2879: [Part 2] How to Rebuild your Credit (Using Credit Cards WISELY) by Ramit Sethi on Money Advice

[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 2 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]: Today's post is actually a continuation from yesterday

[00:00:19] [SPEAKER_00]: So if you're new here, it'd be best to listen to yesterday's episode first

[00:00:24] [SPEAKER_00]: But if you're all caught up, let's hear part two and continue optimizing your life

[00:00:30] [SPEAKER_00]: How to rebuild your credit using credit cards wisely

[00:00:38] [SPEAKER_00]: Part 2 by Ramit Sethi of I will teach you to be rich.com

[00:00:44] [SPEAKER_00]: Number three negotiate a lower APR

[00:00:49] [SPEAKER_00]: Your APR or annual percentage rate is the interest rate your credit card company charges you

[00:00:55] [SPEAKER_00]: The average APR is 14% which makes it extremely expensive if you carry a balance on your card

[00:01:03] [SPEAKER_00]: Put another way since you can make an average of about 8% in the stock market

[00:01:09] [SPEAKER_00]: Your credit card is getting a great deal by lending you money. If you could get a 14% return

[00:01:16] [SPEAKER_00]: You'd be thrilled

[00:01:18] [SPEAKER_00]: You want to avoid the black hole of credit card interest payments so you can earn money not give it to the credit card companies

[00:01:27] [SPEAKER_00]: So call your credit card company and ask them to lower your APR if they ask why

[00:01:33] [SPEAKER_00]: tell them you've been paying the full amount of your bill on time for the last few months and

[00:01:39] [SPEAKER_00]: You know, there are a number of credit cards offering better rates than you're currently getting

[00:01:44] [SPEAKER_00]: In my experience this works about half the time

[00:01:47] [SPEAKER_00]: It's important to note that your APR doesn't technically matter if you're paying your bills in full every month

[00:01:54] [SPEAKER_00]: You could have a 2% APR or an 80% APR and it would be irrelevant

[00:02:01] [SPEAKER_00]: Since you don't pay interest if you pay your total bill each month

[00:02:05] [SPEAKER_00]: But this is a quick and easy way to pick the low-hanging fruit with one phone call

[00:02:12] [SPEAKER_00]: Number four keep your cards for a long time and keep them active

[00:02:18] [SPEAKER_00]: Lenders like to see a long history of credit

[00:02:21] [SPEAKER_00]: Which means that the longer you hold an account the more valuable it is for your credit score

[00:02:27] [SPEAKER_00]: Don't get suckered by introductory offers and low APRs

[00:02:31] [SPEAKER_00]: If you're happy with your card keep it and if you're getting a new credit card

[00:02:36] [SPEAKER_00]: Don't close the account on your old one. That can negatively affect your credit score as long as there are no fees

[00:02:44] [SPEAKER_00]: Keep it open and use it occasionally because some credit card companies will cancel your account after a certain period of inactivity

[00:02:52] [SPEAKER_00]: To avoid having your account shut down

[00:02:55] [SPEAKER_00]: Set up an automatic payment on any card. That's not your primary card

[00:03:00] [SPEAKER_00]: For example, I set it up so that one of my credit cards pays a $12.95

[00:03:06] [SPEAKER_00]: Monthly subscription through my checking account each month, which requires zero intervention on my part

[00:03:12] [SPEAKER_00]: But my credit report reflects that I've had the card for more than five years which improves my credit score

[00:03:19] [SPEAKER_00]: Number five get more credit

[00:03:22] [SPEAKER_00]: Warning do this only if you have no debt

[00:03:26] [SPEAKER_00]: I'm serious about this warning

[00:03:28] [SPEAKER_00]: This tip is only for people who have no credit card debt and pay their bills in full each month

[00:03:35] [SPEAKER_00]: It's not for anyone else

[00:03:36] [SPEAKER_00]: It involves getting more credit to improve something called your credit utilization rate

[00:03:42] [SPEAKER_00]: Which is simply how much you owe divided by your available credit

[00:03:46] [SPEAKER_00]: This makes up 30% of your credit score

[00:03:50] [SPEAKER_00]: for example

[00:03:50] [SPEAKER_00]: If you owe four thousand dollars and have four thousand dollars in total available credit

[00:03:56] [SPEAKER_00]: Your ratio is a hundred percent, which is bad

[00:03:59] [SPEAKER_00]: If however you owe only a thousand dollars but have four thousand dollars in available credit

[00:04:05] [SPEAKER_00]: Your credit utilization rate is a much better twenty five percent

[00:04:10] [SPEAKER_00]: Lower is preferred because lenders don't want you regularly spending all the money you have available through credit

