Repairing Credit vs Saving Money

I thought I should write a little about my stance on saving money, using credit cards and repairing credit.

If you're saving money, should you be using credit cards? Is this a good thing to do? If you're repair your credit, should you be using credit cards?

NOTE: This discussion assumes that you're in the process of rebuilding your credit, paying off excess debts, and don't have much cash reserve savings.

Having good credit is about having a balanced approach. You need to be actively saving money AND actively using your credit cards.

Creditors want to see that you are actively using your credit cards and paying them as agreed and up-to-date on a regular basis. This is what builds your credit score over the long term.

Saving money and putting away a cash reserve is also an important part of rebuilding your credit.

HEALTHY CREDIT PRACTICES
I spoke to the CIBC Bank's credit department last week when I was doing research for some previous posts.

the customer service rep there mentioned that it's better if a person pays off their credit card in full each month, compared to making minimum payments each month.

Paying off your credit card balance in full is not what the credit card companies wants you to do. They would rather you make minimum payments each month as they make more interest that way. It's a bit of a contradiction.

Paying off your credit card balance in full each month means that you've got enough money in the bank to cover your debts. Paying only minimum payments each month means that you may be cash strapped and can only afford to make minimum payments. This puts you at higher risk than somebody who has adequate cash reserves.

CASH RESERVES ARE GOOD FOR YOUR CREDIT SCORE
Saving money is good for your credit score as the following illustrates.

ILLUSTRATION:

• Consumer A has $0 cash savings and $2,500 in credit card debt.
  
• Consumer B has $5,000 in cash savings and $2,500 in credit card debt.

While both consumers have $2,500 in credit card debt, Consumer B is clearly in a much lower credit risk situation than Consumer A. If anything happened to Consumer B's income, she would have enough cash reserves to make at least minimum payment for many months. If Consumer A had a loss of income, she'll be immediately at risk of not making her credit card payments.

THE PARADOX
The funny thing about saving money is this. The more you save, the less you'll tend to spend on credit cards. The more cash you have in the bank, the more you'll tend to buy things with cash. The reason being, that nobody wants to pay 18.9% interest on debt that they used to buy an item when they can pay for the item in cash.

Thus the more money you save the more likelier you are to pay in cash.

USING CREDIT TO REBUILD CREDIT
While I am all for paying cash for items, you still need to build your credit rating to buy a home, car and other necessary items.

If you're saving your money and trying to pay cash for items but still want to repair your credit, it's a good idea to use your credit cards sparingly and then pay them off every month.

Example, I use my rewards credit cards to buy items that I would normally pay cash for.. I then pay off these credit cards every month. (NOTE: I do this because I have enough cash to make full payments every month. I DO NOT promote paying cash for utilities if you're cash strapped and living on credit!!)

So, by paying for my cable bill with my credit card, I am collecting air miles, keeping my credit cards active, and then paying the credit card off in full every month. This is a win win situation all around.

SAVING MONEY IS GOOD FOR YOUR CREDIT RATING
If you haven't tried it, start saving money and see how it feels to have enough cash reserve to make minimum payments!