Credit Cards: The Basics
Your credit score and credit history are much more important than they should be in American life. "Credit" is just a banking term for lending - credit cards, mortgages, installment loans, etc. The credit system ties your lending history to your social security number, a nine-digit number assigned at birth that was never designed to but now basically operates as an "ID number" for US persons. Whenever you are asked for or input your SSN into a field, your credit history is on the table to be checked. There can be a "soft check," which doesn't impact your credit score, or a "hard check," which does ding your score (temporarily). So what is a credit score?
Your credit score is a little bit like your SAT score - it attempts the impossible task of boiling down your performance into a number. Just as classmates may ask about your SAT score to get a quick sense of your prowess as a student, your credit score gives lenders, a landlord, or an employer, a quick sense of your financial maturity. Higher scores are always better. The factors within a credit score are below. The most important thing to 'not mess up' is payment history, and not only because it accounts for the most significant slice of the pie at 35% of your credit score. Missing a single payment remains on your credit report for at least 7 years, so it's a mistake that takes many years to fix. The affluent shortcut to an excellent credit score is adding children as authorized users to credit card accounts - basically inheriting your parent's credit score history.
Note: Your FICO score and credit score are technically different, but in practice, you can think of them as the same thing.
I'm going to not re-invent the wheel here for the basics on credit cards - the most famous card rewards/travel site The Points Guy has a great article on the "10 commandments of credit cards" that I will list here. Commandments are underlined, and my comments are to the right.
- Thou shalt pay thy balance in full >> Your "statement balance" is all your charges from a reporting period. Paying your statement balance each month will avoid any interest charges, something to avoid at all costs, literally. Credit card interest rates of 18% are not uncommon - and that's after laws were passed a decade ago to bring rates down.
- Thou shalt not miss a payment >> Missing just one payment will crush your credit score. All card companies offer autopay from your bank account.
- Thou shalt not cancel a card before thou hast opened a new one >> I wouldn't call this one a 'commandment,' but more of a recommendation for people with many cards.
- Thou shalt not cancel a card and lose thy points and miles >> If you only have one rewards card with one bank, canceling the card could forfeit the miles/points.
- Thou shalt not allow thy rewards to expire >> This doesn't just apply to reward points but also benefits such as an annual free night in a hotel that must be used within a year.
- Thou shalt not miss out on a welcome bonus >> Welcome bonuses or sign-up bonuses are, in many cases, extraordinarily tempting and lucrative, provided you get a high bonus. Ask me if you're unsure.
- Thou shalt take advantage of category bonuses >> I would also call this one more of a recommendation for those who want to 'play the game' and use a specific card (e.g., a grocery card) for specific spending. The mental task of having to think about changing cards for certain purchases vs. a single card for everything is probably not worth it to many people.
- Thou shalt not ignore cards with annual fees >> Annual fees get charged each account anniversary month like clockwork - you should be getting some reward or benefit from paying them actively. If you're not, it may be time to close the card or call and ask for a "product change" to a different card by the bank—more on that in a later post.
- Thou shalt pursue retention bonuses >> Before closing any card with an annual fee, it's always worth it to call in and ask for a "retention bonus." You are calling in to avoid paying the annual fee, and in some cases, there may be a way to waive it, such as spending $1000 within 3 months, for example. These 'retention bonuses' are not published anywhere and can only be found with the retention department over the phone.
- Thou shalt not pay foreign transaction fees >> Free foreign transaction fees are a standard perk on travel cards and premium cards. Many no-annual-fee cards do not offer this benefit and charge 2-3% for any transactions abroad.
Many of us in Poppy Seeds have the Citi Double Cash card, a Mastercard. Mastercard is the payment network, and Citi is called the 'issuer' or 'issuing bank.' The best reason to use credit cards versus other payment types is zero liability for unauthorized purchases on the big payment networks. What does that mean? It means that if/when someone steals your Visa/Mastercard/etc. card and uses it, you do not need to pay the cost of the $1000 kayak a theoretical identity thief purchased. Had you been using a debit card that whole time and it was stolen, not only would you possibly be liable for the cost of the thief's $1000 kayak, but your bank account tied to your debit card may also be frozen for an indeterminate amount of time. There are other credit card benefits too, such as more extended warranties on anything you buy with your card, but the zero fraud liability is a big one that makes credit cards so much more prevalent in America than in most other countries.
The bottom line is that credit cards protect you and can be rewarding, but they come with the cost of slightly complicating your financial life. Unlike debit cards, credit cards allow you to spend money that isn't yours for you to pay it back later. Debit cards directly spend money that you already have. As of this writing, the credit card debt of all Americans is $841 billion. Credit card companies make vast fortunes from people who don't understand them, think their credit line (the card spending limit) is what they are 'given' to spend (lousy way to think about it), and then rack up interest charges because they cannot afford the bill (literally the worst thing you can do). So don't make those mistakes; always pay the entire statement balance, and in the coming months, we will talk about the fun stuff - rewards!
- No trades this month.
- Lindsay, Chloe, Antonio, and Garrett are still sitting on the additional $1000 in cash.
Please remember to update the google sheet detail tab when you buy/sell something. I look at the revision history each month so I can include your trade in this newsletter. The summary tab is at the bottom of this email as a picture and the live link to it is here.