You ever heard the phrase “cash is king”? Well, I agree! In my humble opinion, if cash is indeed King, then credit is Queen.
Having the cash to pay for things right out allows you to have more control and less risk than financing. Most things that you may want or need can be saved up for! Many people live on the financial philosophy of cash only and live good, simple lives. However, like the King in Chess, using cash to make moves can be a slow process. I would highly recommend a cash only lifestyle to clients that struggle with sticking to a budget and/or debt (at least until they can establish healthier habits).
On the other hand, credit, the Queen can be a powerful tool when used responsibly and allows you to make moves more quickly and with more flexibility. In recent decades, credit and the use of credit has taken over most aspects of our spending habits. Many jobs consider a person’s credit history during hiring. Renting a car or a room at a hotel will often require a credit card. Most people would take much of a lifetime to afford purchasing a home without a mortgage. Shoot, often even leasing an apartment requires a credit history.
Whatever lifestyle you desire to live (cash-only or credit-friendly), you may still be interested in establishing a strong credit history! If that is the case, this series should help you along in your journey.
Part 1- Secured Credit
Many people think secure credit cards and line of credit are only for young adults. That’s just not the case! People who have complicated and even downright awful credit histories can take advantage of using this kind of credit.
So, what is secured credit? Secured credit is a line backed up by money that you deposit as collateral.
How does it work? As an example, you could save up, let’s say, $300 and submit it as leverage to receive a credit card with a $300 spending limit.
What’s the point of that? Well, if you haven’t proven yourself to be reliable yet, financial institutions may be weary of offering you what we call “unsecured credit”. Putting that money behind the lines says, “I would like to establish good credit. Give me a chance and if I run off you have nothing to lose!”. As long as you don’t try to run off to Mexico instead of paying your debts (lol), your collateral funds will be safe and sound.
Using Secured Credit Responsibly:
Secured credit can help you establish a history of on-time payments and good use of credit. I would suggest using it for your basic reoccurring expenses (i.e. gas, food, or a phone bill) and pay the full balance off every month. Consider putting the full balance on auto-payment, so you won’t ever miss a payment.
NEVER EVER EVER charge more on to the credit card than you can pay off in full. I mean…unless you enjoy making banks rich off your interest! If you have not-so-good or non-existent credit, your interest rate on this card will probably be high.
What’s next after you establish good credit? I’d suggest giving it at least a year or two first to establish a decent history (patience is a virtue in the credit game too). Once you’ve given it awhile, a few options you could consider are:
· Ask to graduate the card to a more advanced card (get some rewards!)
· Ask to have your credit limit increased.
· Continue utilizing the card for simple reoccurring expenses.
Keep utilizing good credit habits and watch your credit score grow and responsibly enjoy your efforts!
If you enjoyed learning about secured credit, share it with your loved ones! Comment any of your questions or additional inputs about this blog below.
With love always,