July 23, 2024
Episode 7 of MONEY FUNDY$ goes over how credit cards work at a high level, what to look for in applying for new cards, how they affect your credit score, and expert level tricks to beat the card companies at their own game.
So, the first thing that I want to talk about is how credit cards function and how the interest works. Okay, so credit cards, they call their interests; they use the term APR, which stands for Annual Percentage Rate, and it's typically from ten percent all the way up to about twenty-six percent. Is this guy really gonna work out in my video? Hello, everyone! Welcome back; you're watching another episode of Money Fundies. My name is Matt Stearns, and we're here at the beautiful Chautauqua Lake in Mayville, New York. If you missed our last episode, we talked about credit scores, how they are calculated, how they play a role in our personal finances, and also ways to actively monitor and improve the credit score.
And today, we're gonna piggyback on that previous episode and talk about credit cards and how they play into our personal finances: ways to use them effectively and leverage your money, and also some more advanced topics about how I utilize credit cards to even come out a little bit ahead.
Okay, so first I want to talk about how credit cards function and what their APR really means. Okay, so when you get a card, it comes with an APR that stands for Annual Percentage Rate, and that's referring to effectively what they're calling their interest rate. Okay, but unlike some other forms of loans, credit cards actually charge you a little tiny amount of interest on any balance that you have every single day. Okay, so basically, if your interest rate is fifteen percent, divide that by 365 days, and they're charging you that minuscule amount of interest every single day. And this is what makes credit cards so dangerous, because having that interest compounding every single day at a rate of anywhere from ten to twenty-six percent could be extremely aggressive on the amount of loan and the compounding of your credit balance.
Okay, so that's why we talk about paying off your balance, you know, on a monthly basis, and if you can't, make sure that whatever credit you're accruing on your credit card is allocated somewhere with your salary or the savings that you plan to have, and factor it into your budget. Okay, if you want to extend yourself a little bit and take this trip now, even though you might not have the money, have the discipline to, you know, and the wherewithal to save a budget, you know, for those following months to pay down that credit card. Right? It's effectively like saving, but it's just after the fact. Okay, and that's one way to utilize credit cards effectively, you know, to help make you do what you want to do with your life when you want to do it. It gives us some financial flexibility and freedom, and especially here in the United States, we're a little bit more liberal with that freedom; we have higher credit balances than in other countries. But they can also be a powerful way to manage your personal finances if you can do it responsibly. Companies do it, even companies with hundreds of billions of dollars of cash; they use debt to leverage themselves, and so can you on a personal level.
Okay, the second important part I want to talk about is how critical it is for your credit score. I talked about this in the last episode, and having a credit card, making consistent payments, and having extra credit available to you is so critical in your credit score. Typically, the more credit cards you have outweighs the effect of opening new accounts. So really, people, it seems counterintuitive, but the more credit cards you open—assuming that you don't open five at a time, of course—but if you open them over your lifetime, they're great for your credit score, so long as you use that responsibly.
Also, in my last episode, I talked about how I suggest cards with no annual fees. Okay, and I strongly suggest this because if you get a new card and you don't want to use your old card, you have to cancel it because it's not costing you anything. Once you pay off the balance, you could throw it in the garbage, cut it up, or do whatever you have to do, and it's not costing you anything; it's benefiting your credit score. Okay, and it's helping us out in more ways than one, okay, just by leaving it alone. So, I strongly advise using cards with no annual fee.
Okay, and the second point is that right now, the credit card lending industry is very open in the sense that they're offering a lot of promotions and incentives to get people to sign up. Okay, now, this is a double-edged sword; if you do it responsibly, you can utilize situations to actually earn money by using your credit card. But if you do it negatively, you know, you could be left with a high balance, and then the credit card company is earning interest off of you, which is a situation that we don't want on a personal level.
Okay, so for example, a lot of cards right now are offering an intro APR free period. Okay, so let's call it for twelve months. So what will happen is you'll get your credit card, and for twelve months—the first twelve months—they won't charge you any interest on any of your purchases. So, essentially, say you put up a thousand-dollar balance every month, and you don't pay it off. Okay, so let's say at the end of the twelve months you have a twelve-thousand-dollar balance. If you pay it off in one fell swoop before interest comes due, you basically utilize the credit card, get all the points or the cash, whatever it may be, and you never pay any interest.
Okay, so that's one way that you could utilize credit cards to get ahead. Realize this is a more advanced strategy to utilizing credit cards; it's something that I do. I've accrued, you know, over a thousand dollars in cash and points in my lifetime and never paid any interest because once the interest period runs out, I take money that I've saved in a cash account, I pay them off, and then I get a new card with a new intro APR free period. Okay, so I utilize the system against them to exploit and earn some cash back, and it's totally legal; it's good for my credit score. But realize that it requires a lot of discipline and responsibility on the card user's path on their behalf.
Okay, so those are some things to consider when getting a credit card: no annual fee, interest-free period in the beginning. Then, of course, if you're just new to credit cards, start slow. Put on a few small purchases on your card, pay them off, and set up your card for automatic payment. Okay, it'll pay the minimum for you, at the very least, and you'll make sure that you're not missing any payment, so it's not negatively affecting your credit score. And by doing this, we can establish more credit; we can give ourselves some personal leverage with our finances and do the things that we want to do when we want to do them.
Okay, so those are my credit card tips. I hope you enjoyed them. If you have any questions or want to learn more about some of those advanced topics that I talked about, or more details on how I go about it, just send me a message. But that's all I have for you today. Thanks for tuning in, and we'll see you next time!
