Step #3: Wise use of credit

This step always creates controversy.  Proponents of complete debt eradication say I am crazy for suggesting what I am about to show you.  While many financial planners call what I will show you as heresay, and most people think it is just using what you have to its potential.

At this point in a discussion of debt many companies, gurus and so called experts will tell you to go strictly cash.  Get rid of all credit cards and charge nothing else, go forth and prosper young family.  But I differ in this point.  Once you begin to clear your credit you can use what has been giving to you to make your life better.  But again it requires discipline and smarts.

How does using credit help.  Most mortgage lenders today require a minimum of 3 open tradelines with credit amounts of $1000 or more and at least one trade line being open for more than 2 years.  If you begin to close off your tradelines you begin to hamper you efforts in the future to buy investment property or to refinance your current mortgage.  It is not impossible to get loans without tradelines but it does make it harder.  Many mortgage lenders are now beginning to require at least one tradeline with a $5000 balance.  This helps them to evaluate your ability to repay the loan.  

The strategy at this step is to use your credit cards wisely.  Whatever you charge pay the balance off.  Pretend it is an American Express Card and you must pay off the balance every month.  Once you have a clear credit card use it instead of cash.  But track it like it was a debit card.  If you must set up a second bank account and transfer the funds from your checking account everyday as you use the card.  With online banking nowdays this is a very simple thing to do and only takes a minute everyday.  

By doing this you will enhance your rating with the company and not harm your credit rating.  Do not accept large increases in your limit at this point as that can hurt you in the future.  Just use the balance that you can afford to pay off every month.  There is a more advanced strategy but it requires someone who has shown the ability to follow this simple strategy for at least six months and has begun to pay down their debt significantly.

Today's step is about using your credit wisely as you pay off debt.  But a word of warning.  If you are not disciplined enough to pay off the card every month in the way described CUT UP YOUR CARDS and concentrate on getting out of debt.  You can use a debt coaching service like I provide but you must be willing to listen to someone and take their advice.

See you tomorrow.