Speaker 1: Credit cards have always been a bit baffling to me,
Speaker 1: if I'm being honest, and I think that's because credit
Speaker 1: cards have kind of been vilified in films and TV
Speaker 1: as this slippery slope of spending that makes us believe
Speaker 1: we can buy anything we want until we can't and
Speaker 1: we're in even deeper financial trouble than before we had
Speaker 1: the credit card. Take the movie Confessions of a Shopaholic
Speaker 1: as a prime example. The opening scene talks about these
Speaker 1: beautiful women who have beautiful things and they don't even
Speaker 1: need money because they use quote magic cards credit cards. Eventually,
Speaker 1: in the film, this obsession with credit cards leads our
Speaker 1: heroin into sixteen thousand dollars worth of debt. When a
Speaker 1: story wants to show us that someone is in for
Speaker 1: difficult times ahead, there's this classic scene where their credit
Speaker 1: card is declined, and that's our first signal that a
Speaker 1: character is about to hit financial rock bottom. We're constantly
Speaker 1: present with these storylines that portray credit cards as these
Speaker 1: proverbial financial poison apples. But according to a report from
Speaker 1: the Federal Reserve System on the Economic well Being of
Speaker 1: the US household in twenty twenty one, eighty four percent
Speaker 1: of US adults have and use credit cards, so it
Speaker 1: begs the question are credit cards all bad if so
Speaker 1: many people have them? I know we have to be
Speaker 1: careful about accruing debt, but can credit cards also help
Speaker 1: us achieve good financial standing? Also, if someone could tell
Speaker 1: me how to get the most out of the rewards
Speaker 1: i'm the card, that would be great. Let's figure it
Speaker 1: all out together and start taking notes because this is.
Speaker 2: Stuff.
Speaker 1: Welcome to another episode of grown up stuff How to
Speaker 1: adult Now, Matt. When we first brought up covering credit
Speaker 1: cards and credit you were very enthusiastic about this, and
Speaker 1: it was surprising as it's not usually something that gets
Speaker 1: my blood pumping, and I want to know where does
Speaker 1: this zeal come from?
Speaker 2: So credit cards have best been described to me as
Speaker 2: a tool, and in knowledgeable hands, a tool can be
Speaker 2: an amazing thing. Let's think about like a chainsaw. Right,
Speaker 2: you can cut down trees, you can trim your hedges,
Speaker 2: but in less knowledgeable hands you could lose a few toes.
Speaker 2: You know, like credit cards have the power a really
Speaker 2: wreck havoc on someone's financial life. If you've got a
Speaker 2: twenty percent interest rate on your credit card, which you know,
Speaker 2: they can be that high. And you spend one hundred
Speaker 2: dollars in a month and you don't necessarily pay it off,
Speaker 2: you now not only owe one hundred dollars, but you
Speaker 2: owe one hundred and twenty dollars. And if you keep
Speaker 2: not paying it off, that compounds and it can just
Speaker 2: spiral out of control really really quickly. I was very
Speaker 2: lucky when I was a kid. My dad was like,
Speaker 2: if you get a credit card, you pay it off
Speaker 2: every month. There were years where I didn't have one
Speaker 2: because I was like, I don't feel like I can,
Speaker 2: you know, do that right now. But to get away
Speaker 2: from all the scary things, they can also would be
Speaker 2: something really positive, Like they are the easiest way to
Speaker 2: establish a credit history, and we'll get into that in
Speaker 2: the episode, but essentially having a positive credit history makes
Speaker 2: it a heck of a lot easier and more affordable
Speaker 2: to buy a car or a home. Also, if you
Speaker 2: spend a lot of money on dining out or at
Speaker 2: the grocery store or traveling, there are certain credit cards
Speaker 2: that you can use that will give you cash back,
Speaker 2: like actual cash back, like they'll just credit it to
Speaker 2: your credit card or travel points, so you can put
Speaker 2: towards future travel purchases, and more than anything, I think
Speaker 2: credit cards can be a bit mysterious, and I'm excited
Speaker 2: about equipping our listeners with the knowledge they need before
Speaker 2: diving into their own credit card journey. Yeah.
Speaker 1: Absolutely, I was really nervous to see where you were
Speaker 1: going with that chainsaw analogy, but you made it work.
