ADULTING 101, Part 2

Credit, Debt, and Savings, - The Real Triforce of Adulting

You won't learn this from your teachers, and your parents may fret about it constantly, without ever actually sharing their concerns or insight, but these three sides of your finances are key to your Golden Power. Each one affects the other, and there many misconceptions you will have to re-learn. It may even mean educating your own friends or family, because so many people have it wrong.

Credit, as in "credit cards" and "credit score", is not just good, it is vital to success. If you want to know how vital, Muhammad Yunus got a Nobel PEACE Prize for helping people in extreme poverty find a way to get credit. Not a Nobel Economics Prize, which is also a thing. This guy got a peace prize, because he made their lives so much better by allowing them a small (micro, in fact) amount of money to get their careers started.
Anyway, you may think:

  • Credit is bad, 
  • Credit cards are only for emergencies, or 
  • Need to be paid off completely, every month. 
All of these ideas are commonly expressed, sometimes even by people calling themselves "experts". Here is why they are wrong:

  • Credit is how much people trust you with money or valuable things. How can that be bad?
  • The more you use credit cards, the higher your credit limit is raised, because you build trust that you will pay off your balance. 
  • Keeping you balance at zero does nothing to help or hurt your credit, because you're just showing them you will borrow money when you don't need to. 
So what is the best thing to do?

  • Try to keep only one or two credit cards. Having three or more hurts your credit score.
  • Don't get another, unless you have a really good reason, and you plan on using the card at least a few times a year, inactive cards and closing credit card accounts hurts your credit (only a little, but it does hurt your credit score).
  • Keep a balance on at least one card. More than zero, and less than 30% of your total credit limit on that card, and try to make payments slightly higher than the minimum. More on that in a sec.
So what is a "credit score"? There are three big companies that monitor everything you borrow, monthly payments you make, buying or leasing a car, your cell phone, even when you move and if you pay your rent and utilities on time. They determine what your score is. You want to have a good score, because when you need to borrow large amounts of money, for a car, business, personal or home loan, having a better score means they will charge you less interest, or if your credit isn't great, it can mean the difference between being approved or denied entirely from getting a loan or moving into the apartment you want.

Debt, as long as you have credit, does not need to scare you. Many people who are considered successful - owning homes, driving cars, raising kids, have LESS money total, than a homeless person on the street. Donald Trump infamously said something to that effect when he was going through one of his many bankruptcies, not that he should be a role model to anyone. The point being, allowing yourself to carry some debt can give you freedom to use the money you earn for more important, long-term goals. If you have $5000 in credit card debt, and $6000 cash, you may think the smart thing to do is pay off the debt. You still have $1000 left, right? But you need to remember some things can be paid on credit, and some cannot. You cannot pay your rent with a credit card (at least not in a reasonable, responsible way, there are high-interest cash advances, but you should avoid those). If your credit limit is $5000, you should definitely pay off $3500, so you are back to owing only 30% of your available credit. If your limit is higher, you should pay less, and keep whatever remaining cash you have. The "why" of this brings us to the final side of our triangle:

Saving money seems obvious, right? Yet the same story comes out every year, with a different twist: More than Half of American Adults Cannot Afford a $500 Suprise Bill such as car repair or medical expense. One big reason is fear of debt. People want to be free of "the shackles of debt", so they pay back as much as they can, instead of adding to a rainy-day-fund.
Here I will devil's advocate: "What's the difference? I can pay off my credit card, pay less interest on he debt, and charge the emergency expenses if they happen at all!" This is how I thought all throughout my twenties. That way of thinking led to me paying off my $20,000 in student loans, in only 4 years! I felt pretty proud of myself back then, and it was a few years before I realized my folly. paying off debt feels good, and saves you money in paying interest on your loans, but it eliminates your cash. Cash isn't just a rainy-day fund and good for paying rent; it's freedom, it's flexible, and you can use it for anything.  It would have taken me a couple more years, but if I had saved and made the minimum-plus-a-little payments on my student loans, my credit score would have increased, I could have made a down payment on a home, and I even could have sold that home once it was worth more, to by a new home and pay off my student loans! This is just one scenario, but it demonstrates why you would do well to hoard your cash, as long as you are keeping your debt in that 1-30% sweet spot. Some other great cash-only options are: Flexible Spending Accounts (tax-free savings accounts for medical expenses), 401Ks, and IRAs (retirement accounts that not only avoid taxes, but reduce your total taxable income each year!)

Hope this changes the way you see Credit, Debt, and Savings, and gives you a leg up!

Questions? Comments? Cat gifs? Don't be shy!

Bye for now!


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