building debt right back up and perhaps wind up where you started: with debt and wanting to get it all paid off.

Debt free is not a permanent condition unless you make it so.

If you have a low credit score, it may feel to you as though you’re stuck with this blemish forever. Even if you have made the effort to bring all your accounts to current status and have done every single thing you can think of to improve your score it can still take quite a bit of time for your credit score to reflect your hard work.

It can be a tedious task to build your credit rating back up after financial problems, and many people find themselves discouraged and ready to give up.

Here is what you need to know: It can be done.

A person with horrible credit is not doomed to have horrible credit forever unless he or she refuses to make an effort to correct past mistakes. Even the worst items on credit reports eventually fall off due to the number of years something can be reported to the credit bureaus, so in essence this makes the entire process boil down to a waiting game.

Suppose you get your first credit card when you are in your early twenties, and because you don’t have much experience with credit you allow payments to go late and you exceed your spending limit quite a few times. Then you get a couple more credit cards, and before you know if you’re a couple thousand dollars in debt and you have collectors calling you constantly. You change your phone number, chop up the credit cards, and pretend as though it all never happened.

Because they can’t contact you, the creditors charge off the debt and your credit report paints the picture of a person who is generally not trustworthy with debt. You have a low credit score, and there is no way any lender will extend credit to you.

A few years down the road you get to thinking that maybe this is something you should take care of. You contact the lenders and offer a settlement on the debt. Another year or so go by and you get your hands on a credit card with a high interest rate and low available balance. You pay this bill meticulously, and then eventually get a car loan at an embarrassingly high interest rate. You pay this bill meticulously too.

Years go by and you continue to pay your bills as scheduled, and you start getting offers for better credit cards and loans. Though it took some time and effort, by the time you hit your early thirties your credit score is great and you’re ready to get a mortgage loan at a premium rate.

Yes, it takes time to build your credit back up, but always keep this in mind: You are not stuck with your current credit score forever. If the thought of spending years correcting your past mistakes seems like too much effort, just ask a parent how quickly a few years go by. The parent will probably respond with this: “A few years can go by in the blink of an eye.”

If your credit is wrecked, start taking the small steps now to fix it. Years down the road when you can march into a bank and expect the best interest rate on a loan they have, you’ll thank yourself for putting forth the effort.