Life Lessons Your Credit Cards Can Teach You
Using credit cards effectively will save you money and, over time, help you build a solid credit score. Do the right thing with your card, and you’ll impress other lenders and be rewarded for your efforts, including qualifying for the best products on the market.
All of the rules of great credit use can also apply to life in general. Here are the principles of wise credit management and how they can help you learn some of life’s most important lessons.
Don’t be afraid to start small
To create a credit history, you must use credit products which will be recorded on your credit file. In the beginning, you have to start small.
Many people are afraid to establish their credit. But you have to get in the game!
—Ross Macco-star, ‘Get Smart with Money’
“A lot of people are afraid of building their credit,” says Ross Mac, a Chicago-based financial expert and co-star of the new Netflix series “Get Smart with Money.” “But you have to get in the game! Credit is part of almost every facet of life. Do not wait.
There are many starter credit cards designed for people without an established credit history. Some are secured credit cards where you deposit money as collateral, while others are unsecured and have short initial lines of credit.
As long as you manage these cards well by paying your bills on time and keeping your debt at zero or very low, you will prove your expertise. After a certain number of months, you can get your security deposit back, making the account unsecured, or the issuer can increase the limit without you having to ask.
Building trust takes time, so the earlier you start, the better. Which goes for just about everything from relationships to professional development.
Solve potential problems early
You may find yourself using the card to pay for things you can’t afford but still want. If you do, the debt can spiral out of control and you’ll have a hard time paying the full balance when the bill comes. ‘will keep the debt down. This way you can avoid interest being added to the balance.
Track your purchases in real time with your credit issuer’s mobile app and pause billing when you feel they’re spiraling out of control.
It’s always better to prevent a problem from happening in the first place, than having to fix it later. The sooner you hit the brakes, the easier it will be to back up and get back on track – with credit and all.
Face your fears and find solutions
Eventually, you may make a mistake that you can’t stop. You can miss the due date on your credit card and then be charged late fees, or skip an entire payment cycle and then be hit with a late payment on your credit report. Or, maybe you’ve charged so much that you can’t make your minimum payment on a particularly large balance.
Either way, when you focus on solutions, you can overcome anxiety, says New York-based clinical psychotherapist Dr. Fern Kazlow. “Accepting 100% responsibility without devaluing yourself is a huge life lesson,” says Kazlow. “This is an opportunity for you to continue to grow, and that means facing your fears, financial and otherwise.”
Speak on the phone with your credit card issuer, explain what happened and offer your ideas for resolution. This is also your chance to ask if they can do anything to help, like waiving a fee or offering a hardship plan.
If you can have that kind of tough conversation with your credit card issuer, you can have it with your spouse, boss, or friend when you’re wrong.
Allow time to heal old wounds
OK, so you made mistakes or decisions that hurt your credit. It happens. Perhaps an account has legitimately gone through a collection or you have gone bankrupt. While you can’t eliminate negative but accurate information from your credit report, you can let it fade into the background.
According to Fair Credit Reporting Act, most derogatory information on a credit report will disappear from your report after seven years. (Chapter 7 bankruptcy will remain for ten years.) When it is, it will no longer count against your scores and no one but you will know.
Don’t get stuck in the past. Rest assured, even painful errors will disappear from memory.
Focus on the present and move forward
While building a credit history over a number of years helps boost your credit scores, how you’ve handled credit products over the past 12-24 months is much more appealing to a lender than you did many years ago.
In credit development, recency, frequency and severity are important. A slight mistake you made a long time ago will have very little impact, while a steady streak of bad mistakes over the past year will have a lot.
“To use a sports analogy, you’re only as good as your last game,” Mac says. “Recency bias is real, but you can also use it to your advantage. Are you paying all your bills on time now, when you didn’t before? Great. Keep it up.”
All the positive things you do now carry weight. As they accumulate from then on, they become your new normal.
Flex your best qualities
The most popular credit scoring model is the FICO score. There are five categories of information that are used to develop it, some being more weighted than others. Overall, each category is important, however:
- 35 percent: payment history. If you receive all your bills on time, you prove that you are responsible.
- 30 percent: use of credit. Credit cards are payment tools, not extra income. When you charge but keep the balance low relative to the limit, you show that you are independent.
- 15 percent: credit history. The longer you have used credit products, the longer your history will be. When you use them well for many years, you show that you are mature.
- 10 percent: types of credit. When you have used a number of different credit products, from credit cards to loans, you indicate versatility.
- 10 percent: new credit. Applying for credit products with caution is a sign that you are stable. Too many apps in a short period of time is a red flag that you’re desperate.
Combined, these qualities highlight that you are – as a credit user and person – responsible, independent, mature, versatile and stable.
“What we do with credit and money is a powerful reflection of how we see ourselves,” says Kazlow. “It’s a big mirror, not a paddle you fight with.”
Don’t settle for less
Credit card accounts are a two-way street. The issuer allows you to borrow money which you can spend on the things you need while as the cardholder you bill and pay as contractually agreed. When you’ve created a credit score ranging from good to excellent, it’s time to actively pursue the benefits that come with your proven use of credit.
Always get the best credit cards you can qualify for that best suit your lifestyle. This way, you’ll enjoy cards with rewards programs you can take advantage of and benefits, such as travel benefits and consumer protection, that can make your life easier.
Be insightful. Know what’s out there and go for all the things you’ve worked hard for. And take action to get them, because they may not come to you.
You control the outcome
Credit issuers update credit reports with your most recent activity every month, and then every month credit reporting companies also take into account all the financial data that appears on your report. This means that you control your credit rating. Each month your reports and scores will be different depending on what you do.
This type of influence on how you are perceived is powerful. Depending on what you do, each month can be a different story.
“There’s no doubt that credit cards can tell you a lot about yourself,” Mac says. “The courses are the same. It’s about righting wrongs, looking back and making a good impression.