Speaker 2: I figured I followed you.
Speaker 1: I totally follow But when it comes to credit cards,
Speaker 1: there are few sites more apt to help us understand
Speaker 1: than nerd Wallets. So we have invited Sarah Rather from
Speaker 1: the nerd Wallet team to help us figure out the
Speaker 1: basics of credit.
Speaker 2: That's right. Sarah has appeared on The Today Show, CNBC's
Speaker 2: Nightly Business Report, and quote it in The New York Times,
Speaker 2: The Washington Post, The Wall Street Journal, Business Insider, and
Speaker 2: Reuter's just to name a few of the places that
Speaker 2: seek out her advice in insights on personal finance. Hey, Sarah,
Speaker 2: welcome to the show. Before we get too far into
Speaker 2: credit cards, I'd actually like to take a step back
Speaker 2: and talk about credit. You know, like, what is it?
Speaker 3: It's essentially the ability to borrow money, That's really it.
Speaker 3: Whenever you talk about a line of credit or a
Speaker 3: credit card, or anything with credit. You know, buying something
Speaker 3: on credit, it's just borrowing money, and then you have
Speaker 3: to pay it back. And if you don't pay it back,
Speaker 3: that's where things get a little expensive or a lot expensive, honestly.
Speaker 3: So at its core, you're just talking about borrowing.
Speaker 2: So then for people who don't necessarily need to borrow money,
Speaker 2: you know, they have a debit card that is associated
Speaker 2: with their checking account, why might they want to consider
Speaker 2: getting a credit card?
Speaker 3: A credit card is a pretty quick way to establish
Speaker 3: your credit history. There are these companies that are called
Speaker 3: credit bureaus. You might have heard of Equifax, Experience, TransUnion.
Speaker 3: These are companies that gather data on your payment activity
Speaker 3: or some of your payment activity, and that information is
Speaker 3: used to calculate a credit score, which is a three
Speaker 3: digit number. It's between three hundred and eight point fifty
Speaker 3: and lenders, banks, credit unions use your credit history from
Speaker 3: these bureaus and your credit score and other financial information
Speaker 3: like your income, debts, things like that to determine whether
Speaker 3: or not they want to lend money to you in
Speaker 3: the form of a credit card or a mortgage or
Speaker 3: a car loan or anything else. Because they use that
Speaker 3: number and that information to determine how risky it would
Speaker 3: be for them to that you borrow money based on
Speaker 3: how likely they think you are to be able to
Speaker 3: pay back. So the higher your credit score and the
Speaker 3: more established your credit history, the less risky you seem.
Speaker 3: Because you've already shown a history of paying your bills
Speaker 3: on time, of paying off your debts, things like that.
Speaker 3: You've already shown that you're responsible, and so they're like, Okay,
Speaker 3: we're going to use your past behavior as an indication
Speaker 3: that going forward, you're going to continue this behavior, and
Speaker 3: so we will lend this money to you. We'll give
Speaker 3: you a lower interest rate. You're less risky to us
Speaker 3: versus somebody who maybe is newer to building credit, not
Speaker 3: as much of a history, lower credit score, a little
Speaker 3: bit more of a risk to the lender. They might
Speaker 3: still lend you money, but they'll charge you more for it.
Speaker 3: And if you are, let's say you're pretty new to
Speaker 3: the whole adulting thing, you are less likely to own
Speaker 3: a home owned car. You don't own much yet when
Speaker 3: you're like twenty three years old, So that's a good
Speaker 3: time in your life to establish this credit history because
Speaker 3: later on, when you do want to do those things
Speaker 3: when you need to buy your new car, when you
Speaker 3: want to buy your first home, when you want to
Speaker 3: borrow money to start a business, you've already established that foundation.
Speaker 3: It takes down a lot of barriers because you know
Speaker 3: you can at least get the money. You can get
Speaker 3: the money, so yeah, so that's why it's important to
Speaker 3: do that. And then when you use the credit card
Speaker 3: responsibly and you know you pay your bills on time
Speaker 3: every month, you don't charge too much, you don't max
Speaker 3: out the card, within a couple of months, you begin
Speaker 3: to see your credit score start to reflect your responsible behavior.
