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Credit, a tool when used properly, and a hindrance if not.
However, similar to any skill, ability, or tool, it is up to the individual to use it for good. Our intelligence, our words, our actions, can all be used to enhance the quality of our lives and others’, but if used maliciously or ignorantly can be used to harm – in this case, ourselves. The use of our credit has precisely the same abilities.
Often a deeper appreciation for the ability to have access to a means to further advance our dreams is necessary to spur us all into better using the credit we have. Having shared the following historical background in my book, the chapter in which I dive deep into how to master your money, it wasn’t until 1974 in the United States that “the Senate passed the Equal Credit Opportunity Act, which made it illegal to discriminate against someone based on their gender, race, religion and national origin.” In other words, up until 1974, it was perfectly legal for a bank or credit company to ask a woman on their application if she was married or planning on having children, and whether a woman was single, widowed or divorce; as well, it was common for the credit institution to require a man to be present as a co-signer – a man, a father, brother or husband. In other words, well . . . I think you get the picture. But more to the point, a woman’s ability to invest in her dreams, purchase a home, a car, take out a business loan, open a checking account could be significantly limited if not thwarted simply because she was of the female sex.
Progress has taken place, and while 40 years ago seems so long ago to some of us; it is in fact very recent history. But the good news is, we all now have the opportunity to enable credit to work for us, so long as we know how. Let’s take a look at eight ways we all, women and men, can master our use of credit.
1. Build a good reputation with handling credit
Thirty-five percent of our FICO score is based on our payment history: how we maintain our credit (paying bills on time, etc.). While credit can be intimidating to be responsible for, it is necessary to have in order to reveal our responsibility. And in tandem, the length of our credit history (the longer the better especially when handled responsibility) makes up 10% of our credit score. In other words, longevity matters.
2. Keep it simple
The fewer the lines of credit you have, the better. One to two credit cards (revolving credit), installment loans (car loans, etc.), mortgage loans are a few of the different types of credit. It is necessary to demonstrate our ability to handle more than one type of credit, but of each we should have few and have handled (or are handling) each of them with competence. This aspect of our FICO score consists of 10%.
3. Keep the amount owed below 33% of the credit limits available
In other words, if we are using more than 33% of the credit available, it will begin to hurt our FICO credit score. We are bound to have some credit debt at different periods of our life and with different types of loans, but not maxing out what is available to us is a wise approach. Our use of credit makes up 30% of our credit score.
4. Apply less often for new credit
Note that in #1, the length of our credit history is a cintriburing factor, and the longer we have had and managed credit well, the better. So if we have recently applied for credit, even if it was approved, it will negatively affect our score. Ten percent of our credit report is determined by how recently we have applied for credit and how often.
Choose the credit card(s) which are best for what is needed, apply for loans sparingly, but savvily and in so doing it can be demonstrated our ability to while using credit wisely, not being dependent upon it.
5. Choose a credit card with a minimal, or preferably, no annual fee.
Even if $29 a year seems nominal, there are plenty of quality credit cards that do not have a fee and some even provide perks (see below, my love for Discover and why).
6. Choose a credit card with perks you would benefit from
If you are a traveler, Discover offers 1 1/2 points for every purchase, no black outs or limitations, and points earned can be applied not only to purchases for flights but travel accommodations as well. However, not everyone wants to travel, so shop around and compare plans, interest rates and protections offered so that the card chosen card can work for you in multiple ways.
7. Be willing to invest in your dreams
Being in debt is not what we are told is a good idea. However, with careful consideration of the outcome desired and a truthful conversation with ourselves about our work ethic and true passion for what wevare about to embark on, taking out a loan for education, business, real estate development, etc. can be a sound financial decision. The key is to educate ourselves and seek out others who have gone before us. Often we do have to put our money where our mouth is so to speak, but when we do it right, when we are in tune with ourselves and our goals, an investment can be the best choice we could ever make to further our progress.
8. Have a plan and then practice patience and discipline
The key is to know our approach for paying off or paying down our debt. Be honest with yourself about how much you bring in and how much you can spend. The importance of being passionate about what we each invest in is that it motivates us to stay the course, be disciplined about unnecessary spending so that the results we are seeking have a chance to materialize.
Credit and learning to master it will provide a much deeper sleep when we turn in each night. I don’t know about you, but keeping the power of money by using it properly motivates me all the more to have clear boundaries about what can and cannot be purchased. What makes a sound approach to money work is having a clear goal of why we are being disciplined, and once we have that, it is easy to say no to distractors until the goal has been met.
Much more credit management is shared in the following two posts from the archives:
Today the Year of Quality continues for the month of May. Have a look below at the past four months focus on quality in a variety of arenas in our lives and look ahead to see what we will be discussing next month and beyond.
~Mastering the use of credit
~Understanding and reducing self-doubt
~Curtailing the negative commentary (internal and external)
~How to approach staying informed but not overwhelmed by the news of the world
~Designated no work zones
~Smart shopping for clothing
~Recognizing, understanding and eradicating self-imposed limitations