Are Credit Cards Evil?
There seems to be a never ending debate on the topic of whether to primarily use a debit card or credit card. We’ve heard it both ways – that credit cards are the devil incarnate and only serve to bury you in debt, but also that they are an important tool to be used to build credit. Truthfully, there isn’t a “catch-all” rule that can be applied to everyone. Credit cards are good for some people, and debit cards are better for others. Let’s talk about the pros and cons of the credit card and you can decide for yourself which suits you better!
Let’s consider the pros of credit cards: First off, if used correctly, they can help you build up your credit score. When determining a person’s credit score, credit bureaus look for a few key factors that are tied in with credit usage. These being credit utilization, credit age, payment history, and hard credit inquiries. We know these terms can seem a bit daunting, but we’re here to help you understand them. Secondly, there are many rewards to be had in using credit cards; however we’ll dive into some of them here in a bit.
Credit card usage, or credit utilization, is the ratio of your total credit card balances over your credit card limits. Simply put, the lower your credit utilization ratio, the better. That means that you don’t have much outstanding debt and lenders will see you as having less lending risk. How can you keep your credit utilization low? Pay off your balances! Most often, this cannot be done simply by paying the minimum balance each month. Credit cards can have outrageous interest rates, some up to 20%, and if you have a large purchase (like a TV or furniture), you’ll never get out from under the bill if you only pay the minimum required.
Next up, we have credit age. Credit age is exactly how it sounds; it’s the average age of your open credit accounts. Now, these credit accounts aren’t just the credit cards you have open, but also include any loans you have outstanding. These loans could be auto loans, mortgages, student loans, etc. Simply put, the older your average credit age, the better it is for your overall score.
After credit age, we have payment history. This might be the most easy to understand; make your credit payments on time, and your score will reflect it. Miss payments, or ignore them altogether, and your score will tank. It cannot be said enough; pay your bills on time. Set reminders on your phone. Get email notifications when the bill is coming due. Heck, tie a little ribbon to your finger to always remind you. Whatever you do, pay your bills on time.
Finally, we have hard credit inquiries. A hard credit inquiry is made when you apply for a loan or credit card. It’s the lending company inquiring about your credit score, and credit reporting agencies remember the inquiries made on your score. Having too many inquiries hurts your score, but, according to Credit Karma, the good news is that most inquiries only stay on your report for about two years. (Disclaimer: Don’t be afraid of hard inquiries if you’re looking for the best rate for a mortgage. Explaining to lending companies why you have three recent hard inquiries is fairly simple if you’ve just been shopping for the best rate.)
So there it is! Follow these simple tips and credit cards can really help prop up your credit score. Not to worry, we’ll be doing a blog/video soon to dive deeper into maximizing your credit score. Stay tuned!
Did you know that there are significant rewards for using credit cards? Cash back, travel rewards, there are a myriad of perks to be had for simply spending money. Depending on your preference, you could get a card that pays you in airline miles, hotel points, or even cash back on purchases. To be fair, the terms and conditions on these cards can be difficult to understand. Samuel L. Jackson tries to make it sound easy on those Capital One commercials, but there’s a lot more to a credit card than the stated reward (sorry Sam). With these types of credit cards, we recommend CAREFULLY reading terms and conditions before applying. We can always help you determine if the card is suitable for you. Just give us a call if you have any questions regarding possible credit cards.
Now, let’s move on to the dangers of credit cards. If not handled properly, they can be absolutely crippling. The pitfalls here include simple mismanagement and (as stated previously) high interest rates on cards. Mismanagement is a pretty broad topic to cover; it covers anything from forgetting payments to applying for too many cards, all the way to spending indiscriminately without regard to your financial wellbeing. There are undoubtedly many financial advisors in the world who would tell you that debt is the cause of all suffering. An admirable sentiment, for sure, though we would argue that human behavior is the real cause. Credit cards are simply enablers of our already precocious temperaments. If you can control your spending impulses and remember to pay that monthly bill, you can likely handle having a credit card or two.
So, there you have it. In our opinion, leveraging debt to better your credit score can be a very advantageous strategy in life. The question is, are you in control of yourself? Can you handle the demons inside you that are urging you to buy that $4,000 TV? If the answer is yes, explore your options. Call a professional (like us) for a good second opinion. Have fun with the rewards from credit cards. Have faith in yourself, and make good financial decisions. When you inevitably make those more questionable financial decisions, don’t worry. We’ll be here.