Last year, I recorded a video talking about when you should and shouldn't use credit cards. In that video, I defined the terms "want," "need," "necessity" and "emergency", and then clarified at which times a credit card (or another kind of line of credit) should not be used. I'm afraid I was sick at the time, so I'm not animated and it was filmed on a city bus, adding a bit of noise and jittering, so I'll explain here for those who would prefer to read. If you read, you'll get more info than from the video, too! ;) This is more for people who misuse credit, don't pay it off, abuse it or otherwise rely so heavily on credit cards to the point that they are dependent on them.
Definitions
A want is something that you desire but is not in any way required for you to live. For example: cigarettes, junk food, pet rocks, candy, art, fast food, movies, video games, etc.
A need is, for the purpose of this essay, is something that is important to have but which you can actually live without (although it might discomfit you to not have it. For example: a home, car, computer, mobile phone, fancy clothes, etc.
A necessity is one step above and is absolutely required for your survival. For example: (in some cases, a home and car may be in this category) appropriate clothes for the weather, nutritious food, clean water, medical care, etc.
An emergency can be defined as any situation in which a necessity or emergency help is needed to resolve a situation. For example: your car breaks down half-way through the desert, your baby has a high fever and is vomiting, you haven't eaten for 3 days, your house is flooded, etc.
When To Use Your Cards
- When it's an emergency.
- When you require a necessity and don't have immediate access to cash, but will quickly repay the debt.
- When you have money to repay the debt, and have a bad credit score and want to repair it. Purchase something and pay it off within the card's grace period. The same can be done with other types of loans to improve your credit score.
- When you have a want or need, you have the money to repay it quickly and will do so. Always pay your credit (cards and loans) debt as fast as possible.
If you can be responsible to pay your bills promptly, then you can use a cash-back card, and you can also use a card for large purchases (for some things) to get a discount.
If you DO use a card for all your purchases, at the end of the month you can review all your spending and then manage future spending if any areas don’t look right.
These are just a few examples to help you develop rules for the use of a credit line.
When NOT To Use Your Cards
- For fun, a want or a need, unless you'll immediately pay it off.
- When you know you won't be able to afford to pay it, and you want or need things.
- When you're using alcohol or drugs. You'll probably spend too much.
- Binging (shopping, eating, etc.): You're spending on things you don't even need and are not trying to resolve the conflicts that drive you to do this. You're also causing distress for your loved ones and probably damaging your health and/or your credit score, as well as putting yourself into debt for no good reason.
- Hoarding: You're spending on things you don't even need and are not trying to resolve the conflicts that drive you to do this. You're also causing distress for your loved ones and probably creating a hazardous situation in your home.
These are just some examples. Please be careful to differentiate between genuine necessities and emergencies and don't let your addictions get control of you!
Don't Pay the Minimum
Credit companies love customers who always pay their bill on time, and always pay the minimum. Why? Do the math. If you have a $1,000 debt, your interest payment is 20% and the minimum payment is 21% of the principal plus the interest, how many decades will it take to pay it off, assuming you don't borrow more money? Essentially, paying the minimum pays off the interest and BARELY touches the principal (the actual amount you borrowed), so you will stay in debt from that one-time loan for many decades. The credit card company will get many thousands of dollars from you, which makes you a favorite (but not preferred) customer. Sure, they'll probably increase your credit line, but is that really what is required - no, it's a trap to encourage you to go further in debt! People who pay the minimum help keep those financiers rich. NEVER pay the minimum if you can afford more!
Part 1: Wants, Needs & Necessities
Part 2: Emergencies and When to Use It
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