In Debt, Discussions, For Beginners, Money

People know f$&@! all about credit and credit scores

I am completely flabbergasted, but not shocked at how little people know about credit cards, credit scores and so on. The misconceptions of what cards do, and cannot do, is kind of incredible.

If I thought budgeting, income and expenses was difficult for people, it is clear that credit is on another level.

All forms of credit are tools

That is it.

Credit cards, are tools, like money, like anything out there.

It isn’t inherently evil to borrow money, get credit, or anything associated with that and it is only when people abuse this, that they run into trouble.

There ARE people out there who have never paid a cent in interest (me!), and have used credit their entire lives (since 16!) and actually maximize the opportunities given by credit and lines of credit.

Without credit (line of credit specifically), I could have never gotten my education. Without my education, no job, no big starting salary.. none of this.

Without a credit card, I could not have covered my first and last month’s rent and other bills until I got my first paycheque when I graduated.

Credit is there to be used and it is a TOOL.


And yet this is what people know about credit and credit scores…

“My boyfriend just told me he pays his credit card bill every two weeks because “they’re not going to make a dime of interest off me”, and honestly what a turn on.”

Props for always clearing your card, for sure, and every 2 weeks must be because it coincides with his paydays.

What I don’t understand is the mention of not making a dime of interest off of him. Well, they certainly do not make any interest off of you if you pay it every 2 weeks, but if you always clear the credit card balance in full before the statement’s due date, you would not get charged interest either.

Plus, what about your money sitting in a high interest savings account making money for YOU, borrowed FROM the credit card issuer?

You only need to clear your statement balance by the statement due date to not pay interest

I have never paid a cent in credit card interest, and I automate it all AND maximize my money in a high interest savings account, sitting there, earning $$$$…

Here’s how I do it:

1. Use the card, and use it as often as I can to maximize cash back.

2. When I receive an email notification that the credit card balance is due, I check two things:
a) Date Due
b) Statement Balance Due

3. I then log onto my high interest savings account (currently Tangerine, use code _________________) and I back calculate the day I should clear the balance by.

Let’s say it is due on the 17th, which falls on a Thursday, for the amount of $2000.

I count backwards THREE business days, to allow time for my online payment to reach the credit card company in time, to record the payment due on time or before the actual statement date and to not charge me interest.

Three business days means three weekdays (no weekends), and no holidays. If there is a holiday there, or it covers a weekend, I take that into account because nothing happens on those days, so you might as well pretend they don’t exist.

In this case, it would be Monday 14th that I need to send my payment to the credit card issuer.

This means, I need to transfer the amount of $2000 from my high interest savings account on the day before – Sunday 13th, so that the money is there and ready to be paid on Monday 14th without my having to manually think about it, transfer it, and pay it.

 

So that’s exactly what I do. I set up an auto-transfer the money on Sunday 13th, set up the auto-pay of the bill for ONLY the credit card statement balance in full, 3 business days before the actual due date of Thursday 17th.

Automated. Seamless.

Why only pay the credit card statement balance and not the current one?

The credit card statement balance is not the same as your current credit card balance.

Your current credit card balance is what you owe on the card as of today, with the credit card statement balance AND ALL of the most recent transactions you have just made in the past day or two since the statement date.

You do NOT need to pay / clear the most recent transactions. You are only obligated to clear the credit card STATEMENT balance on the date requested.

I have had statements where I have only owed $5, but my current balance says I owe $5000. That is because I may have recently paid for something in the current credit card period, but all that the company has calculated that I owe, is on the statement.

Always just look at the statement of what is due and when. Do not worry or look at your current balance.

So I mentioned a summary of the above and someone responded:

“You are not going to earn much on 2% interest over a few weeks unless you have tens of thousands in the bank.”

She is not wrong, but she is missing the point that you are basically borrowing money on credit for free from the credit card company until the due date of what you spent. That’s about 45 days of free money.

I once had a credit card balance of $16,000 – I spent a ton that month buying stuff for my parents, etc.

$16,000 at 2% interest earned over 30 days was about $26. That is enough for a dinner.

I let my cash sit in my bank account, instead of clearing my card early, and earned $26 on that money (enough for a free dinner), before clearing my card in full with my method above and PAYING NOTHING IN INTEREST charges.

Sure if you only spend a few hundred on a credit card, it is not a lot of money, but it does add up over time. Every little bit counts, frankly.

A dollar is a dollar. Money is money. If you don’t think so, can I have a dollar? 🙂

“Would be better if he didn’t have one [Ed: a credit card] at all!”

Really? Why? I have about 10 credit cards I can name off the top of my head, but I am very financially responsible and awesome with my money.

Why would not having a credit card be something attractive? It doesn’t say one way or another if that person is a money f*&?kup or awesome at managing it.