Speaker 3: So it's a pretty quick process and there's a much
Speaker 3: lower left compared to other forms of borrowing. So for
Speaker 3: many people, credit cards and also student loans are the
Speaker 3: first ways they begin to dip their toes in establishing
Speaker 3: the credit history.
Speaker 1: Credit cards are one of the first and easiest ways
Speaker 1: for us to start building up credit and improving our
Speaker 1: credit score. However, credit cards are super easy to get.
Speaker 1: I mean literally, you just need your name, social Security number,
Speaker 1: and income and you can get approved and get your
Speaker 1: card in the mail roughly ten days later. And because
Speaker 1: it's so easy to get a card, we have to
Speaker 1: be careful that if we don't have the funds to
Speaker 1: pay off what we spend, we could be negatively impacting
Speaker 1: our credit score. But the important thing to know is
Speaker 1: that credit cards can also offer us and our money
Speaker 1: an extra layer of security.
Speaker 2: Besides building credit, are there any other benefits to using
Speaker 2: a credit card?
Speaker 3: Yes, so credit cards have stronger consumer protections than debit cards.
Speaker 3: Do what the heck does that mean? Right? So, here's
Speaker 3: a common problem having your credit card or debit card
Speaker 3: information compromised because you use your card to buy something
Speaker 3: online and the merchant got their data compromised, or you
Speaker 3: lost your wile and somebody stole it. You left your
Speaker 3: card in an ATM and forgot to go get it,
Speaker 3: somebody took it. They are just like bots that, like,
Speaker 3: I don't know, run random credit card numbers and just
Speaker 3: try them out. So fraudulent charges happen on credit and
Speaker 3: debit cards all the time, and when it happens on
Speaker 3: a debit card, basically the law is the longer it
Speaker 3: takes for you to report fraudulent charge, the more liable
Speaker 3: you are to cover more and more of that cost
Speaker 3: out of your own pocket. And because your debit card
Speaker 3: is directly tied to your checking account. If somebody withdraws
Speaker 3: money with your debit card, that money is gone from
Speaker 3: your bank account until the bank completes its investigation, which
Speaker 3: usually takes a couple of weeks, and then refunds the
Speaker 3: money to your account. So in the meantime, you are
Speaker 3: without that money in your account, and you still have
Speaker 3: other bills to pay, and so that can make it
Speaker 3: really hard for you to afford those other bills while
Speaker 3: you're waiting for that refund. It's a little bit different
Speaker 3: with a credit cards, a little bit safer as far
Speaker 3: as the consumer is concerned. And here's why. By law,
Speaker 3: with a credit card, you're not liable for more than
Speaker 3: fifty dollars worth of fraudulent charges, and most credit card
Speaker 3: companies waive that fifty dollars entirely, so you have zero
Speaker 3: liability and it's not a matter of the longer it
Speaker 3: takes for you to report it, the more you're liable,
Speaker 3: even if it takes you three or four weeks to
Speaker 3: notice the charge because you haven't looked at your statement
Speaker 3: in a while. Once you complain, you're not liable and
Speaker 3: they will refund the money to you as a statement credit,
Speaker 3: which means, because of the way credit cards work, you
Speaker 3: essentially run up a tab for the month, and then
Speaker 3: you pay the money out of your checking account to
Speaker 3: pay the tab. You haven't actually lost any money out
Speaker 3: of your checking account. You've only lost money on your tab,
Speaker 3: and then your tab gets a credit back to it,
Speaker 3: so you get that charge taken off essentially, so the
Speaker 3: money is still right there in your checking account, available
Speaker 3: to you to pay your other bills while you work
Speaker 3: to resolve this issue with your credit card company. So
Speaker 3: your money is a little bit more secure in this
Speaker 3: particular instance when it comes to credit cards.
Speaker 2: Yeah, and I actually I learned this thankfully the easy way,
Speaker 2: because I think right after I got my credit card,
Speaker 2: I left it at the counter of a restaurant and
Speaker 2: someone had taken it spent two hundred dollars at three
Speaker 2: different department stores, oh my gosh, And then I think
Speaker 2: that they went back home and bought like an eight
Speaker 2: dollars sandwich from the deli, because that was like the
Speaker 2: last charge that they did, And I was like, I
Speaker 2: like to think that they celebrated with the little eight
Speaker 2: dollar sandwich. But luckily none of that came out of
Speaker 2: my bank account.
