If you ever knew you could borrow money when you needed to -- say, from Mom and Dad -- you understand what having a credit line is. You want to be careful about tapping it because, if you mismanage the situation, problems likely follow. Credit management is different from managing cash. For one thing, cash is in hand, to be immediately allocated. Allocating it through a budget prevents you from misspending it, whereas you might not even use available credit unless an unexpected expense arises. This basic distinction makes for different considerations in cash and credit management. Successfully handling finances means learning about both.
Cash Flow River vs. Pools of Credit
Cash is liquid, which means it is easily accessible. It flows in, you channel it toward a purchase and then the cash flows out. This situation is different from credit. Credit is liquid, too, but it’s a pool that sits undisturbed until you need it. Funds from a credit card may or may not flow in, depending on whether you use it. Managing the flow of cash takes a plan, otherwise known as a budget. A budget should consider income, the expenses you do and don’t have control over, savings and taxes. If you’ve already used a credit card, part of the budgeted cash flow must pay back the debt.
Earning Interest vs. Paying Interest
A major distinction between cash and credit management lies in the consideration of interest. For the privilege of reserving a pool of credit, banks and credit card companies charge fees and interest, which is some percentage of the money you borrow. When managing credit, the percentage rate, how interest adds up and for how long are key factors in deciding whether to use credit and how fast to pay it back. Good cash management involves savings. Banks pay you interest if you let them hold your money. Generally, the less liquid the account, the more interest it pays.
Allocated vs. Untouched
To adequately manage cash, you decide how you’ll spread it among obligations, purchases and accounts that earn you money. You may only pool 10 percent of your money into savings as part of your budget, with the other 90 percent flowing out to meet your financial obligations. Unlike cash management, credit management requires you to think in terms of leaving credit unallocated, using only up to 30 percent of the total available to you, especially if the credit is highly liquid. In a pinch, a liquid unused credit card lets you tap into credit right away, whereas taking out a loan is more involved.
Credit management, more than cash management, has a public face accessible by banks, employers, insurers and property managers. This public reputation is summed up in a credit score, which is based on your credit history. Boiling down your history to a score makes it easier for banks to gauge the likelihood you’ll repay a loan. Although a history of paying credit card bills on time shows cash management skills, lenders don’t care if you’re good at budgeting so much as they care if you pay them back.
- Brigham Young University: Realize the Importance of Good Cash Management in Achieving Your Goals
- Forbes: How to Manage Your Personal Cash Flow
- Bank of America: Types of Savings Accounts
- Brigham Young University: Learn How Credit Cards Work and Describe the Costs Involved
- Bankrate.com: Secrets to Creating a Budget
- Bankrate.com: 3 Steps to Improve Your Credit Score Today
- Wisconsin Homeowner Preservation Education: Credit Management & Counseling
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