I remember when I got my first credit card. I was in college and I needed money badly. When I learned that a local department store had a credit program for college students I applied immediately. Even though I was only working part time they gave me a credit card with a small limit. I used that card to buy clothes and other necessary things while I was in college. It came in really handy.
There were other small credit cards I picked up along the way. A gas station credit card allowed me to keep gas in my car and occasionally paid for small groceries. That was expensive but it was the only way I could make my paychecks stretch.
By the time I left college I was carrying around $1000 in debt on those credit cards along with a student loan. I had also financed a used car. Maybe taking on all that debt while I was only part-time employed was a good thing, though. Because I learned how to live on a budget and at the same time I was building up my credit history. My father told me that if I kept up the payments I would have good credit.
Well, he was partly correct. He didn't tell me that NOT USING the available credit would be better for me than keeping a balance on the cards. I don't know why so many people get confused about whether having a balance helps your credit or not. What the lenders want to know is if you pay your obligations; they don't want to see that you're deep in debt because that makes it harder for you to pay any more obligations.
One year I paid off all my credit cards. One of my friends told me I should close the accounts so I wouldn't have to worry about debt again. Fortunately for me I didn't listen to her but I didn't know at the time that closing your paid-off credit cards hurts your credit. Nowadays the Internet is loaded with articles that warn people not to do that, but back then no one was going to tell you what not to do.
In fact, every time I applied for credit I was afraid that having all those credit cards would hurt me. One day a loan officer finally explained to me that it would only be a problem if I were carrying high balances. She pointed out that most of my cards were paid off, so I didn't have a problem.
People like Dave Ramsey tell you not to use credit cards. In Ramsey's fairy-tale land everyone has enough money to live on and there is never any need for a credit card. But have you ever tried to rent a car or reserve a hotel room? They like credit cards. Sure, you can try to pay with cash up front but not every company accepts cash any more. Believe it or not, your rental car options are limited if you try to pay with cash or a debit card.
I don't like owing money to banks and finance companies. But I don't like living on the floor, or settling for furniture I had to get from dumpster diving, either. Let Dave Ramsey live that way as he collects his millions of dollars from gullible people who buy his books.
Having been debt-free more than once in my life I have learned the real lesson about being debt-free: it means you are completely on your own. If I use a credit card and pay it off immediately I am managing my cash flow. If I use a credit card and it takes three years to pay off the balance it means I am spending too much money. The credit card at least tells me when I am managing my money well.
Financial experts like Lance Roberts tend to make more sense when they talk about how we make choices. Roberts points out that "wants exceed needs"; in other words, you always want more than you actually need. I can agree with that. And if I were using credit cards to pay for things I only want but do not need, I would be violating my own principles of managing money.
So by keeping my credit card balances low I know I am only using them for things I need. But on those occasions when I look at my credit card accounts and I see high balances I think to myself, "I really did want that but now I am paying extra for it." And that little kick in the pants reminds me to rein in my spending.
We really should not be using credit cards for shopping sprees and vacations. It is better to use credit for emergencies and to budget for those other expenses out of the money you save. But most people won't even do that. They are always looking at what other people have and wanting that. The problem is that you want their stuff but you don't want their debt. The next time you look at someone's $200 shoes or $3000 purse remind yourself that it was probably bought on credit.
And that means they are paying more than retail for whatever they have that you want. If you save your money and wait for the stuff to go on sale, you'll pay less than they did and you'll have less debt in the end. And then they'll want to be like you, which won't be such an easy thing to do.
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