22 Jan Credit Cards 201
Once you have mastered the basics of credit cards, you can develop a strategy for their most effective use in your financial life. You might consider this credit cards 201, or the information that moves you beyond being a basic credit card user and enables using your credit card to improve your financial position. In Credit Cards 101, you would have learned that with most cards it is best to pay the full amount due each month, but if you cannot, you should certainly pay the minimum balance on all your cards by their due date. You would have also learned to never spend more than 30% of your total credit possible, and to check your credit card online report at least once a week to examine the items listed as being charged, and to check the balance.
Credit Cards 201 is a step up in financial planning. While credit cards are handy for emergencies or to level out a sporadic income, they should not be used for impulse buying, for unplanned purchases, or for that restaurant or cafeteria chocolate lover’s delight. For credit card debt consolidation please click on the link.
Credit cards can help improve your credit rating, but you should keep in mind that they are not the only factor in your credit score. Other influences include making payments on time – that includes, rent, utilities, car payments, and more; returning your library books responsibly; history of collections or bankruptcy; opening multiple new accounts all at once; the number of new inquiries about your credit score; and the number of credit accounts you have open.
If you are already having trouble meeting your bills, it is probably not a good time to apply for a credit card, as they can increase your difficulty in balancing your budget. If you have a narrow margin, you might be able to use your cards to improve your situation.
Using Your Credit Cards Strategically
In Credit Cards 101, the emphasis was on paying at least your minimum balance on time, but that to take advantage of rewards, you needed to pay all charges before the end of the billing period. That remains true in Credit Cards 201. However, if you wish to raise your credit score using your cards, you will want to have at least one card that you do not pay off completely. You will want to make those purchases on a card that does not necessarily offer rewards, but that does have a low APR (annual percentage rate).
A Model for Strategic Credit Card Use
Credit card companies like to target college students. One of the sad things about today’s higher education system in the United States is that not only are students likely to graduate with a lot of debt, they also often have a sizeable credit card debt built up. The credit card debt, at least, is avoidable. In this example, let’s suppose that you are a junior in college and that you are moving into an apartment. You will have all the usual expenses – rent, utilities, and groceries. You have a part-time job, and you are a full-time student.
The Model Situation
For the sake of simplicity (even though this is not always the case), we will suppose that your grants, scholarships and student loan take care of your educational costs. Your job covers your rent, utilities and grocery bill with a very slender margin for emergencies. Your apartment is partially furnished, which means that you don’t need any major appliances, but you do need a bed, a desk, shelving and a dresser.
To deal with your start-up costs for your apartment, you might consider three types of cards: a department store card, where the store sells groceries as well as general goods; a gasoline card with a company that will also cover car repairs; and a major credit card with the lowest APR that you can manage.
Before you spend any of your new credit, keeping in mind that credit cards are a line of credit, it is not “free money,” sit down and make a budget. How much would you spend on groceries and other household items? How much will your gasoline cost? How much will a bed, a desk and a dresser cost?
Your department store card might offer discounts on your purchases when you buy them, but if you buy the bed, desk, and dresser on that card, you will have charged more than you can pay in one month. Food and gasoline, however, are consumable items that you will purchase each month. You will want to keep the balances on your department store card and your gasoline card low enough to pay off monthly. Your major credit card – which, hopefully, has the lowest APR (this might not always be true) – would be the best choice for buying your furniture because this would be the one which will accrue the least interest cost.
A Model Budget
Your budget then should work something like this:
- Grants, scholarships, and student loans are used to pay school expenses. Refrain from using this money for anything not school related.
- Your paycheck covers your rent, utilities, food and gasoline. Set the amount of food and gasoline aside in a separate account – a passbook savings account works well. Add some additional money to pay on your major credit card.
- Use your gasoline card and your department store card for gas and groceries. But do not spend more than you have set aside. Use the passbook savings account to pay these two cards in full each month.
- Use the added money to pay on the major credit card. This card, which has a low APR, is the one that will affect your credit score the most.
If you hit a bad month where your savings account will not cover your cards, pay the minimum balance on all your cards if possible. Repay the balances on the department store and gasoline card as quickly as you can. By following this model throughout your junior and senior years of college, you will graduate with a good credit rating, minimal credit card debt, and the minimal student loan amounts needed for your education.