I bet you don’t hear that every day, especially from the professional who handles your family’s finances. Nonetheless, it is true. Let me explain…
Credit Cards are associated with debt and many of us were taught either by someone else – or through our own bad experiences with them – that they are the devil and should be locked away in the top dresser drawer or cut up into tiny little pieces. However, for most folks this just simply isn’t the case.
You are probably aware that you need to establish and maintain good credit, but believe it or not your use of credit cards is a major factor in how your credit score is calculated. There are many individuals who attempt to lead a purely cash lifestyle. Though if you think about it, is this really practical in today’s world? A large portion of the population now shop online, which often requires the use of credit cards. Many retirees are interested in leasing vehicles or financing motor homes and other recreation vehicles. This all requires good credit – and most insist on credit cards for security. Moreover, if you read our article, Have the Urge to Own Your Home Free and Clear?, you already know that not taking advantage of good debt could cost you thousands of dollars. In fact, you might remember the Fed study that found that at least 38% of those who were making extra payments on their mortgage were “making the wrong choice.” (P.S. If you have not read the article…take a peak…it’s astonishing how the numbers work out.) Last, employers are using credit scores more and more to measure an applicant’s ethical and behavioral standards.
According to credit expert Philip Tirone, author of 7 Steps to a 720, a significant portion of your credit score is determined by your “mix of credit” (mortgage and/or installment loans, credit cards, etc.)
He suggests obtaining and using 3-5 credit cards from major carriers. Did you notice there is emphasis on “using”? If you get a credit card and just stick it in your dresser drawer, you’ve missed the point. The credit card companies will declare your account inactive and your score won’t be helped.
Want some ideas?
First: Pay them off every month. Having a credit card doesn’t mean you have to be in debt.
Second: Don’t Miss a Payment - Ever. If you do, this just defeated the purpose of building your score. Your payment history, according to Mr. Tirone, sums up to about 35% of your credit score.
Third: Use 2-4 of these cards to make 1 automatic purchase every month. Think small like that monthly Netflix bill, book club, gym membership, etc. Then set up the cards to be paid each month automatically from your bank account. Now, you can lock these cards in your dresser drawer if you would like.
Fourth: This one requires a little homework. Find a credit card with a really great rewards plan and a large credit limit that fits your lifestyle. I have seen everything from cash back opportunities, to new vehicle purchases, to travel. But again: do your homework. Many cards offer the same rewards, but their point systems vary. Once you have the perfect card for you, put your life on this card - every monthly expense you can. You’ll probably buy yourself a free airline ticket, or two or three, every year or whatever your reward plan offers. Just don’t forget the first idea: pay it off every month. (Some fine print you need to know: Another factor in calculating your credit score involves your “utilization rate”. This is the balance on your card vs. your credit limit. You never want your card usage to exceed 30 percent of your limit.)
Bottom line? Go out there and use that plastic – but be sensible.