“Don’t get a credit card, just use cash, and only pay for things you can afford.” This was my parents mantra as I grew up. The idea has been popularized by Dave Ramsey – a favorite by my folks for his ability to help change personal finances. I am very glad that my parents taught me to be financially literate, and that they held this view…but this is also why I’m paying 12.89% APR on my car loan, currently. Before going into how to avoid this trap, let me explain how much I am getting robbed at this rate!

Assuming that my loan started at $15,000, interest is figured monthly, and my loan is for 72 months (no real assumptions here, these are all basically accurate). This translates to a $307 monthly payment. Which means:

307 x 72 = $22,104.

            If I paid only the monthly payment amount, this would mean paying an extra $7,104 over the life of the loan, or 147.36% of the actual cost.

So why did I get taken to the cleaners for this loan? Because of credit…or more precisely, my complete lack of it. Yes, I had never owed a dime, or paid a cent more than I could afford, but the current credit system would rather see you buying things on credit than with cash. While I personally don’t think this makes much sense, it doesn’t matter.

What should you do to avoid the trap of not having credit?

Get a credit card (maybe a secured one to start)

Yes, I mean now! The longer your credit history, the better your score (all else equal). Please don’t make the mistake of getting a credit card and immediately maxing it out. There is nothing magical about a credit card: you still have to pay for all the items you buy with it. You should treat a credit card EXACTLY like you treat a debit card: if you can’t afford something now, don’t buy it!!! So my advice is to get a simple card, buy only items you can afford and pay the balance every month (because 12.89% is nothing in the credit card world).

Don’t be afraid to have a cosigner

When I got my first apartment, I was stuck with having my uncle as a cosigner. In all reality, all this meant is that he was on the rent documents, as I knew he would never have to be held responsible because I did not pay. But don’t take a cosigner as a bad thing, just please don’t make that person regret helping you out by forcing them to be held liable.

Don’t apply for too many cards, or ones you know you are unlikely to qualify for

New accounts, and even just inquiries hurt your score, so be careful before you apply.

Get an app to track your credit

I recommend using Credit Karma (shouts out Terah for suggesting this) as it’s completely free, but allows you to check your credit score.

So good luck! Get a card, be responsible on payments, and build up some credit, so you don’t end up like me!