Can A Cash-Only Philosophy Help Repair Your Credit?
Posted on April 19, 2011
When you are finally beginning to dig out from the pile of debt you have been living under recently, it can be tempting to go ‘cold turkey’ and rely on only the cash resources you have available. While it certainly is a good thing to want to better control your spending, living a credit-free existence may not be the most financially savvy decision you can make for yourself.
Why Credit Matters
After getting close to being debt free, you may have established new rules for yourself in order to move forward and continue living a debt-free life. However, you have to take into consideration many other aspects of an overall financially healthy and stable life.
For instance, did you know that your credit score is important regardless of whether or not you need a loan? You may never need another drop of help from creditor or a bank but if you maintain a low credit score, you can expect to pay more for insurance, you may find it difficult to get a job offer, and you may even be refused a place to live if you rent. There are more industries than just financial ones that use credit scores to make decisions. Even regular service providers will often perform a credit check before agreeing to an account. Low credit scores may require a hefty deposit to ensure you can be responsible in paying your bill since your credit score does not reflect this.
Why Cash Can Hurt
When you switch to an all-cash existence, you are essentially taking away an important aspect of your financial life. Since there are no creditors reporting back to the credit reporting agencies about your ability to handle money, your credit score will drop lower and your credit history will be lacking. Ideally, you want to incorporate a good mix of credit accounts (mortgages, credit cards, personal loans) into your profile. Lenders want to know that you know how to manage your money as well as handle different types of accounts at the same time.
Maximizing Your Cash and Credit
You should plan to use both cash and credit wisely. One sure-fire way to improve credit scores without overextending your credit is to only put purchases on your credit card you actually have the cash on hand to cover. For instance, when filling up at the pump for $30 on your credit card go home and put $30 cash into an envelope to ensure you have enough for a full payoff when your credit card statement comes.
Instead of living off of cash entirely, consider opening multiple savings accounts and deposit money automatically from your paychecks. By building up savings goals you can protect yourself from not having enough cash to meet all financial obligations during any given month.
Cash is certainly a wonderful thing to have and use but you will be doing your credit score no favors. It is better to work toward finding the right balance between cash usage and credit usage moving forward. With time and proper management, you can not only stay on track with budgeting, you will also learn quickly how to live below your means and ensure you are never susceptible to debt problems again.
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