Finance Friday – Lesson 2: Learn To Use Credit Wisely And Responsibly

This is part of a series of posts on 10 Important Financial Lessons To Learn While You’re Young. A new lesson will go up every Friday. And if finances bore you, don’t worry…I’ll keep posting non-finance things on Mondays!

I’m lucky here in that my parents started teaching me how to use and build up credit at a fairly young age, and I’ve managed to be fairly smart and responsible about my credit usage since I started (Thanks Mom and Dad!) But you hear all these horror stories about young adults who get their first credit card when they go off to college and just go crazy with it, ending up with $5k-$10k or more in debt by the time they graduate (and that’s not even including any student loan debt, yikes!)

On the opposite end of the spectrum there are people out there who use cash or debit cards to pay for everything and don’t even have any credit cards (or credit) to their name. In fact, this method is often recommended to help people get out of debt. It makes sense, if you only spend the money you have (actually have in your account, not credit) then you won’t go any further into debt.

But I think somewhere in the middle is where you want to be. If you use your credit cards responsibly you can build up your credit, which can be very helpful later in life.

In my opinion there are a few important “rules” about using credit cards (or just general tips and things you should know):

• Use credit cards in order to build up your credit. Basically this means don’t (DO NOT!) get a credit card just to “have some extra money”. That is lie; a credit card does not magically grant you more money. Sure, it is a temporary source of money, but you’re borrowing against your own self and you’re still liable for those debts!
• If you have a credit card you should only use it for purchases you could have made anyways with a debit card or cash. That way you build up credit without going into debt. (Obviously, there are some exceptions here; at some point you may need to make a large purchase you can’t afford without credit, but we’re talking about just starting out).
• If you use a credit card, pay your balance off in full each month. Paying interest is the bane of my existence and there is no good reason (NO GOOD REASON!) to do it when you are first starting out. Again, there may be exceptions later on, but if you’re following the other rule and only using credit to buy things you could have bought with cash, you shouldn’t ever have to let interest accrue as a balance rolls over to the next month.
• Learn about credit scores. Very basically, your credit score is a number that represents your creditworthiness (the likeliness that you, if loaned money, will pay it back in full without defaulting or going bankrupt, etc.) Credit scores come from a statistical analysis of basically everything about you finance-wise including how many credit cards you have, how many you’ve applied for, how long you’ve had your credit cards, how much debt you have, whether you pay your bills on time, etc. It’s complicated, but it’s important to know what a credit score is and what sort of things affect it. Go Google it and you should find a wealth of personal finance blogs just itching to teach you all about credit scores.

However you decide to deal with credit in your life, the important thing is to learn about it and make sure you know what you’re doing. Credit cards can be dangerous if used improperly or irresponsibly, but the flip side is that unless you have enough cash to buy a house out of pocket, building up your credit now is going to be very useful later in life. Get into good habits when you’re young so that you are not in a world of hurt later on. If you do choose to get a credit card make sure you educate yourself. There are a bunch of great personal finance blogs out there that can help you out.

Do you have any other good credit advice to share?

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