Change the Way You Use Your Credit

Credit cards are so universal nowadays that it's easy to forget that not everyone knows how to use them correctly, let alone to our advantage. The simplest definition of a "credit card" implies trust: banks are essentially telling us, "I believe you are capable of buying things and later paying for everything you've consumed."

‍

Unfortunately, we often see people using their credit cards in ways that betray this trust. This entry proposes a change in mindset regarding the use of this payment method that can be both beneficial and risky.

‍

‍

Julia and Miguel: Two Credit Philosophies

‍

Meet Miguel and Julia, both 21 years old, a couple who met at university. Miguel got his first job a year ago, and Julia started working ten months ago. Both have just received their first credit card, each with a $1,500 limit.

‍

‍

Over time, both have used their cards frequently. Each month, they take part of their salary and pay off their consumed balances. Neither has paid interest for financing nor have they been late on their payments to the bank even once.

‍

However, if we could see their legs, Miguel now drags chains and shackles while Julia can walk without difficulty. What happened?

‍

‍

‍

‍

Two Divergent Approaches

‍

Julia and Miguel represent two essentially divergent philosophies on credit management:

‍

1. Miguel has started to see his credit card as extra money. "Now I have my salary and I can also buy with the bank's money," he thinks. He has made many purchases knowing that he'll pay off everything consumed with his next paycheck. "It's not a problem," he says. "I won't pay any interest to the bank, because I know well that I shouldn't get into debt beyond what I can pay." Miguel took the trust the bank gave him and delegated it to his paycheck.

‍

2. Julia, on the other hand, doesn't perceive her credit card in the same way. "It's not extra money, it's just a payment option," she explains. "Everything I consume with my credit card I could have bought with the money in my bank account." Julia pays with her card for its benefits: the miles, the cashback, the privileges it grants. But she strives not to buy things she couldn't pay for with money she has at that moment. And the way Julia is able to stay on track is by using MyBudgetCoach to guide her spending plan. This app helps her to design spending categories that will prevent her from going into debt.

‍

‍

The Floating Debt

‍

Three years later, Miguel and Julia are married. They maintain their divergent financial habits and still use their credit in the same way as when they were dating.

‍

Both have progressed and now each receives a monthly salary of $4,000. The bank has tripled their credit, and now each can charge up to $4,500 on their cards.

‍

The current situation is as follows:

‍

- Miguel has a balance of $4,285 on his card, while in his bank account there's only $622. "It doesn't matter, my paycheck arrives on Friday, I'll clear my card with that," he says confidently.

‍

- Julia has a balance of $4,394 on her credit card, but her bank account has $4,412. "I could pay off my balance right now if I wanted to," she says. "And I'll also receive my paycheck on Friday."

‍

In other words, Julia has her entire credit limit at her disposal. Miguel, on the other hand, needs to get paid to settle his debt without penalties, but he'll be left almost without capital, forcing him to charge his card to the limit again.

‍

The debt Miguel has on his credit card floats from month to month, only changing its due date, and he can't eliminate it without receiving his paycheck. Julia, on the contrary, can pay off her card at any time. While she owns her credit, Miguel is a slave to his.

‍

When Friday arrives, both receive their monthly paycheck ($4,000 each) and pay off their credit card balances. Miguel is left with $337 in his bank account (622+4000-4285). Julia is left with $4,018 (4412+4000-4394).

‍

‍

‍

Mr. Murphy Intervenes

‍

It's time to add some "doses of life" to Julia and Miguel's story, courtesy of the Jedi Master of unforeseen events, Mr. Murphy.

‍

‍

‍

While returning home, Julia had an accident and was hospitalized. Miguel, upset and worried about his wife, got distracted while driving and hit a wall, significantly damaging his car.

‍

After recovering from the mishaps, they were surprised to find that the costs associated with the hospitalization and the crash amounted to the same figure: $3,000.

‍

They received their bills with concern, but with a capital difference:

‍

- Miguel nervously looked at his available balance, realizing that he didn't have enough money to pay for the car repair.

‍

- Julia's concern was different. Despite having paid off all her pending credit card balance, she knew she had enough in her bank account to pay the medical bill.

‍

Miguel's anguish came from the harshness of his bad behavior, while Julia had more leeway: she could pay the medical bill with her credit card and still had 50 days to honor her debt (30 days of the month plus about 20 days of grace that the bank gives after the cut-off date). Miguel would have to finance his debt and modify his lifestyle, while Julia had room to make adjustments and stay afloat without changes to her daily routine.

‍

Only then did Miguel realize the big mistake he had been making for years: by charging purchases to his credit card without immediate backing, Miguel gradually lost the advantage of having credit. Now with this unforeseen event he will have to fall into the dark abyss of financing.

‍

‍

From Miguel to Julia

‍

The story of Julia and Miguel aims to illustrate two common credit management philosophies. In the world, there are very few Julias but countless Miguels. And even worse, those who are worse off than Miguel, those who, in addition to carrying debt, also carry financing. Miguel will join that club, and that's why he's anxious.

‍

Are you Julia, or are you Miguel? Do you charge purchases to your card because you don't have cash and you're counting on "when I get paid, I'll pay everything I owe" like Miguel did, or when you make purchases, do you choose to pay with the credit card but could pay with cash, according to Julia's example?

‍

If you identify with Miguel and want to have Julia's peace of mind, take advantage of your position before Mr. Murphy throws one of his curveballs at you. Start paying more to your balance each month, so you increase your available credit. In a matter of months, you'll resemble Julia and climb one more step on your path to financial freedom.

‍

This is one of the many scenarios where MyBudgetCoach can come in handy. By creating a budget that prioritize your needs, help you foresee Murphy’s mischiefs and gives you the flexibility to change your priorities when needed, you will be better off to use your credit card for its benefits, and not out of necessity.

‍

‍

Wrapping up

‍

It's important to note that emergency funds were not mentioned in Julia and Miguel's story. The intention of this entry is to illustrate how two credit management philosophies can have vastly different results. However, it's necessary to remember that the first strategy we should cultivate to avoid indebtedness is to build emergency funds (better if they're target-specific) to avoid having to resort to credit when something happens.

‍

If Miguel and Julia had had an emergency fund, their mishaps could have been covered with them, thus avoiding the need to use their credit cards or face financial difficulties in times of crisis.