Speaker 3: And You're not always going to see big charges on
Speaker 3: your account all the time as a sign of fraud.
Speaker 3: By the way, really it's so easy. You know, people
Speaker 3: put their cards on autopay, they don't necessarily check their
Speaker 3: statements before paying it. You want to check your bank
Speaker 3: statements and your credit card statements every month, maybe more
Speaker 3: frequently than that. You can even set up alerts, so
Speaker 3: whenever there's a charge to your card, you get a text.
Speaker 3: You can set up alerts that will text or email
Speaker 3: you when your bill is due, or when a charge
Speaker 3: over a certain amount is put on your card, or
Speaker 3: when your credit card balance exceeds a certain amount, so
Speaker 3: you know to stop spending things like that. So there
Speaker 3: are all sorts of alerts you can set up just
Speaker 3: to remind yourself, hey, my credit card exists and I
Speaker 3: have to manage it. And it takes a lot of
Speaker 3: the guesswork out of it, because sometimes the first sign
Speaker 3: of fraud is this like two dollars charge for something random,
Speaker 3: and you don't think about it because it's two bucks.
Speaker 3: So when you look at your bill, it's not like
Speaker 3: astronomically high, but that's often a sign that they're just
Speaker 3: testing your card out to see if it's friendly, if
Speaker 3: it'll work really, and then the bigger charges come later.
Speaker 3: So many of the times that I have noticed fraudulent
Speaker 3: charges on my card, they've been very small. So you
Speaker 3: want to check your statement.
Speaker 2: Right And are there any other ways that we could
Speaker 2: go about like detecting fraud or protecting ourselves from like
Speaker 2: identity theft?
Speaker 3: So another thing you can do is check your credit
Speaker 3: reports on a regular basis, So the end of this
Speaker 3: year you can actually get weekly credit reports for free.
Speaker 3: That might be a little much, but from all three
Speaker 3: credit bureaus. You can go to annual credit report dot com.
Speaker 3: Never pay for your credit reports. You are entitled to
Speaker 3: that information for free, So annual credit report dot com
Speaker 3: you can get all three of your credit reports from
Speaker 3: the major bureaus once a week and check them to
Speaker 3: make sure every account on there sounds like something you've
Speaker 3: heard of before. Check them and make sure your name
Speaker 3: is spelled right, that your address is right, that your
Speaker 3: social Security number is right, especially if you have a
Speaker 3: common name. If your name is John or Mary Smith,
Speaker 3: you might have another John Smith's bank account, or credit
Speaker 3: card account or other account on your credit report by accident.
Speaker 3: That just happens unfortunately, So you want to make sure
Speaker 3: that report is error free because sometimes mistakes can cost
Speaker 3: you precious points on your credit score. If there's a
Speaker 3: bill or a debt that you've paid off that should
Speaker 3: have come off of your credit report, it hasn't come
Speaker 3: off yet, it's something you can dispute. So you just
Speaker 3: want to be sure that everything is accurate.
Speaker 2: So when it comes to credit scores, would you mind
Speaker 2: telling us what number or range of numbers is considered
Speaker 2: good and what might be considered bad.
Speaker 3: So credit score ranges, they range from bad. It's like bad,
Speaker 3: which sounds bad, but it's is the terminology they use,
Speaker 3: bad or poor credit, fair or average, good, and excellent,
Speaker 3: and sometimes you might see like very good thrown in there.
Speaker 3: There are different score ranges, but in general, anything above
Speaker 3: like six ninety is good or excellent, and that opens
Speaker 3: a lot of doors in terms of borrowing money, accessing
Speaker 3: credit cards, getting good interest rates on loans, things like that.
Speaker 3: Fair credit is sort of like the high five hundreds
Speaker 3: through the high six hundreds, and then anything below that,
Speaker 3: so three hundred to like five eighty or so is
Speaker 3: bad credit. So if you're keeping tabs on your credit score,
Speaker 3: which you can do with different financial apps like the
Speaker 3: nerd wallet app. You can get a score for free
Speaker 3: that might vvery once you apply for a loan. There
Speaker 3: are different scoring models, so what you get for free
Speaker 3: with an app might look a little bit different from
Speaker 3: if you were to apply for a loan what the
Speaker 3: lender uses. So just keep in mind there are some variances,
Speaker 3: but buying large like the score you can get for
Speaker 3: free on an app is elites help to give you
Speaker 3: an idea of where you are, so use that to
Speaker 3: get a picture of where you are today. And if
Speaker 3: you don't like the number that you see, then that's
Speaker 3: a sign that this is something in your life that
Speaker 3: you should focus on over the next couple of months
Speaker 3: and see what you can do to improve your situation.
