Credit card debt… Ahh. In 2017, Americans owed $931 BILLION. The average household owes $15,983 on their cards, $27,755 on their cars, and $47,047 on their student loans. The average amount of interest paid over a lifetime is nearly $280,000. That is over a quarter of a million dollars on INTEREST. Yikes.
Yet, we need it. You can’t buy a house, car, or often even rent a place without it. So how do we make credit work for us, instead of against us? There are lots of ways to “beat the system”, like travel hacking, standard cash rewards, and taking advantage of new card deals in order to get a sweet rebate. Though this is focused on the basics of credit management, I will discuss a little bit about how to choose a card, and using new lines to your advantage for major purchases.
1. Understand how credit works. This is super important. Many people think that if they open a line of credit and never touch it, they’ll have great credit. Debt can’t count against you if you don’t have it, right? Actually, this is incorrect for two reasons. 1) the credit bureaus and banks want to see that you can have debt, and manage it responsibly. And 2) banks won’t make any money if you never pay a dime of interest 😉 Also, bank cards have a little bit more weight than store cards, your payment history is hugely important (even one missed or late payment can make a big difference), and length of credit counts for about 15% of your score. See more here. On the other hand, if you max out your cards, only pay the minimum, and open 10 at once, you are going to see a massive drop in your credit. Not only that, but you are going to pay soo much in interest. Banks will approve you for ridiculous amounts that you are not actually qualified for. With one click of a button, you can get approved for 10 or 15k. Say you maxed that out, and you’re paying a 23% APR. That is nearly $3,500 a year in interest- an obscene amount! Don’t fall into the trap.
2. Keep a small revolving balance. Say you have a line of credit for $3,000. It’s actually quite healthy to never pay off 10-15% of that. Credit utilization accounts for about 30% of your score, which can count towards or against you, depending on how much you use. Obviously, if you max out your cards all the time, that’s going to hurt you more than never touching them. And yes, you will pay some interest on the amount owed. But if you truly keep it around 10%, it won’t be a lot. It shows healthy debt management, and that’s what credit bureaus are essentially looking for.
3. Never miss a payment. Missing even one payment is a huge red strike against your credit. Banks want to see that you are reliable and responsible. Minimum payments are typically quite small, so it is not hard to miss them.
4. Always pay more than your minimum payment. I think my minimum payment is typically around $35. I usually pay $1000 per month. Interest is expensive! Set up auto pay if you are forgetful.
5. Cash rewards cards are great! I get 1-3% back on all my purchases, so I use my credit card(s) for just about everything. That being said, I am diligent about paying them off, because interest payments can and will eat into your cash rewards faster than you can blink! I am currently working on travel hacking- opening new cards to get large amounts of points that I can redeem for airline miles. ChooseFI.com has a very detailed series on this (link above) that I highly recommend reading if you are at this point.
6. Use an app to monitor your credit. I have used Credit Karma for years and really love it. Most bank apps/websites will give you your score now too, though you can also pull your score yearly through Experian or thereabouts. I would recommend keeping tabs on it at least once a month, though. Scores can change 10-30 points in the span of a couple weeks. I.e., if you max out your $10,000 card and your credit is pulled the next day, your score will take a huge hit. If you then pay off the entire balance at once and your score is pulled, it will jump right back up.
7. Be careful not to get in over your head. If you are new to credit, or have had really bad credit, I recommend a secured card. It kind of sucks because you have to pay your limit in advance, but it can be a really good way to learn how to use and build credit without actually taking much risk. As always, do your research and read the fine print before signing up for one, since each bank may do it differently.
8. Cut it up! Another way to build credit without having to pay a large deposit on a secured card is to open a card, make a couple purchases to get you to a very small balance (10% or so), and then cut that card up and throw it in the trash. You can hang onto it forever without ever using it (just be sure to sign up for online banking so you can keep tabs on what you’re owing on interest/make payments and pay it off in full if need be). This can be a great method. Personally, I would shop around until I find a no-fee card with a long 0% APR period (12-24 months), and then pay it off and cancel the card once I get to the end of that period.
9. Open up credit to finance a large purchase. One of my favorite methods! When I was remodeling my kitchen, I wanted to get some new, non-white appliances. I spent a lot of time price and model shopping, and finally found the fridge and stove set I wanted. Prices were about the same at Home Depot and JC Penney, but if I opened a card with JC Penney, I would get $200 off my purchase of $1,000 or more (easy), and not have to pay interest for 18 months. They also had a deal where if I bought a fridge with a JC Penney card, I could get an additional 10% discount on any other matching appliances. Awesome! I also knew that there was a big sale coming up- Labor Day- so I waited to buy until the sale started, which ended up saving me $410. I bought my fridge ($829 retail), stove ($699), and range hood ($199: $1,727 worth of appliances) for $1,199 including tax, shipping, and installation- a whopping 69% of face value. Plus, I got to finance them over 12 months, with no interest. Clearly, these are not top-of-the-line, restaurant quality appliances, but they look fantastic (slate: smudge free!) and have worked perfectly.
*I just googled rebates on JC Penney appliances and found out that I am eligible for a $400 rebate, 6-ish months after my purchase, through GE. This brings my total appliance bill down to $799, an astounding 46% of face value. WOW. This is cheaper than used! Though to be fair, you can often find fantastic deals on lightly dinged appliances by asking a store/warehouse about their damaged or floor models. Moral of the story- always look for rebates.
I think that’s about all I have for you regarding building credit. I’ll add things as they come to mind, and of course, please feel free to comment your questions or reach out to me via Facebook, LinkedIn, or whatever other social media platforms you may find me on. Enjoy your day!