Back in the day, if you needed something expensive you just saved for it. Or, you put it on layaway, or maybe joined your bank’s Christmas Club. (Kids, ask your parents.) You also may have saved for your children’s college education or your annual vacation. The prevailing attitude among financially responsible people was that “if you can’t afford to pay cash for it, you don’t need it.”
The simplicity of a “cash only” lifestyle can be a tempting — especially to those who have been burned by credit debt in the past — but often unrealistic way to manage personal finances in this day and age. Credit, when managed correctly and with a good understanding of the basics, can help you achieve major financial goals that may be out of reach for cash-only consumers.
While getting into credit card debt because you can’t afford to pay cash is always to be avoided for many reasons — it’s expensive and bad for your credit score, for starters — the convenience of not having to carry cash, the rewards programs, fraud protection and other features afforded by credit cards make them almost a basic necessity today.
But the “cash only” method isn’t the only money advice that has exceptions. What follows are some additional credit and money tips that you should take with a big grain of salt.
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In addition to the above financial and logistical reasons why “cash only” isn’t practical for many people, closing credit card accounts can lower your credit scores by reducing your credit availability in credit utilization calculations. In many cases, a downward spiral can develop, where you have lower scores caused by higher utilization, leading to higher interest rates, which leads to higher balances, and so on.
2. Never do something that could damage your credit scores.
Sometimes it’s not such a bad idea to take an action that could hurt your score. For example, though opening a new account can temporarily lower your score, if that new account comes with a low interest rate, high credit limit, generous rewards program, or other feature — and you don’t expect to be financing a new car or home in the next six months — a temporary hit to your score could be worth it.
3. Bankruptcy is to be avoided or delayed for as long as possible.
While bankruptcy can have a severe impact on a credit score, a worse situation for your finances is to continue to incur late payments, charge-offs and collections over an extended time period while trying to avoid bankruptcy. Without a doubt bankruptcy should be a last resort for many reasons, but if it looks like you’ll have no choice but to file, the sooner you do, the sooner your credit score can begin to recover.
4. If you anticipate trouble paying your bills, your lender will work with you.
Most evidence points to banks not being all that interested in your story when you proactively call to tell them you expect to be having some problems. That is, of course, until you stop paying them, by which time the damage has been done to your credit score and late fees added to what you owe. Instead, you’re likely to have better results from contacting a local nonprofit credit counseling agency, such as those affiliated with NFCC, to find out if you qualify for a debt management plan.
5. You have to use a credit repair company to get your score raised quickly.
While trying to give the impression they have some degree of insight and connections into the credit bureau systems, companies who promise to improve your credit for money often rely on false claims and the use of illegal and unethical tactics in an effort to get negative, though accurate, credit information removed from credit bureau reports. Consumers looking to fix legitimate credit reporting errors can go to AnnualCreditReport.com to obtain their credit reports from all three credit bureaus that include instructions for correcting errors — at no charge. And you can continue to monitor your credit score for free once a month using Credit.com’s Credit Report Card.
The trick to all of this is making credit work for you, which can begin with something as simple as creating a budget, listing your short- and long-term financial needs, and doing the little routine things like checking your credit report regularly.
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