Some financial gurus will argue that credit is bad news. They'll say credit cards will destroy your money and your life. This may be true if you rack up a tremendous amount of debt you have no way to repay. But credit isn't inherently evil, and there is a responsible way to utilize credit cards.
Here's the thing: Credit cards are not sentient monsters that are out to victimize you. The reality of the situation is that credit card companies are happy to take advantage of people who are irresponsible with credit card usage, and who haven't learned how to manage their money properly.
But knowledge is power. You don't have to fall prey to the credit trap. If you can learn to be more responsible and manage your credit appropriately, you can utilize credit cards as a tool to improve your finance and turn the game on its head by taking advantage of the credit card companies instead of letting them take advantage of you.
How do you use credit cards responsibly?
The first step is to understand credit is not the same thing as cash. It is not "free" money. When you charge something on a line of credit, you will have to pay back the charge with your cash in a timely manner. If you don't pay on time, you will not only owe what you charged, but since you carried a balance, you'll also owe interest. This means something that originally cost you $100 will now cost something like $120 -- thanks to that sky-high interest rate of 20 percent that isn't unusual to find on a typical card. Your credit card isn't cash. It's a credit card and it deserves your respect, as misusing it can destroy your finances.
Keep up with all charges -- and pay off balances completely and regularly.
You also need to carefully track any charges you incur on your credit card. Your credit limit may far exceed the money you actually have to your name in the bank. Credit card companies would love nothing more than to give you a $10,000 line of credit, watch you charge up every last cent of that, and be unable to pay it back. If you carried that balance on a card with interest, you'd owe $2,000 extra. And that interest just compounds and grows exponentially the longer it sits on the card. But remember, you have the knowledge (and the power) here. If you pay off your balances in full and when they are due monthly, you'll never have to pay interest on anything you charged.
Once you've established good habits by never charging more than you can afford (or had budgeted to spend) and always paying off balances in full and on time, you can start using credit cards as valuable tools to help you improve your financial situation. Responsible credit card use will help build your credit score, and this matters if you ever want to apply for something like a mortgage. A good credit score allows you to secure the best possible interest rate available. This, in turn, allows you to save money over the lifetime of your mortgage because you'll be paying less in interest.
Take advantage of what credit card companies are leaving on the table.
You can take this a step further if you're comfortable with how credit cards work and understand the importance of maintaining responsible use. Again, this means never carrying a balance, never charging more than you budgeted to spend, and always paying off your cards in full and on time. If you cannot consistently manage to do this, you need to first work on establishing better credit habits.
That "step further" is by fighting back against the credit card companies and taking advantage of what they offer instead of letting them take advantage of you. My favorite way to do this is by taking advantage of the travel rewards they offer if you sign up for and use a particular card.
Travel is extremely important to me. But the kind of travel I want to do -- longer trips to different countries and continents -- isn't cheap. Unfortunately, I haven't won the lottery or struck it rich as a writer (and never will), so I need to make the most of my limited funds in order to see the world. Enter travel hacking.
Some credit card companies offer ridiculous sign-up bonuses to people just for applying for and receiving their credit cards. Avid travelers have learned to "hack" the system and go through credit cards in order to rack up a huge amount of points and miles, which they can redeem for airfare and hotel stays. Obviously, by offering the bonuses, credit card companies hope to make their money back from irresponsible or uneducated consumers who forget to pay off balances or charge more to the card than they can afford to pay back. But smart, informed folks like the travel hackers, and you and me, know better -- we pay off all our balances on time and never charge more than we have budgeted for and can actually afford. So we get to take advantage of the reward instead of having the credit card companies take advantage of us.
Bottom line: Yes, responsible credit card use does exist.
Stuff like travel hacking is totally optional and is not something you should try if you don't feel 100 percent confident in your abilities to manage your credit cards and avoid consumer debt. Personal finance is personal. It's okay to use credit cards. And it's okay if you don't feel comfortable with them, too.
But don't let anyone use a fear tactic to scare you into thinking all credit card use will end in financial ruin. The bottom line is that responsible use of credit does exist: You can utilize credit to score lower rates on things like home loans and you can leverage cards as tools to improve your financial situation. There's no reason to fear credit if you understand that credit is not the same thing as cash, you're well-educated on finance, and you're responsible with your money. Debt is bad -- but responsible credit card use is not.
California is the worst state for foreclosures, and unemployment and bankruptcy also are severe problems, according to CardRatings.com. State unemployment rate in July 2012: 10.7 percent (Labor Department).
Arizona has the second worst foreclosure rate in the country, and many Arizonans also have low credit scores, according to CardRatings.com. State unemployment rate in July 2012: 8.3 percent (Labor Department).
Many Floridians are stuck in foreclosure, delinquent on their credit card debt, unemployed, bankrupt, or have low credit scores, according to CardRatings.com. State unemployment rate in July 2012: 8.8 percent (Labor Department).
Georgia is one of the worst five states in unemployment, bankruptcy rates, average credit score, and credit card delinquency rates, according to CardRatings.com. State unemployment rate in July 2012: 9.3 percent (Labor Department).
Nevada has the worst unemployment rate, personal bankruptcy rate, and average credit score in the country, according to CardRatings.com. State unemployment rate in July 2012: 12.0 percent (Labor Department).
Iowa has a lower than average unemployment rate, lower than average credit card delinquency rate, and higher than average credit score. State unemployment rate in July 2012: 5.3 percent (Labor Department).
Montana has above-average credit scores, fewer personal bankruptcies, fewer foreclosures, and less delinquent credit card debt than other states, according to CardRatings.com. State unemployment rate in July 2012: 6.4 percent (Labor Department).
South Dakota has better than average employment and credit scores, according to CardRatings.com. It also has fewer personal bankruptcies, fewer credit card delinquencies, and fewer foreclosures. State unemployment rate in June 2012: 4.4 percent (Labor Department).
Vermont was second best in the country in the foreclosure and personal bankruptcy categories and was above average in the other three categories. State unemployment rate in July 2012: 5.0 percent (Labor Department).
North Dakota "may be the best-kept secret in the country," CardRatings.com says. It was the best state in three categories, including unemployment, and fourth best in the other two, according to CardRatings.com. But remember that if you move there, you would have to live in North Dakota. State unemployment rate in July 2012: 3.0 percent (Labor Department).
Follow Kali Hawlk on Twitter: www.twitter.com/KaliHawlk