[00:04:17] [SPEAKER_00]: It's too likely that you'll default and not pay them anything

[00:04:21] [SPEAKER_00]: To improve your credit utilization rate. You have two choices

[00:04:25] [SPEAKER_00]: Stop carrying so much debt on your credit cards, even if you pay it off each month or

[00:04:31] [SPEAKER_00]: increase your total available credit

[00:04:33] [SPEAKER_00]: Because we've already established that if you're doing this you're debt-free

[00:04:37] [SPEAKER_00]: All that remains for you to do is to increase your available credit

[00:04:42] [SPEAKER_00]: Here's how call up your credit card company and ask for a credit increase

[00:04:48] [SPEAKER_00]: You hi, I'd like to request a credit increase. I currently have five thousand dollars available and I'd like ten thousand

[00:04:55] [SPEAKER_00]: Credit card rep. Why are you requesting a credit increase?

[00:05:00] [SPEAKER_00]: You I've been paying my bill in full for the last 18 months and I have some upcoming purchases

[00:05:06] [SPEAKER_00]: I'd like a credit limit of ten thousand dollars. Can you approve my request?

[00:05:11] [SPEAKER_00]: Credit card rep. Sure. I've put in a request for this increase. It should be activated in about seven days and

[00:05:18] [SPEAKER_00]: number six use your rewards

[00:05:21] [SPEAKER_00]: Just like with car insurance, you can get great deals on your credit card when you're a responsible customer

[00:05:27] [SPEAKER_00]: In fact, there are a lot of tips for people who have very good credit

[00:05:31] [SPEAKER_00]: If you fall in this category

[00:05:33] [SPEAKER_00]: You should call your credit cards and lenders once per year and ask them what advantages you're eligible for

[00:05:41] [SPEAKER_00]: Often they can waive fees

[00:05:42] [SPEAKER_00]: Extend credit and give you private promotions that others don't have access to

[00:05:48] [SPEAKER_00]: How to choose the right card for building credit if you need to open a new credit card to rebuild your credit follow these steps

[00:05:57] [SPEAKER_00]: number one avoid annual fees

[00:06:01] [SPEAKER_00]: Lots of premium credit cards have annual fees

[00:06:04] [SPEAKER_00]: They give rewards and perks which easily exceed the value of the fee

[00:06:09] [SPEAKER_00]: But when you're building credit, you're not going to get the best rewards or perks

[00:06:13] [SPEAKER_00]: Your primary goal is to build up your credit rating so you can get access to the better credit cards later

[00:06:21] [SPEAKER_00]: Fees are only going to slow you down at this stage

[00:06:23] [SPEAKER_00]: When I was building my credit up I avoided fees entirely

[00:06:29] [SPEAKER_00]: That kept more money in my pocket and kept things really simple until I had a good enough credit score to get the premium

[00:06:35] [SPEAKER_00]: Credit cards. I recommend you do the same

[00:06:39] [SPEAKER_00]: We've included reviews of some cards that have annual fees

[00:06:43] [SPEAKER_00]: Sometimes they offer rewards and it's worth it in other cases. They might be the last option available

[00:06:50] [SPEAKER_00]: Avoid fees if you can and if you can

[00:06:53] [SPEAKER_00]: Switch to a no annual fee card as soon as you can once you've built up your credit score

[00:06:59] [SPEAKER_00]: number two if you're a student get a student credit card as

[00:07:05] [SPEAKER_00]: A student you're stuck in a catch-22

[00:07:07] [SPEAKER_00]: You need a credit score in order to get a credit card

[00:07:10] [SPEAKER_00]: But you need a credit card in order to build a credit history and get a credit card

[00:07:14] [SPEAKER_00]: Breaking the cycle can get tricky

[00:07:17] [SPEAKER_00]: These days there are great credit card options for students that help kickstart everything

[00:07:23] [SPEAKER_00]: Most of them don't have annual fees

[00:07:25] [SPEAKER_00]: Some have a few rewards and perks and they're specifically designed for students. So your odds of being approved are much higher

[00:07:33] [SPEAKER_00]: If you're a student get a student credit card that will put you on the path to building credit

[00:07:38] [SPEAKER_00]: And you'll be able to get a much better card later assuming you always pay your monthly bill on time

[00:07:45] [SPEAKER_00]: number three start with one card for bad credit

[00:07:49] [SPEAKER_00]: Every time you apply for a card your credit score will take a hit

[00:07:53] [SPEAKER_00]: It's true part of your score is dependent on how many credit requests that you've had recently

