2878: [Part 1] How to Rebuild your Credit (Using Credit Cards WISELY) by Ramit Sethi on Financial Planning

[00:00:00] [SPEAKER_00]: This is Optimal Finance Daily. How to rebuild your credit using credit cards wisely

[00:00:06] [SPEAKER_00]: Part 1 by Ramit Sethi of I will teach you to be rich.com and I'm your host and personal finance

[00:00:14] [SPEAKER_00]: enthusiast Diana Merriam

[00:00:16] [SPEAKER_00]: this is the show where I read to you from some of the best personal finance blogs on the planet and

[00:00:22] [SPEAKER_00]: Today is a bit of a longer post

[00:00:24] [SPEAKER_00]: So I'm splitting it up into two reading the first part today and the second half tomorrow

[00:00:31] [SPEAKER_00]: So with that let's dive right into part one and start optimizing your life

[00:00:40] [SPEAKER_00]: How to rebuild your credit using credit cards wisely

[00:00:44] [SPEAKER_00]: Part 1 by Ramit Sethi of I will teach you to be rich.com

[00:00:51] [SPEAKER_00]: If you need to know how to rebuild your credit, you're probably already in a bad place

[00:00:56] [SPEAKER_00]: Credit cards are convenient enemies

[00:01:00] [SPEAKER_00]: Almost everyone has a bad story about late fees

[00:01:04] [SPEAKER_00]: unauthorized charges or overspending

[00:01:07] [SPEAKER_00]: Not surprisingly many pundits and parents have a knee-jerk reaction to credit cards

[00:01:13] [SPEAKER_00]: Using credit cards is the worst financial decision you could make they shout

[00:01:18] [SPEAKER_00]: Cut them all up

[00:01:19] [SPEAKER_00]: What an easy battle cry for people who want simple solutions and don't realize the benefits of

[00:01:27] [SPEAKER_00]: multiple sources of credit

[00:01:29] [SPEAKER_00]: but from one perspective credit cards are like a delightful gift from heaven if

[00:01:35] [SPEAKER_00]: You pay your bill on time. They're actually a free short-term loan

[00:01:39] [SPEAKER_00]: They help you keep track of your spending much more easily than cash

[00:01:43] [SPEAKER_00]: they let you download your transaction history for free and

[00:01:48] [SPEAKER_00]: Most offer free warranty extensions on your purchases and free rental car insurance

[00:01:55] [SPEAKER_00]: But unfortunately, there's more to them than that

[00:01:58] [SPEAKER_00]: the truth about credit cards lies somewhere between these two extremes as

[00:02:04] [SPEAKER_00]: Long as you manage them. Well, they're worth having if you can avoid the

[00:02:08] [SPEAKER_00]: unreasonable fees and tricks

[00:02:10] [SPEAKER_00]: credit cards offer

[00:02:12] [SPEAKER_00]: exceptional benefits

[00:02:14] [SPEAKER_00]: To get the most out of using credit you need to optimize your credit cards and use them as a

[00:02:20] [SPEAKER_00]: Spearhead to improve your overall credit

[00:02:22] [SPEAKER_00]: This is all the more important in the wake of the credit crisis

[00:02:27] [SPEAKER_00]: If you don't have good credit, it may be difficult to get an affordable home or car loan

[00:02:32] [SPEAKER_00]: Even if you have a high income

[00:02:35] [SPEAKER_00]: How to rebuild your credit with the right card

[00:02:39] [SPEAKER_00]: Whether you've never had a credit card before or you're thinking about getting an additional card. There are a few things to think about

[00:02:47] [SPEAKER_00]: Number one avoid those credit card offers you receive in the mail

[00:02:52] [SPEAKER_00]: Let's cut to the chase if you hate those credit card offers in the mail as much as I do

[00:02:56] [SPEAKER_00]: Visit opt out pre screen calm to get off their lists

[00:03:01] [SPEAKER_00]: The average American receives 20 credit card offers every year and four out of every thousand people accept them

[00:03:10] [SPEAKER_00]: the numbers are

[00:03:11] [SPEAKER_00]: Markedly different for students out of every thousand students who are mailed offers

[00:03:17] [SPEAKER_00]: 150 except them an

[00:03:20] [SPEAKER_00]: astonishingly high number

[00:03:22] [SPEAKER_00]: Students and young people in general are especially susceptible to these offers because they don't know any better. Let's be real

[00:03:31] [SPEAKER_00]: Taking a credit card offer you get in the mail is like marrying the first person who touches your arm

[00:03:36] [SPEAKER_00]: 99% of the time it's the easy decision not the right one

[00:03:41] [SPEAKER_00]: Most people know better and go out and find what's best for them

[00:03:46] [SPEAKER_00]: They don't just settle for the horrible offers that fall in their lap

[00:03:50] [SPEAKER_00]: For something as important as your credit make the effort and pick a good card

[00:03:56] [SPEAKER_00]: Number two there are options if you're young and or have no income

[00:04:02] [SPEAKER_00]: Getting your first credit card can be tricky, especially if you're young, but there's an easy solution