Speaker 2: Yeah, it's really important. I mean, like, so my wife
Speaker 2: is European and it's not a huge thing where she's
Speaker 2: from to like have credit. It's a very like American
Speaker 2: concept in a lot of ways. And so when she
Speaker 2: came here and we got married, it was very important
Speaker 2: to be like I was like, hey, you know, we
Speaker 2: want to have a house, we want to have a car,
Speaker 2: we want to like do all the things and so
Speaker 2: I was like, it's really important for you to get
Speaker 2: a credit card. And you know, even if you just
Speaker 2: put like our groceries on it for the week and
Speaker 2: build it up. But it's amazing how quickly if you're
Speaker 2: starting fresh that you can really get into good standing
Speaker 2: if you're responsible.
Speaker 1: We'll be right back with more grown up stuff how
Speaker 1: to adult after a quick break and we're back with
Speaker 1: more grown up stuff to adults.
Speaker 2: I want to get into some credit card dues and
Speaker 2: don't And like I said in the intro, the first
Speaker 2: due that was told to me by my father was
Speaker 2: do pay off your credit card every month. Can you
Speaker 2: get into why that is so important?
Speaker 3: Yeah, So here's how credit card works. Think of it
Speaker 3: like a bar tab. You made purchases throughout the month,
Speaker 3: they get added to your tab. Then at the end
Speaker 3: of the month you got to pay your tab. The
Speaker 3: bartender is ready to collect and you get sent a
Speaker 3: bill with all a list of all the charges that
Speaker 3: you made and assuming everything is accurate, then that's what
Speaker 3: you owe and you have a payment. You have a
Speaker 3: deadline to pay this bill.
Speaker 2: You have a due date.
Speaker 3: If you pay your entire bill by the due date,
Speaker 3: then you don't owe any interests because you have no debt,
Speaker 3: you've paid your bill, you're done, so then the next
Speaker 3: month you start from scratch. Essentially, here's where it gets
Speaker 3: a little bit more complicated, because there is a cost
Speaker 3: to borrowing. Basically, if a financial institution like a bank
Speaker 3: or credit union lends you money, they charge you for that,
Speaker 3: and they charge you while you're in the payoff period,
Speaker 3: and then once you're done paying off what you've borrowed,
Speaker 3: you're done owing money for the privilege of borrowing. And
Speaker 3: so when they talk about APR or interest, when you
Speaker 3: see numbers with percentage signs after them, that is the
Speaker 3: cost of borrowing. And obviously the higher that number, the
Speaker 3: more expensive it's going to be when you don't pay
Speaker 3: the bill in full. And there are lots of reasons
Speaker 3: why people don't. It's not this, oh, well, I'm irresponsible
Speaker 3: and I'm flighty, and I think credit cards are free money.
Speaker 3: Like no, a lot of people are in a pretty
Speaker 3: tough financial situation right now. They're using credit cards for
Speaker 3: essential purchases. They're using them get by salaries or not
Speaker 3: keeping up the cost of living. They're not keeping up
Speaker 3: with groceries and medical bills and childcare and all these things,
Speaker 3: and a lot of people are using their credit cards
Speaker 3: to float these costs. So here's what happens when you
Speaker 3: do that. You run up a bunch of charges. You
Speaker 3: make purchases throughout the month, and you get this bill
Speaker 3: and you have to at least pay a minimum a
Speaker 3: small percentage of the bill, and you'll be told on
Speaker 3: your bill this is what the minimum charges, something around
Speaker 3: two percent of what you actually owe. You can pay
Speaker 3: that minimum amount and your account is considered in good standing.