Having a credit card, and using it responsibly (as he seems to have demonstrated by clearing the balance every 2 weeks for peace of mind, not necessarily for interest earning maximization), is already a sign of personal finance smarts and clever money management.

The response given was:


“I just don’t like them personally. That’s just my pinion. I’d be more impressed if he didn’t have one. No credit card I ever had, had rewards. In my opinion, cash is always better.”

Umm.. what?

This is a very old school view of credit cards. Actually, it is just an old, super conservative view, usually held by people who have been burned HARD by abusing credit cards before, or held by people who are just 100% debt-averse.

My partner is in the latter – it took me years to convince him to get a bloody credit card and earn 3% back on categories he was spending thousands on – Home Repairs, Groceries and Gas. It is kind of bananas how much money he is now earning back per year, just by spending on what he would normally spend on, and not have to carry around a wallet full of hundreds and twenties (TRUE STORY.)

Cards are so much easier to use, minimalist, and if they ever get stolen, you just report them stolen and done.

Cash – if stolen, you ain’t never going to get to see that money back in your pocket again.

No way, no how. It is GONE.

If someone is not personally impressed/averse to someone who owns a credit card, that in my opinion is a short-sighted view. I would be looking more at if he knew how to use the cards responsibly (check), was debt-free or relatively debt-free, and if he had proper investments with a high savings rate above 10%. That would be impressive for me and a real, holistic view of whether someone is good with money or not, which is more important than if they had a credit card or not.

“Too bad he can’t just stick to a debit card ….”

So someone replied:

“Gotta play the game!”

To which they replied…

“”Playing the game” sadly, it’s not a game, and debt and temptation have destroyed too many lives, It is possible to live without debt, and without a credit score, which is nothing more than a measurement of how well one handles debt, so one can borrow more money to get into more debt A whole lot of malarkey, IMO.”

…..So. For the first part – yes. If you suck at credit cards and are easily tempted, do not use them. Point blank, live on cash. Only you can decide this.

A few of my family members have gotten into credit card troubles before, but once they cleared the balance and learned their lesson, they were uber responsible and never did it again.

I am sure there are people out there who have zero self control and will continually get into debt over and over again. These people should not be allowed near any cards without supervision, and should consider a prepaid credit card so they can at least build their credit score, but not get into trouble.

That said, that second part about credit scores only being about how much debt you can handle, etc.

Well.. YEAH. That is the whole point of a credit score – how well do you manage debt? How well do you manage money, pay your minimums on time and not default?

The part that is missing from that one-sided answer is that credit scores drive a lot more than how much debt you can get into.

It determines if you can get a rental, if you pass the credit check by your landlord.

It gives you the best interest rate possible when you go in for a loan for anything – mortgage for a home, car, line of credit, whatever.

It gives you financial opportunities like being able to borrow large sums of money at zero percent interest because your score is fantastic. I was given $25K at 0% interest for 3 months to entice me to use the money because my score is stellar.

If I had a lower credit score, I would be offered $5K at 1 month at maybe 1% interest.

(I took that $25K loan by the way, put it into a high interest savings account to earn money on it, and then scheduled to send it all back to the loan the day before the 0% interest grace period was up. Going to make $175 without spending any of my money or doing anything beyond opening the line of credit.)

You can definitely live debt-free and without a credit score. My partner and I are proof positive of that. What I find a little lacking is the fact that you can and should maximize (responsibly) what is out there as financial opportunities to make money.

What is the harm in having a great credit score? Why not have it, so that you have it and it is awesome? You never know when a great credit score can save you.

Worst case scenario possible:

For a woman in an abusive relationship, without a credit score, she is cut off from any kind of help she may need to leave.

She would not be able to get a credit card if she did not already have one, she would not have much of a credit card actually, if any at all.

She would not be able to rent something decent unless it was cash/money under the table because landlords check scores all the time to see if they will rent or not.

She would not be able to get a car loan, if she needed a car to move or get out of her situation.

A lot of that potential help to get her out of her situation, is completely gone.

“I am so obsessive, I pay every charge 25-29 days after I swipe to make as much interest off my money as possible before I give it to them.”

Each and every charge? I mean, yes, this is a good practice to not get into debt but it sounds like a lot of financial busywork with no real benefit.

So I asked – why?

And the response I got back was:

“I was told that they charge interest 30 days after the charge posts. Is this not true?”

O_o

So, they definitely accrue interest charges the DAY you charge the card.

If you spend $15 on the card today, the interest charges start accruing (or tracking) that same day. This is called a daily interest rate charge.

You don’t actually pay any of these interest charges at all, until your statement comes, and you DO NOT pay the balance IN FULL (100%, clear the Statement Balance) and you DO NOT do this before the date the Statement is due (always schedule your payments 3 business days beforehand to make sure it gets there in time to be recorded.)

