Chapter 3: Use Credit to Your Advantage
 Despite all the advantages and conveniences credit can provide, there are some problems associated with credit use. Interest rates and fees can dramatically increase the cost of a purchase made on credit, and generous credit lines make overspending easy. When used correctly, credit can be an excellent tool, and it’s the only way to build a positive credit history – which will help you get what you want in the future at the lowest financing.
Wise Use – and Misuse
There are many appropriate uses for credit cards. They are convenient payment tools, particularly for expensive items. Because you receive detailed account statements, credit cards are also a way to track spending. With some cards you can even accumulate points for such goodies as airline tickets, cash back rewards, and discounted merchandise. In fact, credit cards are sometimes the only way to get what you need, such as booking hotel rooms, buying airplane tickets, making online purchases, and renting a car.
The trouble begins when credit cards are misused. Never confuse a credit line as “extra cash.” It is not a bonus for vacations or money for emergencies (that is what savings is for). Most importantly, it is not additional income to get you through a shortfall until the next month. Using it that way may help temporarily, but it will make the next month more stressful when the same cash flow problems arise – but with more debt to pay.
Use Credit Wisely
- Only charge the amount you can afford to repay when the bill comes due.
- Always pay on time.
- Have just the right amount of available credit for your needs.
- Have and use a variety credit instruments – credit cards, loans, charge cards, etc.
- Only apply for the credit you need.
- If you have debt now, repay it as quickly as possible.
- Avoid expensive, high penalty loans that that can work against you.
Avoid Overcharging
- Keep your charge receipts in an envelope with a running total on the outside. If the total exceeds an amount you consider appropriate, curtail your spending.
- Avoid shopping in stores where you know you will be tempted to spend more than you can afford to repay.
- Save monthly for such periodic and emergency expenses as vehicle maintenance, medical bills, holiday gifts, and vacations. That way you don’t need to use credit to cover these expenses, or, if you do charge them, you can pay the balance in full when the bill arrives.
- Limit the number of open credit card accounts you have. It’s much easier to keep track of your total outstanding debt with just a couple of accounts.
Choose credit carefully
Not all credit offers are created equal. There are some loans on the market today that are especially costly for consumers.
- Payday loans – This is a way to borrow from your future income. They work by you writing a check to the lender for the amount you wish to borrow plus a fee. The check is typically held until your next payday, at which time you can either redeem the check by paying the face amount, or allow the check to be cashed. If you can’t afford to cover the check, you may roll it over for another term by writing another check, which will result in another set of fees being added to the balance. With average annual interest rates ranging from 390 to 871 percent, payday loans are no bargain.
- Car Title Loans – Car title loans are promoted as small emergency loans but because the interest rates are often in the triple digits, repayment is difficult and expensive. You don’t need good credit or a job to receive a loan – just sign over your car title as collateral and hand in an extra set of keys. The typical repayment period is one month. Though most loans are for $1000 or less, the finance charges quickly rack up and it is possible to lose your vehicle if you can’t meet the payments.
- High-cost credit cards – Some credit cards are so fee-heavy that they make no sense for borrowers. Inflated annual, application, monthly maintenance fees, and a whole host of other charges can result in you owing hundreds of dollars before ever charging a dime.
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