Speaker 3: The bartender is happy. You've paid enough of your tab
Speaker 3: to keep them quiet for now, But you still have
Speaker 3: a remaining balance that's getting carried into the next month,
Speaker 3: and that's what you owe interest on. And the thing
Speaker 3: with credit cards, and here's how easy it is to
Speaker 3: get into massive amounts of debt with credit cards. When
Speaker 3: you apply for a card and you get accepted, you
Speaker 3: are assigned not just an interest rate, but also a
Speaker 3: credit limit. So let's say five thousand dollars. You can
Speaker 3: spend up to five thousand dollars in a month on
Speaker 3: your card before your card begins to get declined. And
Speaker 3: then once you pay at least the minimum, at least
Speaker 3: that little two percent of your total bill. You carry
Speaker 3: the debt into the next month, but you can charge
Speaker 3: up to the five thousand dollars limit.
Speaker 2: Again.
Speaker 3: It's not like, well, you've only paid you know, five
Speaker 3: hundred dollars off your bill, so next month you can
Speaker 3: only spend forty five hundred dollars because you've you know,
Speaker 3: you still have this set. No, you can charge up
Speaker 3: to the full amount again.
Speaker 2: Wow.
Speaker 3: And then you can only make the minimum payment again,
Speaker 3: and then you charge up to the full amount again.
Speaker 3: And you do that for a couple of months, and
Speaker 3: you're paying like twenty five percent interest on this card. Yeah,
Speaker 3: and suddenly, I mean, you're reaching a point where you're
Speaker 3: just not going to be able to afford to pay
Speaker 3: that back.
Speaker 2: Ever, and every month that you keep this balance, you're
Speaker 2: getting charged very high interest rates. So we're talking like
Speaker 2: between fourteen and twenty five percent interest on what could
Speaker 2: be thousands and thousands of dollars. That adds up so
Speaker 2: fast and it does not stop right.
Speaker 3: According to the Federal Reserve, the average credit card interest
Speaker 3: rate as of February, that's the most recent data we
Speaker 3: have is t point ninety two percent.
Speaker 2: Wow.
Speaker 3: That is the highest it's been since they started keeping
Speaker 3: tabs on this in nineteen ninety four. So it's a
Speaker 3: lot of money.
Speaker 2: That's a lot. Okay, so we do want to pay
Speaker 2: off our credit card bill each month to avoid paying
Speaker 2: that interest. But what about some don't, Like I've heard,
Speaker 2: it's not a great idea to try to withdraw cash
Speaker 2: using your credit card.
Speaker 3: Yeah, so what you just described is what's called a
Speaker 3: cash advance that is a way to basically borrow against
Speaker 3: your credit limit. You use your credit card much like
Speaker 3: you would a debit or ATM card, You go to
Speaker 3: an ATM and you withdraw money. You can also go
Speaker 3: to a bank teller and do this. Don't do this
Speaker 3: if you're not in like a deep, deep emergency situation
Speaker 3: because it is very expensive. Basically, when you use your
Speaker 3: credit card an ATM to get cash, you are subject
Speaker 3: to ATM fees, cash advance fees, and oftentimes a higher
Speaker 3: interest rate than your card already charges. So you might
Speaker 3: a card that charges like twenty one percent normally, but
Speaker 3: then the APR for cash advances is like twenty six percent.
Speaker 3: And remember how I describe it sort of like a
Speaker 3: bar tab, and if you pay it off at the
Speaker 3: end of the month, then you don't owe interest. So
Speaker 3: this is like a bar tab where the interest begins
Speaker 3: to accrue the minute you buy the drink, so instead
Speaker 3: of having that you know you're spending money. You're spending money,
Speaker 3: it's getting added to your tab, and then you have
Speaker 3: the due date and as long as you pay by
Speaker 3: the due date, there's no interest. No, the interest begins
Speaker 3: to get charged well before the due date, so you're
Speaker 3: already paying that really high interest rate on what you
Speaker 3: take out. That's why, if you are in a bind,
Speaker 3: if there are other ways you can get cash, first
Speaker 3: try it like I don't know, tap it to you,
Speaker 3: just use your debit card at your the ATM, borrow
Speaker 3: money from a friend if you have to. Really, a
Speaker 3: cash advance is very very expensive, and credit cards and
Speaker 3: debit cards look identical in your wallet. Let's just make
Speaker 3: sure you're using the right thing when you go to
Speaker 3: the atm.
Speaker 2: Are there any other situations that you'd consider inappropriate to
Speaker 2: use a credit card.
