Sometimes Old Habits Require New Thinking

Credit can be an extremely useful financial tool or a slippery slope to financial malpractice.  Each of us must choose wisely how we manage our credit capacity (or lack thereof!).

In planning, credit is a reserve or back-stop, extended by lenders or vendors, based on financial reputation and future potential. The risk quality measurement of our ability to repay credit extended is represented by a “Credit Score” designed to dynamically respond to our ever-changing financial circumstances. It isn’t a perfect system, nor is it always an accurate representation, but it is widely accepted. Mortgage, loan and credit card providers all use credit scores to determine some part of how much they will lend or extend to us and at what cost. We may provide collateral security, (in the form of a house, car, insurance policy cash value, or investment), or simply our promise, but our borrowing interest rate cost and loan limit will be affected by our score.

With so much riding on it, credit score is important to not only understand, but also manage.

Parents should start their children early in building a credit rating examining options to have the child be a primary cardholder on their own low limit credit card. By using the card and paying the balance off in full each month (automatically from their bank account is best!), they will build their credit score and their limit will be extended.

Many people use Debit technology to conveniently access their bank account at merchants and for automatic payments to their cable or mobile phone provider. This is a habit that should be changed.

Everything that we buy that can be charged to a credit card without additional cost, and should be. If credit card purchases are not allowed or discouraged based on a price differential, then, and only then, use debit.

Don’t want to spend money you don’t have? Absolutely! Never, ever, ever, carry a credit card balance from month to month. Pay your balance automatically in full every month, just as you would on debit.

Not on auto-pay for the full balance? Sooner or later people miss a due date, pay a late fee and retroactive interest back to the date of each purchase. Banks know human behavior and profit from your mistakes or apathy. There’s no grace period when you carry a balance of even one dollar. Never do it, only spend what you can pay for. If you can’t master that simple habit, experience shows you may struggle in many areas of your future financial life. You are in control, choose wisely!

If you do master that important rule, then you benefit from building your credit score, with complete fraud protection on every purchase, and the opportunity to have all of your consumption generate cash flow and benefits back to you. Debit does none of that. How, you might ask?

Premium credit card offerings have built-in benefits, with the better ones saving you money on things you use, and paying you with points or cash based on your total spend through the card. The right credit card tool can help each of us get the most meaningful enjoyment out of our limited resources by organizing our expenditures, saving on built-in protection costs and fee waivers, and discounting everything we buy via a cash refund.

Sometimes premium cards that cost something are better than the ones that appear free. The best give back far more than what you spend, and protect catastrophic risks you may not even think about. We do, but we’re Financial Advisors. Ask us and we can help you get more from what you spend.