So after watching a ludicrous but somewhat thought-provoking video from Jake Paul, I thought I would elaborate on his idea. He says that formal school sucks, and that kids need a better education on real life “stuff”. That is the short version, however, he nor any of his “peers” are qualified to educate his millions of followers. One of the things he discusses (sort of as he throws money from a balcony) is the concept of credit. Which is ironic, since he so young it is unlikely he secured any on his own merit. Do people need an education in credit management/debt management? Absolutely. Do they need a full semester in learning all about how to borrow money and pay it back on time? No. I think maybe a mini-workshop within a conference for young new small business owners would maybe be a better venue.
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In this day and age, it is not so easy for a young person to get a credit card, store credit card, or a charge card. From what I gather from small business owners it is also not very easy for them either. So a class in credit, how to get it, how to keep it, what is the credit score and why you need to pay attention to it. What the heck is a credit inquiry? Who are the players and how do you win in the losing game of interest rates? Damn, all those things could make for a really good book, seminar, or Youtube video.
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Because of Covid19, no one is going to go to any seminar, workshop anytime soon. So for the sake of today’s lesson, I will pretend that you are my 18 year old nephew who just graduated from high school and knows absolutely nothing about credit. Cool? First off, let me ask you some questions. Why do you want credit? Answer: I don’t have the amount of money required to purchase ______ and due to my current financial situation ($ ____ per month/week/hour) I can afford to allocate ____% of that toward my goal of ______. This “should” be the main answer when asked why they want to borrow the money they don’t have. Other reasons, which come up are things like renting a car, hotel room, buying a plane ticket, or maybe it is simply earning rewards points or getting things like extended warranty. All these things come up and are credit card/bank based.
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In order for an entity like a bank to loan you money, you have to prove that you are going to pay it back, on time – every month, until it is paid off in full, plus interest, the additional money the bank is making by loaning the money to you. There has to be something in it for them. How they determine if you are a risk is based on you payment history. We call this a credit score, a complicated report of numbers, accounts, dates, and historical record of YOU paying back an entity. Understanding how this report/credit number is generated is not what this article is about — you can go read about it from another expert. But in a nutshell, you as a consumer, need to pay back any money you borrow on time, every month. That’s it. You would think that was pretty simple, but guess what? Life happens, and some bills don’t get paid on time because there isn’t enough money. We call that being overextended, and that is a reason why banks want to know what your discretionary income is each month.
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A long, LONG time ago, credit card companies all charged an annual fee, just for the privilege of having/using the card. I think my first Chase Manhattan Bank card, billed me $19 a year! Credit cards today are mostly free, and if you get one from your local bank or credit union, there should be no fee. Prestige cards, such as the American Express charge card (green, gold, platinum) offer premium benefits and as such, charge fees to cover those benefits.
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So how did I get my first credit card, you might ask? Well, back in the 80’s I wanted a credit card and my mom understood the power of credit said okay. I was only 15 and at that time you had to be at least 18 to apply for any type of credit. Mom knew that one day I would want to buy a car and I would need to finance it, so starting a credit file of my own was going to be monumental. So mom “co-signed” a department store card, Herbergers, which went out of business prior to the coronavirus pandemic. What this actually means, is that my mom told Herbergers that if I failed to make a payment, that she would be responsible, and if she didn’t it would be bad for her credit report. The account was approved and they gave me a $5,000 credit line, which was all based on my mom’s credit file. THAT was not going to happen, as mom could easily see me going crazy and she called the bank and lowered the credit limit to $100. Yes, seriously. Why? Well, if I maxed out $100, she knew my hourly paycheck job, at $3.35 per hour would cover it. Very smart lady. NEVER give a minor a big credit line. Why? It is super easy to max out a grand, or two, and then not even have enough to make the minimum payment.
Eventually my credit limit got raised due to my excellent payment history. After doing this for almost 2 years, it was enough for me to get a car loan on my own merit. It usually takes about six months to establish a credit file, and then another year to start a payment history. An established payment history of making payments consistently on time, more than the minimum is important when granting someone a line of credit. Think about it, if you loaned a friend $20 and he paid you back the next day, you would be more likely to loan him money the next time he asked. If another friend never paid you back, would you loan him money the next time he asked? Doubtful.
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Now that is how “I” did it back in the 80’s, but in 2020, credit cards don’t really work that way. Instead what you can do, is simply add your child to your account as an authorized user. This “does” technically start a credit file for the child, however, most bank officers are aware of this alternative move and take than into consideration before loaning a minor tens of thousands of dollars. As Dave Ramsey says, credit lines are demonstrations of how you borrow money. If you are debt free, you don’t need to borrow or have a credit score. I am totally with Dave on this one. I use the American Express card as it grants a lot of benefits, such as extended warranty, and it has to be paid in full every month. So it is unlikely you will go crazy knowing how much your monthly income is, and where is has to go. I always encourage people to have a monthly budget. Know how much is coming in from work and other sources, and know where it is going — bills, rent, groceries, and so on. When I was younger I used a Microsoft Excel spreadsheet to budget wisely. If you are going to go gamble $100, it has to come from somewhere … less gas, groceries, entertainment or something.
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Apply for an American Express Card with this link. We can both get rewarded if you’re approved. http://refer.amex.us/AaRONSPFre?xl=cp33 It is in the form of membership rewards points, which you can literally cash in for gift cards, prizes, credit statements or even as currency on Amazon.
