So if you're a beginner with credit cards, it can be exciting with all the possibilities to get sign-up bonuses, cash back points, and a bunch of other cool things. But the truth is, as a credit card beginner, that's also the most dangerous time for you because there are plenty of ways that you can easily slip up and make some common mistakes that have some pretty bad consequences.
These consequences include things like getting into high-interest credit card debt, big drops in your credit score, and some other general struggles with money that many people could have avoided. That's why in this video we're going to go over the five credit card lessons that beginners need to learn, because these five key lessons can help anyone to get the positives out of credit card usage without any of those bad things that some of you might be afraid of.
Now, I know this might sound boring, but hear me out because the reason for having an emergency fund is simple. For the most part, we all have a good idea of what we expect to spend money on each month when it comes to expenses like rent, groceries, gas, and other typical things like that. But there are also many other unexpected expenses in life that are guaranteed to pop up that we overlook in our budgets.
I know that for me in the past, I've had to randomly pay several hundred dollars to get new tires for my car or maybe a couple of hundred dollars to take my cat to the vet - just things like that that cost extra money that I didn't plan to spend. So because of those unexpected expenses, I've made it a priority over the past few years to build up an emergency fund of six months' worth of estimated expenses in a savings account. That way, I'm prepared if a random expense pops up.
I can pay with my credit card to get points, but then I pay off that balance immediately because I have the flexibility to do that.
Too many times, I'll see people get a new credit card and they'll see that they have this new credit limit of maybe five thousand dollars, so they say to themselves, "That's five thousand dollars of the bank's money that I can use for whatever and then I'll just worry about paying it back later." But the mindset shift that I had early on was to almost forget about that credit limit for a minute and pretend that whatever credit card I was holding said "debit" on the front instead.
Normally, with an actual debit card, that card is linked to your bank account so that any time you swipe it to make a purchase, the money is simply subtracted from your bank account to pay. That means that without considering overdrafts, in order to use a debit card, you actually need to already have that money in your bank account.
Now, with a credit card, we're involving a third party - the credit card issuer. A lot of people view this like they're using someone else's money with that credit limit, but I've never really looked at it like this. I've only looked at my credit card as basically a substitute for my debit card by making sure that I've already got plenty of cash set aside in my bank account before I use my credit card for anything.
This goes back to the whole emergency fund thing. I think it's a good idea to have some money set aside in a savings account for emergencies, along with some money set aside in a checking account to pay certain bills and to pay off credit card balances.
Ignore the APR and minimum payment amount on your credit card statement and just pay off your balances in full every month. The APR is irrelevant when you pay your credit card's full statement balance each month by the payment due date. When you pay your statement balance in full, you won't be charged any interest, so the APR doesn't matter.
You're going to have a billing cycle with an opening date and a closing date. On that closing date, whatever your balance is on that day is going to be called your statement balance. Along with that statement balance, you're also going to see a minimum payment due amount, and that is likely going to be significantly lower than your statement balance. You'll also see a payment due date, which is typically at least 21 days after that closing date for this statement where you have to pay at least the minimum payment.
But we want to ignore that minimum payment amount because paying the minimum is what the credit card companies want you to do. That way, the remaining unpaid statement balance can carry over to the next credit card statement and they can start charging you interest at those high interest rates.
It's a common myth that carrying a balance helps your credit score, but that's just not true at all. We want to be paying the full statement balance instead by that payment due date.
Payment history and credit utilization are the two most important factors affecting your credit score, and credit utilization basically focuses on two things: your credit card balance and your credit card's credit limit. It's calculated as a percentage for each individual credit card as well as across all cards combined.
The calculation for this is pretty simple to understand. You just take your credit card's balance and then divide it by your credit card limit to see how much of your available credit you're utilizing as a percentage. This calculation is typically done on or right around your statement closing date each month when your statement balance gets reported to the credit bureaus.
A general rule of thumb is to keep this percentage below 30%, but ideally below 10%. The lower the percentage, the better.
Payment history is slightly more important for your credit score than credit utilization since payment history makes up about 35% of your FICO score and utilization makes up about 30%. Payment history is important because future lenders looking at your credit report want to make sure that you have a strong history of paying back things that you owe.
With each payment that you actually miss, you'll start to see negative impacts to your score, and even just a couple of late payments can be a bad thing since those are going to stay on your credit report for about seven years.
As always, thank you so much for watching. I hope you have a great day!