[00:04:08] [SPEAKER_00]: Get a secured credit card

[00:04:10] [SPEAKER_00]: These are cards that require you to put down a few hundred bucks in a savings account

[00:04:14] [SPEAKER_00]: And then the bank uses that as collateral to issue you credit

[00:04:19] [SPEAKER_00]: After a few months assuming you've behaved responsibly you can graduate to a regular

[00:04:25] [SPEAKER_00]: Unsecured credit card to get one call your bank and ask about it

[00:04:30] [SPEAKER_00]: Number three avoid cash back cards, which don't actually pay you much cash

[00:04:36] [SPEAKER_00]: People get really mad at me when I say this but cash back cards are worthless

[00:04:42] [SPEAKER_00]: Get 1% back on all your spending Wow if I spend $2,000 per month on my credit card

[00:04:49] [SPEAKER_00]: I'll get back $20, but Ramit you might say

[00:04:54] [SPEAKER_00]: $20 is better than nothing

[00:04:55] [SPEAKER_00]: Sure, but what if you could save more by getting a free $500 flight?

[00:05:01] [SPEAKER_00]: It wouldn't be as obvious as receiving money each month, but in the long run you'd save more with a travel rewards card

[00:05:09] [SPEAKER_00]: number four compare cards online

[00:05:13] [SPEAKER_00]: The best way to find a card that's right for you is by researching different offers online

[00:05:18] [SPEAKER_00]: try bankrate.com

[00:05:20] [SPEAKER_00]: In most cases the simplest credit cards are offered by your bank. So this is often a good place to look

[00:05:27] [SPEAKER_00]: They'll connect with your bank account and you can choose from a variety of options

[00:05:32] [SPEAKER_00]: Including credit limit rewards and more on the plus side. They're easy to get without much research

[00:05:38] [SPEAKER_00]: The downside is that the rewards are usually fairly mediocre

[00:05:44] [SPEAKER_00]: number five

[00:05:45] [SPEAKER_00]: Rewards are important

[00:05:47] [SPEAKER_00]: You're going to be using this card a fair amount so make sure the rewards it offers are something you'll actually want.

[00:05:55] [SPEAKER_00]: I travel a lot

[00:05:56] [SPEAKER_00]: So I got an airline card that gives me free companion tickets free flights and points for every dollar

[00:06:03] [SPEAKER_00]: I spend and every mile I fly.

[00:06:05] [SPEAKER_00]: I get multiple free flights per year and each one saves me about $350

[00:06:11] [SPEAKER_00]: But if you hardly ever travel this card wouldn't make sense for you

[00:06:16] [SPEAKER_00]: Bottom line if you're getting a rewards card find one that gives you something you value and

[00:06:22] [SPEAKER_00]: number six don't go card crazy

[00:06:26] [SPEAKER_00]: Now that you're in the market, you might be tempted by any number of card offers, but don't overdo it

[00:06:32] [SPEAKER_00]: There's no magic number of cards you should have

[00:06:35] [SPEAKER_00]: But each additional card you get means added complexity for your personal finance system

[00:06:42] [SPEAKER_00]: Two or three is a good rule of thumb the average American has four credit cards

[00:06:47] [SPEAKER_00]: Your credit score is based on overall sources of credit

[00:06:51] [SPEAKER_00]: Remember there are other sources of credit besides credit cards. These include installment loans such as auto loans

[00:06:59] [SPEAKER_00]: personal lines of credit home equity lines of credit and

[00:07:03] [SPEAKER_00]: service credit such as utilities

[00:07:06] [SPEAKER_00]: Take it slow Craig Watts of Fair Isaac Corporation says

[00:07:11] [SPEAKER_00]: Cautioning against prescribing a specific number of credit sources

[00:07:15] [SPEAKER_00]: He goes on to say

[00:07:17] [SPEAKER_00]: Quote it depends on how long you've been managing credit the less information in your credit report the higher the

[00:07:25] [SPEAKER_00]: prominence of each new report

[00:07:27] [SPEAKER_00]: For example if you're in college and you only have one credit card in your name

[00:07:32] [SPEAKER_00]: When you open another account the weight of that action is more than it would be ten years down the line

[00:07:39] [SPEAKER_00]: If you limit yourself to opening one card a year, you'll be doing yourself a favor

[00:07:45] [SPEAKER_00]: endquote

[00:07:46] [SPEAKER_00]: How to rebuild your credit with credit cards six commandments

[00:07:51] [SPEAKER_00]: Now it's time to take full advantage of your cards as a means to improving your credit

[00:07:57] [SPEAKER_00]: Optimizing your credit is a multi-step process

[00:08:01] [SPEAKER_00]: Number one pay off your credit card regularly

[00:08:05] [SPEAKER_00]: Yeah, we've all heard it but what you may not know is that your debt payment history represents

[00:08:11] [SPEAKER_00]: 35% of your credit score the largest chunk in

[00:08:16] [SPEAKER_00]: Fact the single most important thing you can do to improve your credit is to pay your bills on time

[00:08:22] [SPEAKER_00]: whether you're paying the full amount of your credit card bill or

