Don't be a slave to your cards...

Last week I posted about what I would have liked to have known about personal finance before I turned 18, or became an adult. I introduced topic number one, It’s never too early to start investing. Today I’m going to focus on topic number 2, Don’t be a slave to debt. Here is a recap on my Big Three:

1. It’s never too early to start investing – making compound interest work for you,
2. Don’t be a slave to debt – using credit wisely, and…
3. How finance charges work – using amortization tables for clarity.

Number two: Don’t be a slave to debt - use debt repayment strategies that work!

Signing up for that first credit card is exhilarating. I remember the feeling of shock when I first received my credit card application in the mail, having just turned 18 I was beginning to feel like a real adult. I was one of those kids itching to move out of my parent’s house and be on my own, so I did just that. Looking back on that credit card application experience, I don’t remember my parent’s explaining credit cards or credit scores to me. I wish they had. Knowing that someone is allowing you to spend hundreds to thousands of dollars by just swiping a flexible-plastic card can be enticing. But, the money you swipe on that card, is the money you owe the bank.

I learned this the hard way a few years after graduating college. The first few years of my credit card experience had been positive ones. I had used my “beginner” cards wisely paying them back in full with in a short time period and soon after graduating college, received a few pre-approved credit cards in the mail. Within a couple of years they were maxed out and I owed quite a bit of credit card debt. Which brings me to my next point,

• Building good credit means using your cards wisely – only spend what you know you can pay back within a reasonable amount of time. Reasonable meaning 30 to 60 days. If you can’t make that commitment, then don’t purchase the item.

Had I only taken this advice to heart. Oh, wait! No one told me this explicitly! This is something I had to learn the hard way. That whole “School of Hard Knocks” is where I learned much of my own personal finance information, not the easiest way to learn, let me tell you. I also didn’t have an understanding of why it was important to have a good credit score and how quickly you can ruin your credit by making a few poor decisions. My score plunged from around 700 (I’m not really sure what my score was at its peak) to the 400 range. Pathetic, I know.

Later, when I had hoped to purchase a new vehicle, I couldn’t get approval due to my poor credit history. An effect of what a poor credit score does to a person’s overall spending habits. A low score not only limits what you can buy, it can also decrease your overall wealth. For instance, if you actually do get approved for a loan, your APR is much higher than someone with stellar credit. Over the period of that loan, the interest paid on the amount can be up to 10-fold of what it would have been had the rate been much lower. (Something I will discuss in part 3…using an amortization chart).

Here are just a few main points about what good and bad credit choices look like:

• Bad – Maxing out your credit cards – limits the amount of money you can put away in your savings and can reduce your credit score.
• Good – Having a high credit score – can mean getting the best interest rates on a new vehicle purchase or home loan.
• Bad – Making late payments – infuriates your creditors and lowers your credit score limiting the availability of credit extended to you.
• Good - Using your cards wisely – only using your credit cards when you know you can pay them off quickly and in full can increase your score by proving you are responsible with your credit.

These are just a few simplified points. Remember that using credit means you’re borrowing money. It’s not YOUR money, it’s money you owe the bank. I will follow up in the next week with part 3, How Finance Charges Work…using an amortization chart for clarity. I think it will go nicely with part 2.

What was your experience with credit as a young adult? Did someone sit down with you and explain how credit cards and your credit score work? How did you learn what you know now?