EP 08: Using Credit Responsibly

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Hello, and welcome to everyday finance and economics with the Sigler's the podcast where we discuss what you need to know about personal finance and economics, and give you practical advice on how to get started and be smart with your money.
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We're your hosts, Glenn and Christina Sigler.
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So Christina, what's going on today?
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What matters this week is Bitcoin.
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Bitcoin has had a really volatile month.
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It's been worth almost 60,000 us dollars and had a recent load this weekend of$31,000, which means a huge difference in what your money's worth, depending on when you checked your investments.
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This weekend volatility has been caused by Tesla's founder, Elon Musk, who has been a huge proponent of cryptocurrencies.
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He recently decided not to accept Bitcoin anymore as payment for Teslas electric cars and criticize Bitcoin for its huge energy consumption and its mining practices.
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Also volatility has been caused by both the U S and Chinese governments, which have hinted at a regulation crack down on the cryptocurrency market.
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Now, Bitcoin is our economic term of the week and Bitcoin is a decentralized digital currency.
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Meaning there is no government, no central bank or administrator backing it up and it can be sent user to user on the Bitcoin network without the need for intermediaries.
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All right, guys, let's finish out our series on credit.
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Okay.
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How do you, how do you build good credit history and a good credit?
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Well, again, a lot of this is common sense, but we'll start with the bait pace, right.
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You know, for the younger listeners, uh, you can become a good way to start is to become an authorized user on one of your parent's credit cards.
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And that's, if your parents are good, responsible credit users with good credit scores, you're essentially piggy-backing off of their credit history.
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So how, how does that work?
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Um, so it for you, if I put you on my credit card, you would over the next year or two, um, gain some of the benefit of my credit history.
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Oh, great.
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So do I get to spend your money?
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Well, you do, but guess who's looking so you, so, so know.
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So the credit card companies, aren't, they're not stupid.
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They know you're going to have adult supervision.
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Yeah.
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So,
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You know, they know that I'm not going to let you just go out and go crazy
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With, with my, with my credit card.
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So close.
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No, no, you never, never close.
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So another way is if, if your parents don't agree to get on their credit card is to sign up for secure credit card.
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And like I said, secure credit is one where you put up some collateral and a secure credit card is, Hey, I want a$2,000 line of credit or a thousand dollar credit line of credit.
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Well, guess what?
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To start that out, you put up a thousand dollars and then you charge against that thousand dollars and you pay you payback, you know,
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Hey, that's not even credit at all.
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It's just spending your money over time and give them your money.
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Absolutely.
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And, and so
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Technically it is credit, but you can do the same thing yourself without even using credit by, you know, before you go out and buy something, save the money ahead of time.
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Yeah.
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But the thing is, that'll, that'll get you a credit score and saving the money ahead of time.
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That's exactly right.
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And that's why you do, that's why, so you're essentially building a credit history with these, with these
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Copper own money, with your own money.
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And then, you know, in, in six months to a year, if you've done it well, they'll say, Hey, we want you to have one of our regular credit cards.
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And that usually leads to an unsecured credit card with a larger
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Limit.
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Okay.
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Now
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You get into the, nitty-gritty pay your bills every month.
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Yeah.
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That that's a basic pay your bills on time, pay him in full.
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And that's probably the best habit that you can get into is paying
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Early, give you extra points or whatever
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It
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Can.
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Yeah.
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Let me just leave it at that.
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It can't, there are situations where it can be helpful.
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Um, you know, when push comes to shove and you just say, Hey, look, you know, I paid those bills.
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Not, not when they were due, but as soon as I got them and I did it for 15 years, so you guys should give me more credit, right?
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Yeah.
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Things of that, things of that nature.
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And then, so once you've done those, those things, now you go, and you heard me say before that the credit card companies will be looking for you to upgrade your card.
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And you know, some people will have to do it, you know, Hey, credit card company, I want to upgrade to a secure credit card.
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Well, credit card companies are, are, are they're paying attention.
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They'll probably make you the offer beforehand before you, you asked them they want your money.
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Right.
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All right.
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And then keep your credit card utilization, low deterioration to your credit score happens when your usage hits 30% or more 30%, 30% or more, and you don't pay it back.
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So if you, if you, you know, you started percent of your credit limit and you pay it all back, they, you know, they don't care or actually that's good.