[00:08:26] [SPEAKER_00]: Risking my wrath by paying just part of it pay it on time

[00:08:30] [SPEAKER_00]: If you miss even one payment on your credit card here are four terrible horrible, no good very bad results you may face

[00:08:38] [SPEAKER_00]: First your credit score can drop more than a hundred points which would add

[00:08:44] [SPEAKER_00]: $240 a month to an average 30 year fixed mortgage loan

[00:08:49] [SPEAKER_00]: Second your APR can go up to 30%

[00:08:54] [SPEAKER_00]: third you'll be charged a late fee usually around $35 and

[00:08:59] [SPEAKER_00]: Fourth your late payment can trigger rate increases on your other credit cards as well

[00:09:05] [SPEAKER_00]: Even if you've never been late on them. I find this fact amazing

[00:09:10] [SPEAKER_00]: Don't get too freaked out. You can recover from the hit to your credit score usually within a few months

[00:09:15] [SPEAKER_00]: In fact, if you're just a few days late with your payment

[00:09:18] [SPEAKER_00]: You may incur a fee but it generally won't be reported to the credit bureaus

[00:09:24] [SPEAKER_00]: Most people pay their credit card bills online now, but if you haven't set up automatic payments yet

[00:09:29] [SPEAKER_00]: Log on to your credit cards website and set it up now

[00:09:34] [SPEAKER_00]: Number two get all fees waived on your card

[00:09:38] [SPEAKER_00]: This is a great easy way to optimize your credit cards because your credit card company will do all the work for you

[00:09:45] [SPEAKER_00]: Call them using the phone number on the back of the card and ask if you're paying any fees including annual fees or service charges

[00:09:53] [SPEAKER_00]: It should go a little something like this

[00:09:57] [SPEAKER_00]: You hi, I'd like to confirm that I'm not paying any fees on my credit card

[00:10:01] [SPEAKER_00]: Credit card rep. Well, it looks like you have an annual fee of $50. That's actually one of our better rates

[00:10:10] [SPEAKER_00]: You I'd rather pay no fees which card can you switch me to that doesn't charge fees?

[00:10:15] [SPEAKER_00]: I'd like to make sure my credit score isn't affected by closing this account too. Can you confirm?

[00:10:21] [SPEAKER_00]: Yeah, I really talk like that

[00:10:23] [SPEAKER_00]: The vast majority of people don't need to pay any annual fees on their credit cards

[00:10:28] [SPEAKER_00]: And because free credit cards are so competitive now, you rarely need to pay for the privilege of using your card

[00:10:35] [SPEAKER_00]: The only exception is if you spend enough to justify the extra rewards a fee charging account offers

[00:10:42] [SPEAKER_00]: Number three hear that on tomorrow's episode

[00:10:50] [SPEAKER_00]: You just listened to part one of the post titled how to rebuild your credit using credit cards wisely

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[00:12:05] [SPEAKER_00]: I'm a big fan of using credit cards for the perks

[00:12:09] [SPEAKER_00]: After I got out of credit card debt in 2016 and learned to control my spending I started churning credit cards

[00:12:16] [SPEAKER_00]: This means that I would open a card spend enough to get the signup bonus points

[00:12:21] [SPEAKER_00]: Usually there's a spending minimum in the first three months

[00:12:24] [SPEAKER_00]: Then I would downgrade the card to avoid any annual fees and move on to the next card

[00:12:30] [SPEAKER_00]: For personal spending I had to find cards with low minimum spending thresholds, and it was a relatively slow process

[00:12:38] [SPEAKER_00]: But once I started my business the churning really accelerated

[00:12:43] [SPEAKER_00]: For the economy conference, which is an annual party about money designed for the fire movement

[00:12:48] [SPEAKER_00]: Most of my expenses would hit in one month out of the year

[00:12:52] [SPEAKER_00]: So I would open four to five cards at once and earn a ridiculous amount of points

[00:12:58] [SPEAKER_00]: I used a website called doctor of credit to help me find the best signup bonuses and according to my spreadsheet

[00:13:05] [SPEAKER_00]: I've done this over 20 times. I

[00:13:08] [SPEAKER_00]: Even got my Midwestern gentleman involved to open really good cards that I already had

[00:13:13] [SPEAKER_00]: Here's the issue it got way over complicated

[00:13:19] [SPEAKER_00]: tracking sign-in details and minimum spends across two different people with personal cards and business cards plus

[00:13:27] [SPEAKER_00]: monitoring for fraud

[00:13:29] [SPEAKER_00]: Proved very difficult even for someone as detail oriented as myself

[00:13:34] [SPEAKER_00]: I had a number of instances where some details slipped through the cracks and it made me throw in the towel

[00:13:40] [SPEAKER_00]: But I enjoyed at least ten thousand dollars of free travel when I was in the thick of it

[00:13:46] [SPEAKER_00]: So the experience was well worth it to me

[00:13:49] [SPEAKER_00]: But this is just the first half of the article

[00:13:52] [SPEAKER_00]: So be sure to come on back tomorrow where we'll finish up this post and where your optimal life awaits