Sunday, November 29, 2009

My Credit HiSTORY

To Owe, or not to Owe, that is the Question . . .

When I was 18 years old, I was given very little advice or direction about finances, except one suggestion from a non-blood relative, "Get a credit card. It will show you are responsible and will help you build your credit."

Three years and ten-thousand dollars in debt later, I found myself unable to participate in a volunteer opportunity because I had this big ball of debt hanging around my neck. I moved to Alaska, lived with a family friend, and worked two jobs. I spent $100.00 on a bike, and a few dollars on clothing at a thrift store. I walked to work in 35 below zero in the winter, and rode my bike to work in the summer, 14-20 miles round trip each day for nearly a year. I was literally a slave to that debt, but I paid off every penny of that credit card, a two-thousand dollar car loan, and student loans. I was debt free!

Three years later, I married, and started the process all over. We paid off credit cards, along with some other debt. A week ago, we had six credit cards with absurdly high credit limits. None of them carried a balance. Today we own ZERO credit cards. We have zero consumer debt, and are working toward being mortgage free.

The Credit Logic Train:

1. Myth: Credit cards help you build credit.
Truth: Paying your utility bills on time, managing a checking account without overdrawing your account, and owning a debit-visa card that draws from your checking account will build your credit. Sometimes you need a loan for a car or a home, or maybe a student loan if you really can't afford to pay out of pocket, but you don't "need" credit cards.

2. Myth: It's safer to use credit cards. They are protected, while debit cards are not.
Truth: Debit-visa cards are afforded the same protection as regular credit cards.

3. Myth: I need credit cards to travel.
Truth: Debit-visa cards work just as well to reserve rooms, purchase airline tickets, etc.. If you can't afford it, you shouldn't be doing it in the first place.

4. Myth: I need credit cards in case of an emergency.
Truth: If you will save even one dollar out of every paycheck now, and then anytime you get a raise, put that amount into savings every month, you will have a nice little DEBIT reserve instead of needing credit. Saving is a great way to show how much self-control you really have!

5. Myth: I get a cash refund from credit cards, or I build up SkyMiles. People who don't pay their balance every month are basically paying me for my responsible behavior.
Truth: Yep. I used this excuse too. Sounds pretty good at 1%, 2%, or even 3%!I could pay it off every month while earning money! Keep in mind that all the credit card company is doing is giving you part of the fee they are collecting from retailers for each credit purchase. Credit use drives up prices at retailers because they have to pay those fees. You are still paying for it. As for SkyMiles or Rewards, I figured out that the annual fee for carrying the rewards card actually only just paid for itself. I could have saved $35.00 per year and ended up with a plane ticket faster than I could with SkyMiles earned, and the SkyMiles would expire before I could use them. I won't even touch the whole consumer debt rationale, "Let's buy (expensive item) because we will get money/miles back for this purchase."

6. Myth: I need to keep credit card accounts open because it makes my credit look good and shows how much people are willing to lend me.
Truth: Open, unused credit card accounts are a liability. I get all of these little notices every month that tell me about a new change in my terms, and these new terms are typed on tiny, and hard to notice slips of paper. I have found that credit card companies tried to sneak some crazy fees in there, but I caught it in time and called to opt out. My time is too precious to read the fine print on every change they make each month, and I assume yours is, too.

7. Myth: Same as cash credit card with zero percent interest are a great deal, because I know I will pay it off.
Truth: Careful, all of that interest you didn't pay for those two years could hit you in one big chunk at 25-35% if it isn't paid off by then, down to the last cent. Of course, that is the gamble. Don't get hurt of lose your job, or suddenly that good deal could double in price.

8. Myth: If you are responsible, you should go ahead and use credit cards. People who are irresponsible make credit cards look bad.
Truth: Struggle a bit and wait long enough to pay cash for it. Pay into a bank account instead of paying a credit card company, and make that purchase once enough is saved. That sounds pretty responsible to me. There's no need to be a debtor to someone else. This list could go on and on, but instead, let me address the real question you may want to ask:

No credit cards? Sounds stupid. Why would you do that?

Here's why (Skip this part if it hurts):
Certainly, "credit," (as in loans for equity-worthy items of necessity) can be useful. It is how one purchases homes and helps pay for school when necessary. Credit card companies are really good at making people believe that credit card purchases and cash advances are really just little loans, not unlike a home loan. Not so. They make it look like you are more financially smart by having them. Now, this may not always be the case, but right now credit card companies are in trouble, and guess who they expect to get them out? Me (oh, and the government, but that's another story).

Before cancelling all of these cards, I received notices from almost every single company, stating that my rates would be locked in at a significantly higher rate - from 11% up to 35% in some cases. Various fees were listed like a shopping list for this or that, and I thought, I don't need this, even if I do carry a zero balance. All I need is to have one "newly imposed" annual fee escape my notice, and WHAM! That can add up pretty fast at 35%.

Chalk one more up for being a non-conformist in a world full of credit-crutches.

Have you ever paid off a large credit card or loan? How did it feel?

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