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Mastering Credit

By Edited Nov 13, 2013 0 0

The correct way to use a credit card is not to run up a bill and walk away from it. Even a relatively low balance will ding your credit score if you do that. It will make it harder for you to get credit later. It will make interest rates on your home loan and car loans higher. It may even make the term length of your car loan longer which translates into thousands of extra dollars paid by the end of the loan. Imagine this, if you bought a car cash, the price might be only $24,000, add a loan to it and the interest over the life of the loan means you paid $30,000 altogether for your $24,000 car. You didn't get more car, you just paid more for it.

Use a credit card as a stepping stone to getting better credit in all aspects of your life. If you do well with a credit card, and do well with a car loan chances are better of you getting difficult loans such as a bank loan for a start up business or a construction loan. Your start rate on your home mortgage may be lower as well. How do you use a credit card correctly? Start by paying it off in full every month. This will enable you to avoid paying interest. You will still get 30 days float to gather the money for your purchase, but if you pay it off in full when you get the bill you won't have to pay interest. If you do this consistently for a year you will probably start received offers for other credit cards even in this economy. The beauty of this system is, it really doesn't matter even if your first credit card has a pretty high interest rate.

If you pay consistently, you will probably get better offers after one year of doing well. If you are worried about not having enough money to pay off your card in full then don't charge more than five dollars in a month. What is the point of that, you ask? It's the way to establish credit. And by the way, do yourself a favor and remove that five dollars from your check book ledger as soon as you spend it. That way you will be assured of having the money when the bill arrives. If you trust yourself enough use the card consistently to do one thing, such as buy gas. It will help you track expenses. If you buy nothing but gas with your credit card you will get a feel for how much that expense costs you in a month. If it seems like too much you can adjust your habits accordingly. Most people just fill the tank as it needs it, and therefore have no idea when they are overspending. If you figured the cost of gas into everything you did, you would know if driving to Costco or Sam's club is really the bargain you assume it is. Add in the cost to belong to the club and you will have an even more authentic estimate of your "savings."

So many credit cards to chose from, what makes a good value? Look for one that has no annual fee. If you can't qualify for one your first year out, chose the one with the lowest annual fee you can find. If you pay no interest over the first year, you'll get better offers in the mail soon enough. As soon as you can get a card with no fee, drop your membership with the cards that require a fee. Also be sure there is a "grace period" on all your credit cards. A grace period means the interest does not start accruing until you get the bill. On some credit cards interest starts accruing from the moment you made your purchase. This is not a credit card worth having. This is more difficult to overcome than a card with a merely a high interest rate.

It's also beneficial to get a credit card from somewhere you actually shop. If you like camping goods look for an REI card that will pay you dividends in product or product discount. I found a credit card associated with one website I like that offers free shipping on any item I purchase from their website with their card. I have saved well over a hundred dollars on this feature alone. Another website I shop at regularly offers double "points" on items I buy at their website verses single "points" on other purchases. When I get to 2,500 points I can have $25 worth of product from their website. If you consider that I haven't paid any interest on the card, because I pay every month in full, this represents 100% savings for me over purchasing the items in any other manner.

Thanks to paypal.com, you can purchase things on line even without a credit card. You can have their website hook your email to your bank account safely. It's like writing electronic checks sans check numbers and without any of the merchants knowing your bank account number. It's a wonderful way to send money to anyone with an email address, even a child. However, the money, if they are a child, and do not own a bank account, will sit in their Paypal account until they use the money on line or request a check be generated and mailed to them. For all its security and convenience, Paypal will not increase your credit rating, because it's not credit. It's just an electronic means to access your own money.

Paypal offers a service called "pay later" whereby if you have a good history with them they will allow you to pay the merchant in full, and pay back Paypal over a period of time. They also will issue you a debit card so that you can use your paypal money at places other than the internet. Lastly, they do offer a Mastercard credit card. If you have been good with your paypal account this would be a reasonable first credit card to apply for.


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