[00:07:58] [SPEAKER_00]: If you apply to a bunch of cards all at once your score will go down a bit. I

[00:08:04] [SPEAKER_00]: Personally hate this right when you really need a credit card the process of applying for credit cards makes your credit worse

[00:08:11] [SPEAKER_00]: The credit score hits are minor, but they do add up if you're trying to rebuild your credit

[00:08:17] [SPEAKER_00]: I recommend getting a credit card that you're confident that you'll be approved for

[00:08:21] [SPEAKER_00]: The last thing you want is to try to apply to cards out of your reach

[00:08:25] [SPEAKER_00]: ding your credit score even more and make it even harder to get one credit card and

[00:08:32] [SPEAKER_00]: Number four get a card designed for average credit when you can

[00:08:37] [SPEAKER_00]: Once you have one credit card that you've been using a while and have built up your credit

[00:08:41] [SPEAKER_00]: Try applying for one of the credit cards for folks with average credit

[00:08:45] [SPEAKER_00]: These aren't the premium cards, but you'll get started with some rewards as a general rule

[00:08:52] [SPEAKER_00]: Consider applying for one of these cards once your credit score is 600 or above

[00:08:57] [SPEAKER_00]: There's no guarantee. You'll be approved

[00:09:00] [SPEAKER_00]: But this is the range where it becomes a possibility and the odds are in your favor

[00:09:05] [SPEAKER_00]: Once you get close to a credit score of 700 and above

[00:09:09] [SPEAKER_00]: Remember to only apply once in case your score isn't high enough if you're declined

[00:09:15] [SPEAKER_00]: Continue building your credit for another year or two and try again

[00:09:19] [SPEAKER_00]: I'd avoid multiple cards at this tier. So only apply for one at a time

[00:09:25] [SPEAKER_00]: There's no reason to have more than one

[00:09:27] [SPEAKER_00]: Later on you can consider having multiple premium cards to maximize rewards and perks

[00:09:34] [SPEAKER_00]: But at this stage you want one decent card that will give you some rewards while you keep building credit

[00:09:40] [SPEAKER_00]: Continue to avoid fees and keep things really simple at this stage

[00:09:45] [SPEAKER_00]: You just listened to part two of the post titled how to rebuild your credit using credit cards wisely

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[00:11:01] [SPEAKER_00]: This is a paid advertisement

[00:11:04] [SPEAKER_00]: We all know that we should pay our credit cards in full every month to avoid being charged interest

[00:11:11] [SPEAKER_00]: But in my 20s when I was racking up credit card debt and only paying the minimum required payment each month

[00:11:17] [SPEAKER_00]: I had no idea just how much that debt was spiraling out of control

[00:11:22] [SPEAKER_00]: This is due to compound interest

[00:11:24] [SPEAKER_00]: When you carry a balance on your credit card, the interest is calculated not just on the original amount you owe

[00:11:32] [SPEAKER_00]: But also on any interest that has accrued

[00:11:36] [SPEAKER_00]: This means that your debt can grow exponentially over time if you're only making minimum payments

[00:11:42] [SPEAKER_00]: When you have credit card debt, the compound interest is working against you and digging a deeper hole

[00:11:49] [SPEAKER_00]: But when you invest your money in the stock market

[00:11:52] [SPEAKER_00]: Compound interest is working in your favor and will eventually earn you more money each year than your yearly salary

[00:12:01] [SPEAKER_00]: Here's a hypothetical example

[00:12:03] [SPEAKER_00]: Let's say you buy a $20 hat on a credit card with 14% APR

[00:12:08] [SPEAKER_00]: If you only pay the minimum payment of 40 cents per month or about 2% of your card balance

[00:12:15] [SPEAKER_00]: It would take you six years to pay it off and you would ultimately spend

[00:12:20] [SPEAKER_00]: $30.19

[00:12:22] [SPEAKER_00]: Now a $10 difference might not seem like that much but we're using small numbers here

[00:12:28] [SPEAKER_00]: You end up spending 66% more for that hat when you don't use credit cards responsibly if it was a

[00:12:36] [SPEAKER_00]: $20,000 purchase in the same scenario

[00:12:39] [SPEAKER_00]: It would take more than 30 years to pay off and you'd make over

[00:12:44] [SPEAKER_00]: $46,000 in total payments. The point is we should be avoiding credit card debt like the plague

[00:12:53] [SPEAKER_00]: But that's gonna do it for today

[00:12:54] [SPEAKER_00]: Thanks so much for listening every day and all the way through and I'll see you again tomorrow for more optimal finance daily

[00:13:02] [SPEAKER_00]: Where your optimal life awaits?