Credit: A long term, worthwhile game to play

The following is a post from Sam Peters, with lots of (purple!) commentary from yours truly.  If you’ve been reading my blog for a while, you know I’m a big fan of credit cards.  We only use cash to pay the local farmer who sells us eggs, and for the occasional garage sale.  Everything else – thrift stores, grocery stores, gas, phone bill, Netflix… all goes on credit cards.  We have a few different cards we use, because different cards give different rewards based on what you’re buying.  But no matter what, they all get paid off in full every month.

Although we love the convenience and built-in spending tracking that credit cards give us, we’re very aware of the fact that every penny spent on a credit card is still a penny spent.  The bill must be paid in full at the end of the month, no exceptions.  We don’t treat our credit cards like free money.  Rather, we treat them like a very convenient month-long loan that must be paid back at the end of the month – the consequences for not doing so are dire!

Our regular credit card recently had a web glitch that caused their system to cancel our scheduled payment just a few days before it was to be pulled from our bank account.  When we noticed that the payment had not been taken from our account, we contacted them and they discovered the problem in their payment system.  We arranged to have the bill paid and since the error had been on their end, they immediately refunded the late fee and interest charge that had been assessed.   But they were an eye-popping $60!  Even though we didn’t have to pay them, it was a reminder of the sort of fees that are charged when people make mistakes and either pay bills late or don’t pay the full balance.  Credit cards are great if you use them as if they were cash, spending only what you actually currently have the cash to cover.  But they should never been viewed as a long-term loan or free money.

Credit: A Long­Term, Worthwhile Game to Play

The purpose of credit (and, specifically, credit cards), as you may know, is to allow the consumer access to many great financial benefits such as the ability to make instant purchases, have adequate funds in the event of an emergency (FB note: make sure it’s truly an emergency if you’re considering using your card for a purchase that you don’t have the cash to cover.  Stuck on the side of the road in the middle of the night in need of a tow truck?  Sure.  Needing a new pair of black heels to go with the dress you want to wear on Saturday night?  Not an emergency), and, of course, to build credit which helps lenders determine if you are trustworthy and reliable.

Unfortunately, we have all been told, at some point, that:

? Credit cards will ruin your finances!

? Credit cards will skew your lifestyle!

? Credit cards are an evil invention!

There is much hoopla about credit cards because there have been so many using them incorrectly, which generally comes about when an individual is living beyond their means.  A person that understands credit cards (and credit) can do great with the piece of plastic when they show reserve.

Credit, basically, is a long­term, worthwhile game to play if you know the rules.  Unfortunately, we are human and we make mistakes. The mistakes we make cause financial hardships regardless if we are the type to denounce credit or those that use it effectively.  To really understand what you’re in for when applying and receiving a credit card you should really know what you need to do in the event you cannot show self­ control.  It happens to the best of us, it’s not fun, but at least understanding the options we have is better than going blindly into accumulating debt and feeling the stress from our financial decisions.

There are a few items worth noting when it comes to fixing up credit as so many of us may find ourselves doing at one point or another:

1. The first is that we have to understand that credit cards fundamentally change our lifestyle because never before did we have instant access to products at a swipe of a card. Credit cards are great when you have set a budget and you know you can make the payments (FB note:  make sure you’re able to make the payments IN FULL.  Making partial or minimum payments does not count as using a credit card wisely) but they’re easy to suck you in when you develop a mindset of instant gratification. The big take­away is that you need to shift your mindset as if you don’t have this instant access and that you do have to wait to make purchases; doing so will help you avoid appealing to feelings of instant gratification which, in turn, helps prevents you from making (or continuing to make) financial follies.
2. The second is that we can’t allow the loom of financial debt to ruin our outlook on work and life. It becomes very easy to feel distressed from debt and create a cycle in which you start tossing out the bills because you don’t want that on your mind but each time you skip a payment you are essentially buying time through interest, which will eventually become too much. It is at this point that you need to consider credit services that can help you rebuild your credit (which will take time). (FB note:  credit repair services can be very helpful, but although there are legitimate credit repair services available, it’s important to realize that there are also plenty of scammers out there who love to prey on people in desperate financial situations.  Check with your local BBB or attorney general’s office before signing up with a credit repair service).  The sooner you apply to credit services, the sooner you can understand how long it will take to repair your credit so you can take actions now rather than it being too late. As far as how long the repair will take, estimates are variable. The site www.lexingtonlaw.com notes that when “credit reports are promptly sent to us, many clients have seen exhilarating progress within the first 60 days.”
3. The third is that you need to think of credit (and credit cards) as a long­term investment like you would stocks, bonds, and other assets. You do have instant access to making purchases but it should be done, from here on out, with the intent to keep a good credit score rather than appeal to your ego or to concept of “keeping up with the Jones’s”. Don’t shred your cards if you made follies because it’s very important that you keep that line of credit open (FB note:  but do entomb them in ice in your freezer or stash them in a safe – somewhere they can’t be used while you get your finances sorted out!  Don’t risk adding more debt on top of what you already have if you’ve gotten into a position of not being able to pay off your card in full each month). You can fix your mistakes, though they take a while, and eventually when you’re back on track you will see the real value of credit when you have little to no trouble applying to items like loans and mortgages.

Ultimately you need to put up blinders when receiving opinions about credit cards from those that weren’t able to use them effectively because if you forgo obtaining one you are greatly missing out on the opportunity to build great credit which opens many doors. You will make mistakes (as we all do) because it takes a while to build great financial habits but there are always tactics and resources to get back on track for when we do. Now go play the game.

FB note:  I agree that it’s important to have good credit, and to have a credit card available if you need it (things like reserving a hotel room or buying an airline ticket can be tricky without one).  And when it comes to major purchases – like a home – having good credit that you’ve built by being responsible with credit cards will result in a lower interest rate and significant savings over the life of the loan. 

But I think it’s also important to remember that credit shouldn’t be something that we see ourselves needing long term.  It’s great for people who starting out and wouldn’t otherwise be able to buy a home.  We bought our first house when I was 24, and all we had for a down payment was $10,000 – I’m grateful for the good credit that allowed us to get a loan for that house, and for the one we have now.  But we’ll have our house paid off in 2018, and I can’t picture us needing another mortgage, probably ever (because if we ever bought a different home, we would sell the one we live in now and use the proceeds to buy the next house – we wouldn’t upgrade to a more expensive home).  I also can’t picture us ever needing a loan for a vehicle.  We’ve only ever had one car loan, and it was paid off in 13 months.  Ever since, we’ve been saving money every month so that one day – hopefully in about 10 or 15 years – we’ll just pay cash for another used car.  

My parents have excellent credit, but haven’t really used it (other than their credit card, which they pay in full each month) in probably 40 years, despite having bought and sold about 30 homes in that time.  Not needing credit at all should be the long-term goal.  Save as much as you can every month, use your credit very wisely so that you have it there if you need it, get good terms on loans when you need them for truly necessary major purchases, and then pay them off as fast as possible.  Continue saving, with a goal of not having to get a loan next time you have a truly necessary major purchase.  And remember, using credit for a depreciating asset like a vehicle is not a good financial plan.  With all of this in mind, enjoy the convenience and the financial rewards that come with wise credit card use.