Financial advice includes some broad ideas that apply to a lot of people. Nuggets of wisdom like “pay yourself first” or “diversify your portfolio” are time-tested and never go out of style. However, there are certain financial lessons that can backfire if the teacher, including you, is not careful. For Financial Literacy Month 2022, we are sharing financial literacy lessons that can do more harm than good if you’re not careful, as well as advice for teaching the core concept.
The Double Edged Sword In Your Wallet
Credit cards are a powerful tool on the financial toolbelt. Like most tools, they can build or destroy depending on the user. Everything that makes credit cards convenient also makes them dangerous:
It’s just a card/app. You don’t need to carry cash or use an ATM. You just swipe/tap a card, or even store the card’s information on your phone or smartwatch and pay with that. So simple! This can be a downside because paying a dollar feels the same as paying a hundred dollars. You might think twice if you had to pull out, feel, and hand over physical money to pay for something.
You have roughly a month to pay it back. There are about 28-31 days between credit card statements, meaning you could go weeks before payment is due. Once again, convenience and flexibility are great, but they also require discipline. Putting a ton of purchases on a card and forgetting about it until the statement arrives is a recipe for disaster. If you only pay the minimum amount on the card, you will end up paying extra interest over time.
Purchases can earn money or points back. Depending on which card you choose, you can earn statement credit or redeemable points based on where you eat, shop, and travel. There are all kinds of strategies for maximizing credit card rewards. However, those rewards still require spending a fair amount of money, and no matter how valuable the reward is, cost should come first in spenders’ minds. Getting a dollar back on a $100 purchase is still spending $99!
For these reasons and more, it makes sense that some people treat credit cards like they are radioactive. Some people overspend, swear off credit cards, then cut them up and throw them away. It’s okay to not use credit! However, there are ways to build card confidence as well as your credit score. Credit does not have to be an all-or-nothing decision.
Start With Debit and Cash
One of the most steadfast rules someone can apply to their credit card is, “Use it like a debit card.” A debit card is tied to the value of one’s bank account. When the bank account runs out of money, the debit card is worthless, and will likely trigger penalty fees for “overdrawing,” or spending more than you have. That’s right, getting charged money for not having money.
Get used to using a debit card, though, and you will be on your way to forming a mindful habit around always knowing how much you can afford to pay using a card. If that sounds too risky, then carry cash. Be mindful of what you spend, when you spend it. Keep track of the amounts you spend and where. These habits will benefit you no matter what form of payment you use.
Build A Credit Score With Intentional Spending
This next piece of advice applies to the credit-hungry and credit-wary alike. It's about using something as simple as a candy bar to take advantage of something as complex as a credit bureau.
Your credit score is used by lenders to determine whether to offer you a loan as well as how much interest to charge. One major type of credit score, called a FICO score, is determined by several factors. A history of making payments on time, not charging too much, and the age of your line of credit are all simple to build. If all you did with a credit card was buy a candy bar each month and pay off the resulting statement every time, your habit would fulfill 80% of what goes into a credit score.
There is a lot more information about how credit scores work. Here are some good places to start:
AnnualCreditReport.com - Government-mandated website for retrieving your free credit report from all three credit bureaus