In January 2017 credit card debt hit an all-time high surpassing $1 trillion, with the average American carrying $6,375 of credit card debt.
I went through college without using a credit card and missed out on four years of building credit. So now I’m starting from scratch using secured credit cards, but I’m not going to be suckered into making credit card companies richer.
You can use credit cards to cash in on perks and build credit or to dive into debt with predatory interest rates.
Why This Matters
A credit card is a tool; you can use it for good or bad. But it’s key to building credit to save you thousands of dollars through cheap future credit.
Why does an invisible credit score matter? Because it’s a signal for how trustworthy you are, which affects the cost at which you can borrow money and rent apartments. A credit score ranges from 0-850. Predatory interest rates will plague someone with a 400 credit score if they finance a car or house, or they may even be denied a loan.
Many apartment complexes refuse to rent to people with no or low credit score. Or if they do rent to you, they can demand a larger security deposit, or a deposit plus first and last month’s rent.
Many government jobs requiring high clearance will reject your job application if you have bad credit because it’s easier for you to be blackmailed. Similarly, some private sector jobs may reject you because they see your credit score as a reflection on your attitude. If you don’t pay your bills on time, you probably don’t care about your job enough either.
How to Get a Kickass Credit Score
Reaching a score above 700 is simple.
35 percent of your credit score is based on on-time payments (shocker). Set reminders on your phone and even better, set an auto-pay on your card. Just make you have enough money in your account.
If you’re like me and are just starting, you can jumpstart your score by opening multiple credit cards and setting small monthly payments on them such as Netflix or Hulu. If you only have one card, then the max number of yearly payments you can have is 12. That’s a long road to a solid credit score. Debt amount: 30 percent.
1. Debt amount: 30 percent.
This is an easy way to boost your credit. You should use only 30 percent of your credit limit to keep an A ranking in this category. FICO sees people who habitually max out their credit cards as a more significant risk. An easy way around this is to ask your credit company to raise your credit limit, which they should be willing to do if you’ve made past on-time payments. Just don’t take this as a cue to increase your spending as well.
2. Length of Credit History: 15 percent
This hurts me because I just opened my cards. It would hurt me to close any of my cards shortly, even if the rewards are mediocre. So it’s better for you to keep cards for a long time and make small purchases with them. Thankfully, this is a more minor influence than the others and exists because your behavior over a long period is indicative of your future spending habits.
4 and 5: New Credit and Credit Mix: 10 percent each
If you open six new credit cards, then FICO is going to assume you’re in trouble and have no plans to pay down that debt. So limit the number of cards you open simultaneously.
A good credit mix means FICO believes if you have a history of paying off multiple kinds of debt on time, then they trust you more. For example, on-time payments on a car payment, student loans, and a mortgage would give you a good ranking in this category.
BENEFITS
Consumer protection
When you swipe, you’re spending the credit company’s money, which gives them skin in the game when you get ripped off by a dishonest vendor or cab driver. So the credit card company will be incentivized to recover their money spent, unlike when you get ripped off using a debit card when the bank loses nothing.
0 Percent Interest
This is a blessing and a curse. Many companies offer zero-percent financing for months, which encourages you to upgrade to that leather couch you don’t need because you won’t feel the consequences for several months. But this can be a lifesaver in emergencies, or to avoid paying a higher interest rate. You should always have a three-to-six-month emergency fund for times like these, but shit happens. Just be sure to pay off the entire balance within that period to avoid the even higher interest rate that screws people who forget they impulse bought half of Ashley’s furniture store. As a rule of thumb, always consider how these companies profit off of these “deals.” They don’t give them out of the goodness of their heart.
DRAWBACKS
SPEND MORE
Although it’s true that you’re spending other people’s money, you still have to pay it back by the end of the month. So don’t spend outside your means. Whenever people spend using cards or Apple pay, they spend more than they do compared to using cash because the pain receptors of the brain aren’t activated when swiping, like they are when a waitress carries a Benjamin away, never to be seen again.
Try this next time you check out at the grocery store or fill up your car. Can you remember how much it cost by the time you get back in your car? I usually can’t, unless I remember I decided against buying that Ben and Jerry’s because I would have to break another bill. One company found we spend 12-18 percent more when using a card compared to cash, which adds up quickly.
Also, check yourself when you justify a large purchase with the reason “I get X number of points.” The credit card company is incredibly good at manipulating the human psyche, and your points are incredibly diluted compared to the amount of cash you spend. You can get a lot more money back by refusing to buy things you don’t need. If you struggle with impulse buying, you should place things on a 30-day list. If you still want that item by the end of the wait, then buy it. I usually don’t.
HIGH INTEREST
If you carry a balance on a credit card, then you’re an idiot. That’s like borrowing money at 30 percent interest— not a good deal. In the words of Mark Cuban, you will never be rich while paying interest on credit cards. If you have hefty credit card debt, check yourself, refinance your loans or get a lower rate loan through lending club and pay that shit off.
OVERVIEW
Using credit cards doesn’t mean that you’ll be a slave to a credit card company for your entire life. Instead, stay on top of your payments and make your life exponentially cheaper.