Managing your money - part 2

Getting mixed signals about credit cards? On the one hand, ‘credit cards are dangerous – beware!’ and on the other hand, ‘you should build your credit!’

Truth is, it’s a little of both.

Credit cards CAN BE dangerous
Not trying to use scare tactics here, but think about how credit card companies make money. Sure, they make a small amount of money when you use your card in a store (the store pays a fee). But they make money off of you, too: the small potatoes is the annual fee that you often pay to even have the card, but they make big money if you don’t pay your balance off each month, with fees and with interest.

Take a look at these stats (from a recent study by Sallie Mae), and think about whether any of them apply to you:

• Nearly every undergrad has at least one credit card, and most have multiple cards.
• Average balances run more than $3,000, with a full 82% of students carrying balances each month (which means BIG FEES on top of the money they didn’t pay off).
• A typical senior graduates with over $4,000 in credit card debt.

How to use credit cards wisely to build your credit
It turns out that the length of time you have credit (which could be a credit card or a loan, etc.) does feed into how ‘good’ your credit is (your ‘credit score’) – and makes up 15% of your score. So yes, it can be beneficial for you over the long term to have had a credit card while in college.

The challenge is to use your credit card wisely. Here’s a little advice that probably strikes you as logical: don’t charge anything that you know you don’t have the money to pay off (nearly half of students do this), and don’t use credit cards to live beyond your means (most students do this). Spending can often be an emotional rather than a logical experience. Think about whether there were ever times that you made a purchase when you knew you didn’t have the money, and why you did it?

Here are some guidelines to help you use a credit card wisely:

1. Pay off balances every month.
2. Really. Pay off balances every month.
3. If you are struck by lightening and absolutely can’t pay off the balance in a given month, be sure to at least pay the minimum.
4. If your expenses are more than you can cover, work on balancing your expenses and your income. Don’t use a credit card to get you through. You can work with your Coach to draw upon some simple-to-use tools to make the balancing act easier.
5. Use your credit card only for your necessities, and restrict the use of it things like for going out for dinner, nice clothes, your morning latte. Force yourself to pay in cash for expenses that may be more emotionally-driven.
6. Set aside some reserve money for emergencies. Then if a situation comes up in which you need to charge unexpected expenses on your card, you will have peace of mind knowing that you have the money set aside to cover the bill.
7. Set your credit card spending limit low, like $200.
8. Set up automatic payment from your bank account.
9. Know when your payment is due every month, and be sure you’ve got the money to cover it in full.

Credit cards can be valuable tools in your toolkit of financial management, but they should never be considered a source of free or easy money. ‘Cuz one thing’s for sure: there ain’t no such thing as free money.