Let’s get right to it: If you live in the United States of America (the U.S.) you know about having a credit score. Simply put, the credit score thing is a game. Learn its rules!
Credit is not something that we have all around the world. I don’t know how many countries’ financial world works, but in the U.S. you can have cash and no credit, and because of that you may not have access to certain things. You have to have credit.
Schools in the United States don’t teach credit in elementary schools, but I really think it should be taught that early. It is such an essential thing! I have heard enough stories of recent high school graduates having access to thousands of dollars when they are accepted to college, and it is their first time having such access. Credit companies approach them with a tempting offer of a credit card with $2,000 or $3,000, but often they accept the offers without understanding how to use the credit.
Credit is a part of American life, so ya best learn how to play the game! Why do I call it a game? Because it is! lol!
I used to sweat my credit score so much! I’d worry about it as if it was something irreversible! I come from a country where there isn’t such a system, and I was a scared immigrant: scared of making financial mistakes that would keep me from achieving all I could while in the U.S.
The thing is… credit scores go up by small point increments and down by large numbers. You can be bad at money-management and not pay your bills on time, OR you can have lost your job & be excellent with money-management and not be able to pay your bills on time anymore. Your credit score will go down like.. 40-70 points in one month! Just like that!
You ask for the right amount of credit, you keep your credit used at less than 30% of your total afforded credit, you pay your stuff on time, etc etc… and your credit score goes up 2-10 points each reported cycle (companies report to the credit bureaus and they in turn adjust your credit score.) I’m generalizing the points, I don’t have exact calculations 😉
Learn the game and teach the game to the kids. If we want them to have a life in which they are able to support themselves financially and have a more wholesome access to things in the U.S., we MUST teach them these things. App developers, where is the game or the feature in an existing game, where we teach kids about building credit? If it’s out there, please let me know 🙂
In the meantime, there are ways to build your credit. I am still learning the game in its totality, but I have learned a few rules. Here is what I know:
- I went ahead and got an account with Self. I signed up to pay $25 per month (+$1.05 for the service) for a total of 2 years. Self reports my payments to the credit bureaus and that helps me build my credit as long as I pay on time. At the end of the 2 years I get my $500 back. I could have gotten a card from them after having paid $100, but I didn’t want to do that. Think of this as a savings account that also builds your credit score. There are other companies, but I have only tried Self so far.
- Say you are given a credit card worth $300 dollars. There is hopefully no annual fee, but you will have an interest rate applied to any balance used. Make sure you only use up to 30% of the $300. Let’s say a $100. That’s it. Don’t use more than that if you aren’t sure if you can pay it back. This brings me to the next rule:
- Use ONLY what you can pay back. If you have $20 in your bank account, that you can use toward a purchase, use your credit card for that $20 purchase, and immediately make a $20 payment on your credit card, with that money you have in your bank account. Here is a fun song about having or not having $20 dollars 🙂 20 Dollars by Angie Stone
- Don’t make plans with money you don’t yet have! I am an optimist, but you never know what curve ball the universe may have in store. You think that extra $1000 is coming, and then it isn’t, and now you owe Vinny a favor. This also applies to using credit. You see something you like, you say ‘Oh, I have that $20 in my account that I can use toward a purchase, but this item is $40. I can borrow from the funds I am keeping aside for my electric bill, because the item I want to buy is usually $80 and this is an awesome sale so I have to get the item. I will put back the funds for the electric bill when I get paid on Friday.’ Sometimes shit happens and Friday comes without your money. Now you’re late with the electric company and now you owe Vinny a favor.
- If, by chance, you had to use more than what money you have to make an immediate full payment to your card (you used your credit card for $100 but don’t have $100 in your bank account to pay your credit card bill), don’t worry. Most credit cards allow you a minimum payment. This depends on your credit score and the interest rate they apply to your card. Let’s say, though, that your minimum payment is $25. If you can, pay $30. I have been told you can call the credit company and ask them to apply the extra $5 how you want it: to the balance or to the interest.
- Some credit cards, like your traditional American Express card, require that you pay whatever balance you used in full every month. Say they give you a $1000 limit. If you use $200 in January, you have to pay the $200 in full before the beginning of the new billing cycle. I personally like this because it forces me to manage my money in a more responsible way. American Express (and many other cards) do have an annual fee to pay. Often it’s $45-$100. If you’re like me, you might think that’s nothing and you’ll be be able to handle that in a year’s time. BUT, just like putting away 20% for taxes when you’re self-employed, I strongly suggest putting a bit of money away every month (or when you can) so that when that $100 annual fee is due, you have it.
- Last but not least, you must know this: the money available on the credit card is not real until you use it. I repeat: the credit money isn’t real…it doesn’t exist…until you use the card! This also applies to student loans. It’s not like you went to Aunty Mae and she gave you $300 of her money and a payment plan to repay her. Aunty’s money already exists and she could have used it for something else. No… you apply for credit, you are given a credit limit and until you use it, that’s an imaginary thing. Once you use it, though… it’s real. Just whatever amount you use, is real, and you have the responsibility to pay it back. If you pay it back within the parameters given to you, often you can avoid paying interest fees for the first 3 to 6 to 12 to 18 months.
- Interest fees are the cost for the company having lent you the money when you needed it but didn’t have it.
I know life happens and often we use credit cards because we don’t have another way to pay for something we really need. However, we each know ourselves and our money management skills. If you haven’t assessed these skills, it’s okay: do it now. We are always growing and hopefully learning, so you can learn how to handle your money better, you can ask for help to learn how to do it, and if you’re in a country where there is a credit system, you can learn its rules so you can be really good at the credit game. If you lose a round or two, don’t worry… you will win some rounds again soon. Life is too precious and too much NOT about credit, to give this game so much power. Some want us to give it power, but it’s only one game of this physical realm. Play it, become great at it, but don’t let it rob you of joy or stress you out.
Happy 2022, everyone! 🙂
PS: If you’re curious as to who Vinny is, click here.
DISCLAIMER: I am not a financial expert and these tips are only based on what has worked for me. In the past year I have increased my credit score over 100 points, but as life happened I also lost points. Which reminds me… if you live in a community in which cable is included in your rent, but you have a modem and/or router in your apartment, IF you move from there it is your responsibility to take that equipment to the cable company. I didn’t know this, so it affected my credit score as I ended up owing them the money for the equipment (lost by apartment management, if you’re wondering why I didn’t just take it back). Sometimes it’s the questions you don’t know to ask. So, pick up from there and build again. 🙂