Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
I am 20 years old and am currently working for a management company while going to college part time. Last winter, I went on a trip to Dubai for a class on scholarship and got a credit card from a local credit union in case I missed a plane or something. Over the summer, I had to use the credit card a lot because I took summer classes and did not make enough money to cover the costs of my long commute from home. Because of interest, the card is now roughly at its max ($1,500), but I am making regular payments to keep the balance slightly under $1,500. I now need to go to Mexico to visit some friends, and some parking tickets that amount to a little less than $200 have come up that I was not expecting. I was wondering if it would be completely destructive to try to open another credit card at a different bank, or even if they would let me? Once I get back in January, I will be starting a second job for the sole purpose of paying off my credit card debt, and plan to pay off the second credit card and close that account within a month or two of getting back. What do you think? I really don’t know what to do otherwise. I have already bought the airline tickets, and have to have some money with me because I will be in Mexico for about a month. — Victoria
It seems you made a few critical credit errors in your short time as an adult. That’s not uncommon, of course. Managing a card is not an innate skill — you have to learn how to do it right.
Here’s where you went off the rails and how you can get back on track — in the form of six simple lessons:
- Know the right and wrong way to use a credit card
Your primary mistake was relying on the credit card to get you through a financial pinch. By doing so, you infected a little problem (a temporary shortage of funds) with a terrible illness (long-term expensive debt). As you’ve discovered, interest builds on unpaid balances quickly, and having to scrape up a payment — even the minimum — is painful when cash is tight. Therefore, only charge items and services that you can and will repay within 30 days — or a couple of months at the very most.
- Delegate your dollars smartly
You’ve got a lot going on right now with all your traveling and schooling. It’s time to prioritize. Whether the money you have coming in is from student loans, a job or parental support, total it all up and then parcel it all out in a sensible way. Always make sure you pay for the things you absolutely need first, and then if you have any extra, spend it on those that are less critical.
- Travel with plastic, but pay with paper
As someone with a major wanderlust streak, I get the desire to globe-trot. Before you travel cover all the costs involved before leaving. It’s not that hard. Find the best airfare, make sure you have that sum in the bank and then charge. When the bill arrives, pay the entire balance. After that, start saving for accommodations, entertainment, food and whatever else you may want to spend on your trip. Bring your credit card, of course, but have enough cash in the bank to pay for everything upon return.
- Take responsibility for your current debt
All bills are serious, but parking tickets are especially so. Repercussions for not paying may include fees being added to the balance, not being able to renew your registration, collection activity, the car being impounded and your driver’s license suspended. Pay them now. As for your current credit card debt, determine a fixed sum that you send every month and stop charging while you’re in repayment mode. It would be best to not owe a penny before leaving for Mexico, but if you can’t, deal with it aggressively when you return and get that second job.
- Only pursue the credit you really need
Do not add another card to the mix before mastering the one you have. After you’ve deleted the debt, start charging regularly again but this time paying in full. Then consider another. Apply for the best one you qualify for. When you have it, keep both accounts open, as that helps your credit rating. In the meantime, you’ve got at least a $1,500 credit line, which should be sufficient for a student’s lifestyle even with some traipsing around. If it’s not, ask your current credit issuer for an increase. By proving that you’re a great credit risk, chances are good they’ll consent.
- Have fun
Yes, fun. To do that, follow lessons one though five. This way you’ll become financially secure and prepared for all the exciting things that life has to offer. And as you have experienced, being weighed down with expensive consumer debt is neither exciting nor fun. It’s awful.
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