Use credit wisely, instead of not at all

From time to time I hear people say that because of their bad experiences with credit, they want to pay cash for everything and never borrow again. This may seem like an admirable goal. but in reality, a life totally without credit can actually reduce your financial stability. Even if you never plan to borrow again, a poor credit history can:

• hurt your chances of getting the job you wan
• increase the cost of your insurance
• make it difficult to get a cell phone or rent an apartment
• increase the amounts of your security deposits on utilities and rent

Instead of avoiding credit entirely, a better goal is to begin using credit wisely.

Reasonable use of credit puts positive information in your credit report to offset negative information from the past. It allows you the convenience of a credit card or loan, without the burden of too much debt.

One way to keep your use of credit within reason is to never use a credit card unless you will be able to pay off the bill at the end of the month (never carry a balance). You set up a recurring expense (like a phone bill or water bill) to be paid each month with a credit card. Then, you can set your on-line banking to pay the credit card.

Since these are expenses you would have to pay anyway, you will be building your credit automatically without buying things you can't afford.

Another idea is to save up for larger items, like furniture or electronics, take out a small loan to buy the item, and then use the savings to pay the loan over several months.

Using the savings to pay a loan builds your credit history, but ensures that the money will be available to make your payments.

Some specific guidelines to help you use credit wisely include the following:

1. Get a copy of your credit report at least once each year, so that you can correct errors and dispute inaccurate information.
2. Your monthly credit payments (excluding your mortgage) should add up to no more than 15 percent of your monthly take home pay.
3. Comparison shop for credit, to be sure that you are getting the best deals.
4. Make the largest payments possible on credit accounts and loans.
5. Don't use credit for things that will be used up or wear out before they are paid for (unless you can pay the entire balance at the end of the month).
6. Have an emergency savings fund, so that you don't have to use credit to pay for "emergencies."
7. Always pay on time! (Your payment history is the biggest factor affecting your credit score.)
8. Don't co-sign loans for others.

If you would like to learn more about this topic, contact us for information about our free Managing Your Money series, which is offered continually in localities throughout the Northern Shenandoah Valley.

Call me at 540-459-6140, e-mail me at kpoff@vt.edu, or call your local office of Virginia Cooperative Extension.