So what exactly is credit? Credit lets us make a promise to pay in the future for something we really want, but can’t quite afford to pay for now. It’s a gateway from wanting to actually having. But how do you make credit work for you without it taking control of your life?
Without a doubt, credit plays a major role in our everyday lives. It helps us go to school and buy that first car — and maybe even that first really good interview suit. And it can make it possible to finally have a house of our own. Although my parents never borrowed a dime … but their house was also only $20,500!
Enter the lender…
So now we turn to the lender, whose main job (in addition to making money on the loans they make) is to decide if you are “credit worthy.” Someone they can trust with the obligation to pay them back. And your job is to actually pay them back … with interest. And on time.
But before you even get to asking for a loan, you need to manage your credit in a way that doesn’t leave you drowning in debt. Or hounded by folks trying to get money you can’t pay. Not only so you can be credit worthy when needed, but so you aren’t at the same time drowning in stress. And hounded by scary calls from debt collectors.
I call this page Credit 101 because the more you understand how credit works — and how you can make it work for you — the healthier you and your personal financial picture can be. And I use the word “healthier” on purpose, since the stress money (or lack of it) might lead to can also be a huge health factor.
Credit 101 basics to make credit work for you
Like it or not, lenders decide to loan you money based on their evaluation of how well you manage your money. Now that may sound contradictory. If you need to borrow, doesn’t that reflect badly on you already?
Well, not if you can show the lender a sound history of money management, financial stability, and paying on time. Most people need to borrow money at one time or another. That’s what keeps lenders in business.
They just need to bet wisely on your ability to pay them back on a timely basis. And your credit score (based on your credit history) helps them make that all-important guess.
Bad credit also affects other parts of your life where money is involved, as the next section explains. And bad credit can even affect job interviews and types of jobs you qualify for. Or what apartment you can get. Credit scores are used in a lot of places!
Your future starts now
So the best thing you can do right now to make credit work for you for some future day — when you want to buy a house or car or even borrow to start your own business — is make sure you’re creating a credit history lenders can count on. We all know it’s easy to charge things. But as debt accounts grow, so do monthly payments — and interest.
Even a late bill payment or two can knock your credit score down — and into higher interest rates when you are ready to borrow. And in case you didn’t know it, you’re also charged more for things like insurance or credit cards if your history shows missed payments or excessive borrowing / cards.
Again, all that can be seen on your credit reports and the resultant scores you get assigned. And paying more now for all the things that feel so tempting means you’ll have less money when you truly need it — and less evidence to show a sound financial position when looking to borrow on big ticket items.
If all that seems unfair, it can be!
Getting ahead of the debt cycle can feel impossible. Especially if you’re not earning enough money to not need to borrow. Bills and debt pile up easily when not enough money is coming in. And sometimes there isn’t much you can do until your money situation eases up.
Although I know not always possible, maybe during times when bills are piling up you can find some extra work — just for a while — to help catch up. Or you can tighten the budget even more … again just for now. Even small things or monthly services / subscriptions you don’t really need or can hold off on can start to loosen up funds. Looking at your monthly expenses is a good start. You might be surprised what you discover.
But most of all it’s about starting from this moment on to at least only buy what you can actually pay for. Again, I know it seems unfair. And may not always be possible. But a friend of mine who once had major debt now has major savings. And he did it by studying where he spends and where he can cut back. And holding strong when tempted.
So how do you manage your credit?
To really make credit work for you, it helps to first get a solid handle on the numbers. What you owe. The money you have. What comes in each month. And what goes out. If you’ve been avoiding taking a close look. now is the time to muster the courage to dig into the whole picture.
- Gather your financial information.
- Monthly credit statements.
- Checking account statement.
- Money available to you (savings, checking).
- List all money coming in monthly from salaries or elsewhere.
- List all you pay out monthly including debt repayment.
- Create a “cash flow” page showing money in & money out.
- Examine flows in & out for where you can improve.
- Prepare a monthly budget (what you spend now).
- Prepare a new monthly budget (adjusted for where you can improve).
- Cancel or stop things you don’t need. Look to find money “leaks”.
- Look to increase $$$ for paying off cards / debt.
- NEVER pay minimum on cards. Any amount more you can do helps you get out from under debt.
- Minimum doesn’t lower actual $$$ owed.
- Ask card companies for lower rate. Try hard.
- Pay off highest rate cards more to get rid of them.
- Consolidate debt at lower rate where possible.
- Try not to add to your cards as much as possible.
- You can make it a monthly game.
- If you pay off more than you add you’re already making progress.
A few more thoughts
I know it’s easy for me to sit here in my comfy apartment and type all these nice ideas for making credit work for you. I get that you have real-life circumstances to deal with. And money is not always available for things you really do need, no matter what a website says.
But I also know that unhelpful money habits now can, over the years, grow into major credit problems that will be even harder to handle. And can lead to serious life-disrupting financial situations, I’ve seen it with friends and when I worked for a homelessness organization.
Good credit can get you far more in the long run than a wallet full of maxed out credit cards — even if they represent memories of nice things you got yourself. So as unfair as pulling back on things you want now may feel, you can buy yourself way more happiness by getting a handle on your credit and spending today. And that will feel far better than fair when you get there!
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