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Yeah.
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But if you, you know, um, spend a lot on your credit card and then, you know, only pay back half or, you know, and the, and the usage gets back to about 30%.
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You'll see some hits in your car credit score.
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I see.
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Okay.
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Don't open too many credit, uh, accounts at once.
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We talked about this a little bit earlier.
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Um, and again, don't just pay your credit card bills on time, pay all your bills on time.
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You know, there, you know, there are instances where utility bills can, you know, uh, you know, they feed all of these creditors, feed your credit history and credit reports.
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Got it.
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So, you know, this is stuff that everybody's paying attention to, uh, pay particular attention to avoiding student loan default.
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Okay.
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What is defaulting on
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A loan?
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Let's go into that
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In essence, not paying.
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Okay.
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Just a fancy word for not being alone.
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Yeah.
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Essentially you have a loan agreement that says you are going to pay X amount each month for X number of years.
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Once you, you know, if you don't pay it once you're late, once that late lateness gets above a certain time period, usually 90 days, uh, you are in a, what is called a technical default.
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You have failed to comply with the terms of the case.
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That's what that's essentially what it fall.
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Got it.
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Okay.
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I specifically talk about not defaulting on student loans because they will follow you through bankruptcy.
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Right.
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But I'm take making a broader approach.
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You don't want to fall too on anything.
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Yep.
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Again, you want to be on time with all your bills.
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And so your ability to manage credit is really a demonstration of your ability to master your budgeting and stay on top of all your okay.
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I see.
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I see.
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Okay.
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Now, if you're having problems with your student loans, you try a couple of things.
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You'll look to go for the, from it.
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No, we're just say, Hey, Hey, loan company, I can't pay you to write them a letter.
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Can, can you, uh, can you, can I stop paying this for now?
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Like, there's something that's come up for me.
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Uh, can I freeze this loan?
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And you know, you can, you can still accrue interest, which is what they typically do.
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Um, and
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You know, I'll pay you back in, I'll start paying you back and X, you know, X amount of time.
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Yeah.
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That makes sense.
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Cause student loans follow, like people be paying student loans for
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Forever, forever.
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And, and there's other things that you can go through.
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You can look for switch to income driven repayment plans.
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So, Hey, look, you know, I don't make as much money.
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Can you, can we restructure the payment based on my income.
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And then, you know, uh, given, uh, one of the things that happened over the last two, two years, they're looking for a loan forgiveness.
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And so, so people are campaigning on the student loan forgiveness.
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Now there's, there's some tax implications for that, but you know, that's a, that's another area.
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Yeah.
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I said, that's a whole other episode.
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All right.
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And
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Now if you have private student loans, you may not have all these options.
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Uh, but
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Student loans being like, what, what does that, so
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Are there are, um, uh, uh, federal guaranteed loans as essentially a yes.
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Okay.
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And, um, you know, those things have some protections for the, uh, for, for the borrower or some, some rights for the borrower that they can go do the private student loans, like, like straight from your bank.
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That's not, that's not associated with, um, with that FASFA.
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Um, they don't have those same protections.
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And so you want to go ahead and try to renegotiate them.
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Those, you try to get a refinance them at lower interest rates.
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Um, and if there, if you're struggling with that, you may have to get a co-signer and you know, the, the challenge with that in getting somebody to co-sign is that if you default on the new agreement, it not only hurts your credit, it hurts your costs.
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Oh.
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So this is like an accountability issue.
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Yeah.
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Okay.
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Okay.
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Got it.
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And then, you know, you're going to want to, so let, let's move off into other, um, credit management techniques.
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You want to keep the credit accounts open, unless they're costing you for credit cards and things of that nature.
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There can be too many.
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Yeah.
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That makes you, you can have too many.
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Right.
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Um, but you want to be careful which ones you close cause the one, you know, if you've got, uh, you know, don't close the ones with the longest history, because that helps your credit score.
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Now, if that one with the longest credit, uh, longest history has like terrible rates or costs a high annual fee, then you might want to, you might want to get rid of that one.
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Yeah.
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Okay.
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But you know, you've got to, uh, you've got to be mindful of closing, you know, closing your accounts.
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And again, the closed end loans will close automatically the revolving credit you've got to be careful about because you know, not only when that, when you close that it reduces the amount of loan capacity or credit capacity you have.
