Before today’s letter, I need to do a little house cleaning (if you don’t care about it, jump straight to the “Credit Cards” section below).
House Cleaning — Why Not Change The Series’ Name?
My last two letters— on minimalism and weight loss — were probably my two “fastest growing” letters so far (due to the amount of traffic, I believe the minimalism one trended on Medium).
Their popularity led a couple of people to tell me something like “since your two past letters had little to do with finance, maybe you could change the name of the series?”
Now, they didn’t exactly tell me “change the name” but they both hinted at it. So, I feel the need to address this (in case you were thinking something similar).
I understand the thought. If it’s a series on finance, why talk about things like weight loss and minimalism??
The answer is simple. Your financial situation is a direct result of your lifestyle.
Let me be clear. A gym membership or a “spender’s mentality” directly affect how rich you’ll be five years from now.
These things look small today (“the gym membership is just $50 a month to get in shape” or “these new shoes are cute! I’ll add them to my wardrobe. They’re just $100 they won’t break the bank”).
Unfortunately, they quickly add up. Hence why I say avoid them.
However, if I only told you “try minimalism” or “workout from home” you probably wouldn’t listen (since both those sentences lead to many more questions).
This is why I don’t just write about what to do. But also why and how.
To top it off, I see it all through a “financial lens” (after all, our goal here is to help you reach the financial situation you want).
This is why I don’t feel the need to change the series’ name.
Sidenote: However, if you only want “finance finance finance!!”, rest assured. As you can see, we only have 3 letters left on “Save Money”. Starting June 20th, we’ll talk about “Invest Money”, which is alllllll about “finance finance finance!!”
Now, onto today’s letter.
Are they good or bad?
This question drives financial bloggers crazy.
Credit is a tricky thing (mostly because it has different names, for example, debt).
Most of what you call money is actually credit. Today, the total amount of credit in the US is $63 Trillion, whereas the total amount of actual money is only $3.8 Trillion.
This is generally good for the economy because it means the citizens have higher buying power (you can buy things you cannot afford, thanks to credit). This is good for lenders and sellers. It allows companies to grow bigger and faster than they normally would.
But credit is bad for you, the indebted individual, especially if you cannot pay the money back (or if you have to pay back way more than you borrowed, due to interest).
So, is using credit a bad thing? Not necessarily.
If you use it to buy things that don’t generate more money (like a house, a car, or a big TV), then credit is a bad thing. And you should stay far, far away from credit cards.
On the other hand, if you use credit to buy something that would generate more money (a rental house, for example) then credit is a great thing!
Should you use a credit card?
Personally, I think the vast majority of people shouldn’t have access to a credit card (cc).
This is only because the average US household’s cc debt is at an all-time high, at over $16,000.
Furthermore, the average cc interest rate is 18.76 percent(!!). This leads to the average household paying, on average, $1,292 in cc interest every year!
Sidenote: cc companies are also very sneaky in their own way. This hilarious video highlights it well.
However, if I told you “don’t use a credit card and live frugally, like I do”, many people would tell me how un-American that is and that I should get out of Marx’s butt.
So, I won’t say “don’t use a credit card”. Besides, many finance bloggers get a lot of benefits from ccs. This shows how great using them can be.
Instead, I’ll say “if you’re going to use them, do it well”.
How? Keep on reading.
How To Use Credit Cards Well
The first step to using credit cards well is to make sure you have no cc debt (duh).
In fact, that was my first step to being able to buy anything you want. This is because cc interests are insane (You should never, ever, ever pay interest on a cc balance).
This makes sense because a) it gets rid of your debt, b) it raises your credit score and c) it’s the only way to make points worth it for you. Win-win-win.
Set it up to full automatic payment. As soon as your salary comes in, the first thing you should do is automatically pay off all of your cc balance.
You can use a spreadsheet, Mint, or Personal Capital.
Also, set up reminders (any calendar app can help).
The point is, make sure you’re keeping track of how you’re using your credit card(s). This way, you’ll ensure you’re doing all the things necessary to qualify for the bonuses.
I don’t do this, but I’m considering it.
Mr. Money Mustache constantly talks about enjoying ridiculous cc signing bonuses (including $400 for the Chase Sapphire Preferred Card or $500 for the Chase Ink Bold).
Obviously, those require a certain amount of spending to qualify. By tracking it all, this shouldn’t be a problem.
Sidenote: MMM also recommends watching out for the annual fees for some of these credit cards (which usually kick in after a year). So, after a year, he cancels the card. Then, he gets a new card and enjoys a new signing bonus
If you spend a certain amount with a specific cc, you get points.
Later, those points can be redeemed (usually, for travel).
I don’t travel much, so I’d redeem the points for cash.
If you travel a lot, it’s better to use your points for international travel.
Remember, points should help you spend less on travel. They should not be an excuse to travel more.
Another thing to take into account with credit cards is the cash back percentage.
There is no mystery here, cc companies will pay back a small amount of your expenses just to keep you happy as a customer.
Cash back percentages vary depending on the purchase (for example, something like 4% of gas and 1% on groceries).
This is something I learned about thanks to my girlfriend, but you can have cc charges removed (whaaaaat?).
Since the cc companies don’t want to lose you as a customer, they’re very likely to be nice about this.
Ramit Sethi teaches the way to do it in this post.
Sidenote: Speaking of calling the company, before activating a card make sure to call and verify you’ll get the bonus and that the annual fee is what you think it is.
High Credit Score
I have a beef with credit scores. There’s just something that bothers me about an imaginary number generated by some secret formula no one understands.
Besides, I view a high credit score as a stamp that says “I’m better with debt than most people”.
I believe the best loan is the one you don’t have. It’s better to save enough money to buy whatever it is you want.
However, some people need a high credit score to help them with insurance, a job, and even to get the big bonus credit cards.
If that’s the case, the first step is to monitor your credit score with a service like Credit Karma.
The second step is to pay off your balance in full every month (like I said, automatically). Make sure your credit score stays up in the 800s.
How To Pick The Right Credit Card
I fantasize about building a startup that creates a new credit card from scratch.
It would be all digital, extremely low-fee, and incredibly consumer friendly (I’ve seen some startups try, but they never manage to completely get it right).
If this continues, someday I might get together a group of my most talented friends and go build that startup.
Until then, I recommend you use the Mad Fientist’s tool for picking the card that works best for you. It will take into account the airlines, hotels, and other things that best fit you.
And that’s it for today!
Today, we learned:
If credit cards are a good or bad thing
If you should use them.
What are the best tips to use them.
And which one(s) you should get.