Credit Lessons
Paying interest is really painful. It can be difficult to take the wisdom from the generations that lived through their life lessons. When it comes to analyzing your parents credit it just may help you understand what not to do or what to do.
Here are some lessons we wish our parents had shared:
Paying interest is one tough chore
Let’s be real: Making monthly credit card payments isn’t fun. But the pain literally compounds when you top off your monthly bill with interest payments. With many credit cards carrying an interest rate above 12%, missing even one payment can result in a large and painful interest payment.
We wish Mom or Dad had said: “Paying interest is like scraping your knee in the same spot every day.”
Even a half-percentage interest-rate reduction matters
Negotiating isn’t always on the docket for financial literacy programs, but it’s worth mentioning: Some numbers carry more wiggle room than you’d expect. When opening a new line of credit, negotiate your rates. Although you may not always get your asking interest rate, you and your lender could very well land on a number lower than the original offer. And, yes, even a 0.5% reduction matters when it comes to paying interest. A $1,000 loan with a 17% interest rate reduced to a 16.5% interest rate would save you $5 a month.
We wish Mom or Dad had said: “An extra $5 a month? That’s a latte, a beer, or, in a year, a pair of shoes.”
Credit can offer greater protections against fraud
Quick, what’s the safest way to make a purchase: cash, credit, or debit? Answer: credit. Choosing to use a credit card instead of swiping your debit card can offer greater protections against fraudulent purchases. Most credit card companies will remove fraudulent purchases as soon as you alert them to unusual/suspicious activity. Credit cards also cap your liability at $50. Claiming fraud for a debit purchase, on the other hand, may require you to file a more complicated claim and fraudulent purchases may not be reimbursed for up to two weeks.
We wish Mom or Dad had said: “You can report a stolen credit card to the bank in a matter of minutes, saving you time and money.”
Credit doesn’t build itself
This one may sound annoyingly similar to Mom’s “the bed won’t make itself”. But really, credit doesn’t build itself. Be proactive when building credit. A good credit score can save you a lot of money in the long run. For instance, strong credit can help you lock down lower interest rates and empower you to make large financial decisions like taking out a mortgage. A smart way to begin building your credit is to start soon and start small. Make small purchases using a credit card and then immediately pay them off. Better yet, start with a secured credit card. This “small beans” approach to minor, easily paid purchases can help build good credit habits early on.
We wish Mom or Dad had said: “If you don’t start building credit now, you may have to ask me to co-sign a loan on your first home.”
Credit limits aren’t “suggestions” (and a 30% credit utilization rate goes quickly)
Opening that first credit card can often be confused with scoring a windfall at the bank. But being approved for a $2,500 credit line doesn’t mean you have $2,500 at your beck and call. In fact, credit bureaus recommend that you stick below a 30% credit utilization rate. That means spending only up to 30% of your credit line. To avoid maxing out your credit be deliberate in the way you use your credit card for purchasing. Additionally, approach every purchase with a game plan by asking, “What’s my timeline for paying this loan back? Is it realistic?”
We wish Mom or Dad had said: “Just remember my tidbit about scraping your knee in the same spot every day.”
A financial philosophy can help make, or break, your credit score
“Everything will work out in the end.” How many kids have heard this oft-repeated parental mantra? It’s short and sweet and usually true in the grand scheme of things. Unfortunately, it doesn’t translate well when you’re trying to negotiate an overdue credit card bill with your lender. It’s crucial to tack down a financial philosophy as you begin your financial journey. Having a clear and actionable financial philosophy can help guide you as you make financial decisions.
Mom or Dad should’ve said: “Everything will work out in the end unless you abuse your credit. That you’ll have to pay back.”
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