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And so your debt, your, your utilization rate could go up automatically.
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Oh, I see.
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Okay.
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Because you've, you know, you had a credit card with a$10,000 limit, you took it out.
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And so now you have, and now you, Betsy, you could
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Be using 30% or more already.
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Yep.
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Okay.
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Yep.
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Yeah.
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Now, uh, responsible credit users use some additional tools to help them manage their debt, get your credit report annually.
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Remember what I said?
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The credit report is essentially your history.
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You want to check it, you know, make sure that, you know, there's no errors on there.
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And if there are errors, there's there's tools out there to help you go and get those errors.
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Correct.
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Right.
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Because they are obligated to fix them to represent you.
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Correct.
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Right.
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And you want to dispute any errors or fraudulent accounts.
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And then if you can go ahead and apply for free credit scores.
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So remember the credit score is a representation of your credit history, compose compile it to one number.
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And so you want to see, you know, see what that number is.
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Yeah.
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There's all these
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Websites and stuff now where you can see your credit score for free.
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Absolutely.
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Absolutely.
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Now, you know, you want to check is great.
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You want to check, you want to check your score.
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It's great.
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Don't obsess.
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If you see errors, you need to make changes.
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But you know, if your score is seven 40 instead of seven 80, uh, don't obsess over the, you know, look, look at what, look at your situation to see if she can rationalize it.
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Don't make decisions just for optimizing your credit score and, and get yourself into, into, into bad financial situations.
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So some of the lessons use revolving credit, but don't let it turn into debt, right?
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Pay your, you know, try to pay off your bills as quickly as you can.
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If you can pay off the balance every month, pay on time, not just your credit bills, all your bills, and don't take new loans unless you need them.
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Okay.
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All right.
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So how do you, we've dutched on a little bit of this, but how do you responsibly use credit specifically credit cards?
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So many financial advisors emphasize that, you know, making only the minimum payment on your credit cards is not enough.
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So you, you know, you'll get a credit card statement, oh, you charged$2,000 this past month, but you only have to pay back$15.
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Okay.
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If you pay back$15, that means, you know, this month you're going to owe the 19, 1985, plus whatever interest
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And plus the stuff that you charged next month, right?
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So
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How do credit card companies make money off your interest, your interests.
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So, you know, they're happy, you know, they may be happy for you to, you know, give them some interest.
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Um, now they're not happy if you never pay them back, but they're happy to, for you to pay them, pay them much, but not, but only paying the minimum is not in your best interest.
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Right.
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And so if you're not able to pay the full balance that in, in some financial advisor's mind is an early indication that you're already spending money on your lemon beyond your means.
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Yeah.
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Credit cards should be used for convenience, not to make ends meet they're handy because they eliminate the need to carry cash.
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Yeah.
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And they generate reward points where you, you know, and they're helpful in, in emergencies and they can help you spread out big ticket items, you know, um, over a short period of time.
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But after emergencies, you're spending, should your S your rest of your spending should be changed to allow you to get your back balanced back to zero as quickly as you can.
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Yeah.
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Yeah.
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But data thought that the advantage
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Of credit and credit cards was that you could afford more expensive items like in now, like you could get more expensive items that you would normally have to save for, like now, why shouldn't I just purchase all those big, expensive items that I have.
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You make a great point.
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They do allow you to absorb the cost of big ticket items over several months.
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However, this is something you have to watch out for.
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You got to consider the full cost.
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If you're using the credit card to buy anything, the true cross is what you, what you paid for.
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Plus all the interest that spread out over time.
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So something that may have been on sale, if you let it stay on your credit card for, you know, a year, you've paid a lot more than what the, the sticker price that bargain may end up costing you a great deal more than you expect, especially if you let that linger on your, on your credit card.
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And so that's how people get into trouble with debt, because one month it may be, oh, yeah, I'm just going to spread this, this payment out over a couple of months, and then you have an emergency, and then you've got to get something else.
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And so now you've got a lot of credit cards, so be mindful of that.
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All right.
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That's our show.
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Thank you so much for listening and be sure to join us again next time when we would discuss the benefits of financial literacy.
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Yes.
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And if you have any questions for us, you can email us at E F E S podcasts, gmail.com and follow our Instagram at EFS podcast.
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Thanks so much for listening.
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Take care, everybody.