When Should You Use Credit Cards?

If you remember seeing the movie Catch Me If You Can starring Leonardo DiCaprio, you'll remember the scene where Frank's father opens a checking account for his son as a birthday gift, "One day, you'll want something from these people-- a house, a car. They have all the money. There's 50 checks there, Frank, which means, from this day on...you're in their little club. I'm in their little club." Unfortunately, Frank Jr. took his father's words to heart and began to travel the world as a con artist committing check fraud. He later publicly confessed his mistakes but now inspires young people to not follow in his adolescent footsteps. Frank Jr. joined the FBI's check fraud division after serving 5 years in prison.

Credit! It is the future of determining a borrower's financial risk. Checks used to be a popular form of payment and you were only eligible based on other criteria since 'Credit Reports' were just beginning to enter the financial market as a new measuring tool for creditworthiness. "Engineer Bill Fair and mathematician Earl Isaac developed the first credit scoring system in 1956. In 1989, a refined credit scoring system based on their initial system was introduced, and quickly became an industry standard." Another author writes, "Before credit scores were invented in the 1950’s, lenders took a much more social approach to determining creditworthiness." Credit cards are a tool to building credit. There are good reasons and bad reasons for obtaining and using credit cards. They can either help you or hurt you. I submit 5 reasons to obtain and use a credit card. When should you use a credit card?

1. Credit cards should be used for emergencies.

A great reason to use credit cards is for an emergency. If you need your car towed, if you have a health related expense, or if you need to buy yourself a little time one month. Credit cards can buy you time. In fact, that is a good reason to use it. If you're paycheck was a little low one month, but you know that it isn't normal, the credit card may help you purchase budgeted items once in a while. An emergency is any purchase that is absolutely necessary for your benefit. Food, clothing, shelter, and utilities are good examples of necessities.

2. Credit cards should be used for budgeted items.

If you do not have a monthly budget, you need to make one as soon as possible. Once you have budgeted all items including spending money, savings, and perhaps unplanned miscellaneous expenses, then only use your credit card for these items. Once you begin using your credit card for unplanned expenses then it can become out of control. The dollar amount to be paid in full at the end of the billing cycle can become outrageous and unmanageable.

3. Credit cards should be paid in full every billing cycle.

Besides emergencies, if you know that you may not be able to pay off your credit card in full by the end of the billing cycle, then you should not use it. It is best to think of your credit card as your liquid assets and you're only using it for budgeted items. Experian credit reporting bureau notes, "There is a common myth that carrying a balance on your credit card from month to month can benefit your credit scores, but that is not true. Ideally, you should pay off your credit card in full every month. If you are trying to establish a strong payment history, you can do so by making small purchases on your credit card each month, paying the balance in full, and making sure all payments are made on time."

4. Credit cards should be used as a tool to build your creditworthiness.

As previously noted, It is best to think of your credit card as your liquid assets and you're only using it for budgeted items. Then why should you use your credit card if it is basically like using cash? Because, strictly speaking, it is the bank's money and not yours. Using a credit card is using their assets and not yours. It is good security. It prevents your debit card or checking account from being accessed by thousands of third parties every month. Every time you swipe your debit card you are allowing access to your liquid fund-checking account. This has become more and more subject to hacking and funds are being depleted, especially with online shopping. Never store your debit card information online! It can take months to recover your funds and this also hurts the bank since they have to report it and depend on law enforcement to catch the criminal. The bank then has track down the funds and recover them. Sometimes, they never do.

5. Credit cards should be used regularly.

Credit cards can build your credit score. Experian explains, "The elements from your credit report that shape your credit scores are called credit score factors. Some factors that may affect credit scores are:

• Your total debt
• Types of accounts
• Number of late payments
• Age of accounts

Factors indicate what elements of your credit history most affected the credit score at the time it was calculated. They also tell you what you must address in your credit history to become more creditworthy over time." Further, it is not good to obtain a credit card and never use it. This may affect your credit score negatively because it demonstrates nothing. The bank will eventually close your account and that will hurt your credit score.

The whole point of a credit card is to take the banks money and spend it responsibly in order to develop a history of spending and making payments that demonstrate your credit worthiness. How much money should the bank lend to you? What kind of mortgage do you qualify for? Your credit worthiness will determine the answer. When it comes to home loans, remember that a credit card can help you build your credit score, but it can also affect your debt to income ratio which mortgage lenders use to determine qualification. If you have high payments and too many of them, they can add up, and the debt to income ratio can exceed guidelines. Do not overextend yourself simply because you have high balance limits.