How to manage the stages of a credit love affair
By Dawn Papandrea
February 12, 2016
Your relationship with credit is not unlike a romance. How it progresses has a lot to do with the choices you make, and the effort you put into it.
Of course, if you choose cards that aren’t the best match for your needs, you could end up in a string of bad relationships that can really drag you down, says April Lewis-Parks, director of education with Consolidated Credit, a credit counseling service.
To make the most of your credit courtship, here’s what to expect each step of the way:
Your first plastic date
With your first credit card, just like when you were new to dating, it’s a good idea to take things slow, says Kelley Long, CPA/PFS, and a member of the American Institute of CPAs’ Financial Literacy Commission. “Get to know how credit works,” she says.
“Credit cards are not a fly-by-night fling that you use up and leave for a newer, better model.”
— April Lewis-Parks,
director of education
with Consolidated Credit
Start out by just using the card once or twice a month, and make sure to always pay it off in full to start building a strong credit history, says Long. Developing a good credit reputation will make you more attractive to future credit suitors.
Though tempting, you don’t have to settle down with the first card issuer that winks at you. Before you swipe right, so to speak, consider the potential for a long-term relationship, says Lewis-Parks. “Credit cards are not a fly-by-night fling that you use up and leave for a newer, better model,” she says.
In other words, go beyond just looks to investigate each card’s terms, fee structure and long-term benefits to decide if you can build a history together.
Playing the field
As you get more comfortable using credit, it’s only natural you might want to start seeing other cards. “Maybe your first card had a low limit and very few rewards,” says Long. Just be careful not to get in over your head, since juggling multiple credit partners simultaneously can lead to trouble.
For instance, it can be exciting to apply for multiple store cards and receive big discounts at your favorite retailers; however, you don’t want to end up overspending and paying super high interest on purchases you don’t really need, Long says. Those lingering balances can quickly become the credit equivalent of being stalked by a crazy ex.
While it’s fine to have multiple credit lines, the key is to be selective about which ones you really want and avoid opening too many at once. In fact, taking on too many obligations in a short span of time will cause your credit score to take a temporary dive since it is perceived as risky behavior.
Breaking up is hard to do
When things start to go bad with credit, often people’s reaction is to end the relationship completely by closing a card — and not always in a healthy way, says Lewis-Parks. “You can’t just disappear and start dodging calls to avoid dealing with debt.”
“If you have card balances that are maxed out, that drags your credit score down. You might want to go on a financial diet to pay more on the balances to bring your utilization down to less than 30 percent of your limit.”
— Kelley Long,
Instead, you should really do everything you can to either save the relationship or part ways as friends. You might even decide to enlist an intermediary like a credit counselor to help get you both back on the right page, says Lewis-Parks. “A credit counselor can help you work on your problems so you can get back to a healthy point in your financial life without leaving credit behind completely,” she says.
At some point when you feel financially comfortable, you’ll want to settle down, says Long. “First you need to open your eyes to any damage you may have done during your ‘dating years’ by getting a checkup,” she says. You can do this by accessing your free credit report from each of the three credit bureaus (Experian, Equifax and TransUnion) at annualcreditreport.com.
Your credit report will help you flag past financial relationship baggage that could affect your long-term financial health. Then comes the self-improvement phase of trying to boost your credit score. Long says one of the most effective ways to clean up your act is to show your credit utilization some love. That refers to the amount of debt you’re carrying in relation to the amount of available credit you have.
“If you have card balances that are maxed out, that drags your credit score down,” explains Long. “You might want to go on a financial diet to pay more on the balances to bring your utilization down to less than 30 percent of your limit.”
Doing so, while continuing to pay all of your bills on time each month (the other major factor affecting your credit standing), will help prepare you to enter into other meaningful, long-term commitments, such as buying a house.
“At first sight, credit cards are incredibly attractive. Then suddenly when the bills come due and interest is added, you start to see a different side of credit,” says Lewis-Parks. However, if you can make it past the honeymoon phase and learn to accept credit for what it is, you and your plastic partners can live happily ever after.