As a kid, I always wanted the semi-plastic card my parents pulled out of their wallets. With just one swipe, they were able to take something out of the store and into our car. It was a novel concept and I needed one. When I finally got my first card, I made sure I would pay off the card in full at the end of each month, so I could be credit card debt free.
So, you can imagine my shock when I got an email stating my credit score was below average and it was time to check out my credit report. I didn’t realize there were multiple layers to how credit worked and that credit cards were just one part of the bigger financial picture.
To start, credit can determine how rich you will be in the long term. Most large purchases, such as a house or a car, are made on credit (or on a loan). If you have good credit, you become eligible for lower interest, saving you thousands of dollars in the long run, creating the basis for your rich life. For instance, let’s say you’re taking out a $100,000 30-year mortgage. If you have a credit score of 780, you’ll likely have a lower interest, saving you $15,000+ over 30 years, versus if your credit score was 650. That can save you way more money than stopping your daily latte habit. To determine what state your credit (or credit history) is in, you’ll need to understand credit score versus credit report:
Credit score: A number between 300-850 which shows your credit risk to lenders. The higher the number, the better (lower interest rate), and lenders can decide whether they will lend you the money for a mortgage, car, or even a credit card bill.
Credit report: Credit-related information (like payment history, accounts, etc.) given to potential lenders.
To build credit, opening credit cards is the best option. You earn credit, get points or cashback for the purchases you make, and essentially have a free short-term loan if you pay your full bill every month. Seriously…you have to pay your credit card bills on time in full, so you don’t end up in credit card debt and have a lower credit score as a result. The average APR (annual percentage rate) or interest for cards currently is at 24% and credit card companies add late payment fees every time you miss it. This means you can rack up debt real quick if you don’t stay on top of your payments.
For those of you who want a credit card, but don’t have income, you can usually start with a secured credit card where you put some money in a savings account, and use it as collateral against the purchases you make. Once you pay your card off in full every month, you can ask to be upgraded to a regular card.
Now mistakes happen and you may miss a payment on your card. If so, call your credit card and let them know it was a one-time thing (make sure that it is!). Almost 90% of the time, based on your payment history, the credit card company can reverse the late fee and interest placed on your account. Again, make sure it’s just a one-time thing. If you’re nervous about not making the payment deadlines, set up auto-pay and make sure your account has enough money to cover the bills.
If you’re reading this and are thinking “Oh sh*t, I already have a lot of credit card debt” - that’s ok, we’ll take it one step at a time. First, write down how much debt you have and then figure out which debt you want to pay off first. Choose the debt that is either higher in amount or highest in APR, and put an extra $10 towards it every month. Perhaps, take a month-long break from the daily latte habit, and put what you save towards your credit card debt. At the same time, call your credit card company and see if they can lower your APR as you pay off your debt. It may not always work but it is worth a try because as we saw earlier, even a slightly lower interest rate can save you money!
Understanding the concept of credit and how it lends itself to your dream purchases can help build a better financial base. We’ll get into student loans and credit card perks in a future money month but in the meantime, do the following:
Get your credit score and report from Credit Karma
Apply for a credit card if you don’t already have one
Pay your credit card off in full each month!
Find out how much credit card debt you have already
Figure out a plan to pay off said credit card debt
Call your credit card company to negotiate down your APR, waive any late fees or annual fees, or get more credit (plus a lot more perks we’ll get into next time)
