Many financial coaches subscribe to the belief that the path swerving widest from troubled credit is one that includes no credit cards whatsoever. It’s hard to argue that line of reasoning, to be honest.
Paying with cash as often as reasonably possible – car loans, mortgages and funding career education being the major exceptions – means rarely paying for anything with money that one doesn’t really have yet. Before reaching that state of personal financial strength, many people at some point or another don’t find themselves with many other choices except to use credit as a lifeline when absolutely necessary.
That’s sometimes where the trouble begin: many find themselves straddling a blurred line with a decreasingly less clear concept of which expenses could be defined as true “emergencies.” Worse, one indulgent shopping spree leads to a downhill snowball that gains unstoppable momentum and leaves cardholders maxed-out, sunk into debt, and looking for a way back to a more responsible state of mind.
If you decide to get another credit card after resolving all outstanding consumer debt and starting fresh, congratulations! You’ve learned to forgive yourself. Make the most of the opportunity and get back to the very basics of responsible credit usage.
To borrow from the Bill Murray comedy classic What about Bob?, take baby-steps toward the elevator. Leave the standard credit card offers by the wayside and begin anew with a secured credit card.
Secured cards function essentially identically to “normal” credit cards, including crediting balance payments to your credit history. Instead of simply trusting you not to run roughshod with the power of plastic, the issuer will hold a varying deposit that will cover your full balance in the event of delinquency.
Treat it kindly, and 12 months or more of remaining in the issuer’s good graces could earn you a traditional card with a reasonable limit. In the meantime, the issuer is at least covered against an outstanding uncollected balance should you backslide.
- USE ONLY AS DIRECTED
Card issuers are competitive and attentive to the way the customers they target use their credit lines. Before you even complete an application, examine the terms, conditions and even perks. Carefully consider whether you’ll even have a practical enough use for the rewards to justify paying the annual fees or if the features and interest rates really suit your needs. Some companies tailor their rewards, limits and services to what they understand to be expected student behavior with cards – right down to cautiously low limits that anticipate bouts of flighty irresponsibility.
Meanwhile, adults with lengthier demonstrations of a good perspective on credit often qualify for more prestigious cards entrusted to less-risky profiles.
Then again, there’s always the secured card.
Get to know the card before you sign up, from the interest rate, annual fee and credit limit to the balance-transfer and cash-advance limits. Just as importantly, comparison-shop it against other card offers. After that, use it like the kind of customer to which the issuer has tailored its features.
- THE STATEMENT
This is your chance to really get it right the second time around.
Take your statement seriously. Know exactly how long the billing cycle is and note when each one ends, as statement periods can vary – usually as long as 29 days for most issuers. The best way to use credit as an avenue to repairing your score is to make one small purchase each month, followed by an immediate payment with days of the statement arriving. We’re talking about a pack of gum or dollar-menu cheeseburger.
Credit bureaus don’t so much care about the size of your purchases as they do about the fact that you’re making payments in a timely fashion and not carrying a balance that leads to a finance charge.
Finally, budget for fees, but do all that you can to avoid them. Many cards charge a few-ways-around-them annual fee, but many also leave an “out” for fees for users who don’t carry a balance. Choose wisely.
See your second card as an opportunity. Remember, our counseling is geared toward helping our clients avoid the mistakes that landed them initially in debt. Every decision that you make after clearing your ledger is either a step toward consistently developing new, better habits or one toward the familiar agony of debt.