There is no real reason to create financial busywork by tracking and paying each charge 25+ days after you charge, unless you want to do it for credit card verification or making sure you always knew how much you spent and didn’t overspend and be caught short at the end of the month.

I used to do this when I was younger, treating it like a debit card, and getting the benefits of the cash back and rewards points of a credit card but using it like a debit one.

For each charge would make, I would send the payment right away and any extraneous charges would show up as a balance on my credit card statement which I would then review and check for fraud.

Paying each charge without having to think about clearing the card later or if I had enough money to clear it is a good way to make sure your balance is at $0.

There were times when I would spend and track nothing, and then be slammed with a $700 bill at the end and scrambling to clear it because I did not think I spent that much.

Those days are long over!

“The only thing that would have made it better is if he told her how much he made in rewards this year – with his existing purchases and lifestyle! The credit card company paid him how much??”

Honestly, this isn’t bad for sure, but I am more excited by how much he saved in the bank and has invested, his returns, his investing strategy and his money goals for the next 5, 10, 15, 40 years.

“But wouldn’t you wait for the statement to pay off to help your credit score?”

Again, umm.. what?

Waiting for a statement has nothing to do with your credit score.

Your credit score is determined by how much credit you have available to you, how much of it is currently in use, how long you have had said credit cards or lines of credit (history), how many credit cards you may have applied to lately (lots of credit card applications is a red flag), and whether or not you pay at least the MINIMUMS of said credit on time. They do not care if you clear the balance, wait for the statement, or whatever.

They care that you paid the MINIMUM.. ON TIME.

This gets difficult because it means you could rack up $500K in credit cards and lines of credit, but as long as you paid the minimums each month to each of those lines, you would be golden. Your credit score would be spotless.

Consequently, if you lived with $0 debt, no credit cards or any lines of credit, Your credit score would be nil, nonexistent or very low, which is ironic. In fact, this hurts a lot of new people like my partner who immigrated to the country later in life, because he had savings, but no credit score to speak of, as he had never lived here.

He found it very hard to get a credit card, rent a place, etc. He was dependent on what the banks would give him, and they offered him basically a debit/credit card that he would preload with a balance, and then spend out of that balance to slowly build his score.

Your credit score is based on how you prove to lenders that consistently pay the minimums of your obligations to lenders, on time, and for how long. That is it.

I hope that clears up a few questions about credit and credit scores… because I have a feeling these are common questions/misconceptions. O_o

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Sherry of Save. Spend. Splurge.

Millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. Since then, I have paid my $600K home in cash (my half was $300K), my $180K casr in cash, worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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6 Comments

  1. SP

    My MIL is so odd about credit cards. She refused to buy something on Target.com, and instead purchased a prepaid gift card, THEN bought it online. Similar, she linked a prepaid credit card to Lyft or Uber when she visited because she was scared to give them her CC info. We told her how CC are totally protected from fraud, but she was not comfortable. I can only presume she rarely uses a credit card? I don’t know how she pays for things, though? maybe she just is not comfortable with online?

    I do pay my CC more often than monthly. This is mostly a neurosis and I get antsy if the balance gets about $2k or so, and I don’t pretend that it makes sense. But it makes me feel better 🙂

    Reply
    1. Sherry of Save. Spend. Splurge.

      Hah! She is nervous about cards in general maybe. I use CC cards so often…. I cannot live without them

      I also wait until the last minute to max my interest savings.

      Reply
  2. Hana

    Are your savings account and credit card personal accounts or under your business?

    Reply
    1. Sherry of Save. Spend. Splurge.

      Personal and business. I have doubled up on all accounts, as my personal money is separate from my business.

      Reply
  3. Sense

    Agree! The credit score thing is real, though, and I really respect that guy for wanting to be on top of his $$. That is rare, though your way of course garners a few more dollars in interest over time. I track my scores using Credit Karma. Even though I pay off my balances in full each month, I do notice that if I charge a lot one month, my scores go down because it says I’m using up more of a % of my credit line. It just has to do when the banks report to credit bureaus, I think. They don’t KNOW that I’m going to pay it off in full. If I paid it off every 2 weeks like that (commendable) guy, my scores probably wouldn’t go down as much. I don’t actually care because I’m not buying a house/car/whatever anytime soon, but maybe that guy does?

    The rest of them, though…

    Reply
    1. Sherry of Save. Spend. Splurge.

      I agree – my score is nice to have or know but I don’t really need it for anything. Your balance of outstanding is marked against what you have available as credit as a whole.

      If I have 5 cards, $10K each and only $10K overall in debt balances month to month, that is 20% of debt usage.

      I have I think by now, close to $70K in credit across all my cards.. I should calculate this some day, and only carry a balance of about $5K – $10K a month, which is why it looks so good.

      If I had a line of credit that was $100K, and only used $1K even as a balnace, that would look really nice.

      Reply

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