Credit is one of the most vital factors in building wealth and achieving financial freedom.
Building good credit is one of the first steps in creating an infrastructure for achieving financial freedom. Your largest purchases are almost always made on credit. People with good or excellent credit save tens of thousands of dollars on these purchases through lower interest rates and better terms.
There are two main components to your credit: your credit report and your credit score.
A good or excellent credit score can save you hundred of thousands of dollars in interest charges. Since if you have a good or excellent credit, it makes you less risky to lenders, meaning they can offer you a better or lower interest rate on loans such as mortgage loans and automobile loans.
Lenders charge you more or less for a loan depending on you score and credit history, which signifies how safe or risky you are.
Once a year, by law, you’re allowed to obtained a copy of your credit report free from the major credit bureaus: Experian, Equifax and TransUnion.
It’s important to plan now to monitor, manage and improve your credit before you need the auto or mortgage loan three to five years in the future.
And, never forget that one of the most important factors in improving your credit is getting out of debt and paying your bills on time.
Credit Cards
There has been a great proliferation of credit cards and people owning multiple credit cards over the past decade and more. And, the competition for consumers among competing credit card companies has become fierce.
Credit cards provide convenience and flexibility. And if you pay your credit card bill balance in full and on time each month, they can be utilized as a free short -term loan. They can help you track your spending much more easily than cash and you can download your transaction history.
Additionally, there are many benefits and rewards associated with credit cards such as cash back and travel rewards. But beware, most of the best rewards credit cards have annual fees. Only if you spend thousands of dollars per month on your credit card, the annual fee for the rewards might be worth it.
If you’re booking travel or eating out, use a travel card to maximize rewards, writes Sethi. For everything else, use a cash back card.
If you don’t completely pay off your credit card bill balance each month, you’ll incurred an enormous amount of interest at an high annual percentage rate (APR) that compounds.
It’s very easy to overuse and overspend with credit cards and find yourself in debt. One of the biggest problems with credit cards is the hidden cost of using them, says Ramit Sethi, “I Will Teach You to be Rich”. Many Americans have over spent and carry large credit card balances. The average credit card debt in the US in 2021, was $5,525, per Experian’s report. This was nearly 7% lower than the $5,897 in average credit card debt that was recorded in the same report in 2020.
To maximize the credit card benefits like cash-back, gift cards, air miles, discounts at the gas pump, or other rewards. And perks like free roadside assistance, free car rental insurance, or a free credit score and minimize the cost of credit cards, Sethi recommends:
- Pay off your credit card bill balance monthly. The single most important thing you can do to improve your credit score is to pay your bills on time. You’ll save thousands of dollars. If you miss one payment on your credit card, your credit score may drop, your APR can increase, you’ll be charged a late fee, and your late fee can trigger a rate increase on your other credit cards.
- Try to get fees on your credit card waived. A month before your new annual fee kicks in, call your credit card company and ask if they will waive the fee.
- Negotiate a lower APR. Call your credit card company and ask them to lower your APR. If they ask why, tell them that you’ve been diligently paying your bill in full on time for the last several years and there are a number of credit cards offering better rates.
- Keep your main cards for a long time and keep them active. Lenders like to see a long history of credit. Thus, the long you hold an account, the more valuable it is for your credit score.
- Get more credit. Do this only if you have no debt and you consider yourself financially responsible. You obtain more credit to improve your credit utilization rate, which is simply how much you owe divided by your available credit. Lower is preferred because lenders don’t want you regularly spending all the credit you have available. It’s too likely you’ll default and not pay them back.
- Use credit card’s secret perks. If you have very good credit, call your credit cards companies and other lenders once a year and ask them what advantages you’re eligible to receive. Often they can waive fees, extend credit and give you private promotions.
Call your credit card company and ask them to send you a full list of all their rewards.
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