Been bad with credit cards? How to start handling them again, wisely
Dear New Frugal You,
My husband and I have paid off our credit cards and are trying to repair the damage we have done to our credit scores. I read your September 23, 2010, article addressing a man's question as to whether or not he should go back to using credit cards. In the article you stated that, like alcohol, some people can handle credit cards and some can't. My husband and I have decided that we're the type of people who can't be trusted with credit cards. But if we don't use credit cards, what other options do we have to repair our credit scores? We are homeowners, and we make our mortgage payment, via ACH, on time every month. And I have student loans, which are on an in-school deferment and are not being paid on right now. What would you suggest? -- Credit Shy
Dear Credit Shy,
You are right to be concerned with your credit score. It can affect your auto insurance quotes, your ability to get a job or get into graduate school and more. So rebuilding your score is important. And, for someone who has handled credit badly in the past, it can be a daunting challenge. But, however, it is not an impossible task.
The first thing to recognize is that the purpose of the credit score is to predict how well you handle credit, so you want to be perfect in meeting your financial commitments. That would include banking records (including any overdraft fees), utility bills, auto loans and your mortgage. Sounds like you have that part under control.
Unfortunately, it's very hard to raise your credit score without using credit, especially if you're trying to restore a score that's been dinged in the past.
However, just because you were unable to control your spending in the past doesn't mean that you can't learn new behaviors and control it in the future. You might find that, if you're very careful, you can use credit cards. You could try getting a low-limit credit card. Choose one that will refuse to approve purchases above your limit. Use it for purchases that you're paying cash for now. As you make purchases, put the appropriate amount of cash into your checking account so that you can pay the entire amount when the bill arrives.
If you really don't trust yourself, put the card in a place that makes it hard to use. Some people freeze their card in a block of ice or even put it in the safe deposit box at your bank. In any case, do not carry it with you on a daily basis. Make it impossible to use it on a spur-of-the-moment purchase. Bring it out once or twice a year to demonstrate activity.
You would also be wise to examine what exactly went wrong with your past use of credit. There are two methods that could help find the answer.
One is to look at your past purchases for patterns. What did they have in common? Were most at the mall? Were they online purchases? Were they made at a certain time of day or night or when you were in a certain mood? When you spot the pattern, figure out a way to avoid it. It could be that eliminating one or two behaviors could allow you to use credit cards safely.
The second way to solve the problem is to look at the psychology behind your spending. Many people who struggle with spending are using money in an attempt to fulfill deep-seated emotional needs -- often needs that they may not even know they have. For them, the answer is to find out what those needs are and recognize that spending will not fill them. It's even better to have the needs fulfilled in an appropriate manner.
One of my favorite books on the topic is called "The Financial Wisdom of Ebenezer Scrooge" by Ted Klontz, Rick Kahler and Brad Klontz. Charles Dickens' Christmas tale is used to study Scrooge's views on money. The reader is encouraged to consider their own money beliefs. It's an easy, enjoyable and enlightening read.
Handling credit in a connected world is no easy task. But you're absolutely right to recognize that it's a challenge that you need to face.
See related: The 5 factors of a FICO score
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