Speaker 3: When you have to make a purchase, you know you
Speaker 3: don't have the cash to pay back, and that can
Speaker 3: happen if, like you know, you need to repair your car,
Speaker 3: or your dog gets sick and has to have surgery
Speaker 3: or I mean, things happen. What's tough is just dealing
Speaker 3: with that in the aftermath and like really buckling down
Speaker 3: and prioritizing paying it back as quickly as you can
Speaker 3: and trying to limit how many months you're in debt
Speaker 3: after a major expense. So it's just something to be
Speaker 3: careful for. The issue is that life happens, and sometimes
Speaker 3: you do have to get into debt.
Speaker 2: Right. Is there such a thing as having too many
Speaker 2: credit cards? And if so and we cancel one, how
Speaker 2: might that affect our credit score?
Speaker 3: Yeah, so there's no right or wrong number of credit
Speaker 3: cards to carry. What's right or wrong for you is
Speaker 3: when you feel like you're in over your head. You've
Speaker 3: gone too far. It's time to scale yourself back. You know,
Speaker 3: if you're carrying let's say you're routinely rotating through anywhere
Speaker 3: from three to five credit cards depending on your habits.
Speaker 3: But you've got your your alert setup, you know when
Speaker 3: your bills are due, you pay your bills on time
Speaker 3: every month. You don't get into credit card debt. You
Speaker 3: feel like you're on top of things. Then you are
Speaker 3: on top of things, and for you, you are in
Speaker 3: a situation that is sustainable. But if you start like
Speaker 3: forgetting a bill due date and you miss a payment
Speaker 3: because you didn't set up the alerts and you forgot
Speaker 3: to you know, and suddenly you are overwhelmed, then that's
Speaker 3: a sign that you need to scale back and it's
Speaker 3: okay to only use one credit card for everything. If
Speaker 3: that's what makes you comfortable and sleep at night, then
Speaker 3: you should sleep at night. That's really one of the
Speaker 3: better things. My advice about your finances is that if
Speaker 3: you're waking up in the middle of night with heart
Speaker 3: palpitations about your money, then something needs to change. So
Speaker 3: long as you're managing everything well, like carry on now.
Speaker 3: Closing cards is another story. It can affect your credit temporarily.
Speaker 3: A lot of people think, well, I'm going to spring
Speaker 3: clean my wallet and I'm going to cut things up
Speaker 3: and throw them away and it's going to feel amazing.
Speaker 3: There can be some repercussions to your credit score if
Speaker 3: you do this. You just want to go about it thoughtfully.
Speaker 3: That's not to say you should never cancel a card.
Speaker 3: I've certainly done that many times. It's just something that
Speaker 3: you want to be a little bit strategic about, especially
Speaker 3: if you're maybe a couple months away from like applying
Speaker 3: for a mortgage or a car loan or something like that,
Speaker 3: because it can lower your credit score temporarily.
Speaker 2: Here's how.
Speaker 3: When you have a bunch of credit cards open, you
Speaker 3: have a total credit limit, which is basically the sum
Speaker 3: total of all the credit limits on those cards. In general,
Speaker 3: we recommend not charging more than thirty percent of that
Speaker 3: total credit limit every month under ten percents. Even better,
Speaker 3: that's your credit utilization ratio. That's the amount of your
Speaker 3: total available credit you use each billing cycle. Maxing out
Speaker 3: your card is bad for your credit. So when you
Speaker 3: have a card, especially if it has a pretty high
Speaker 3: credit limit, by closing it, you're automatically lowering that total
Speaker 3: credit limit, and if you're spending remains the same, you
Speaker 3: might run the risk of exceeding that recommended credit utilization ratio,
Speaker 3: which can affect you over time. So that's one thing
Speaker 3: to think about. Another thing to think about is when
Speaker 3: it comes to your credit score. Age is good. It's
Speaker 3: not like the rest of society where age is not valued,
Speaker 3: but they like to see a high average age of
Speaker 3: your accounts on your credit report. So if you close
Speaker 3: a card that you've held for a really long time.
Speaker 3: Maybe it was your first credit card that you got
Speaker 3: when you were twenty one years old, and now ten
Speaker 3: years later you're closing it and all of your other
Speaker 3: credit cards are really new. Then you're going to dramatically
Speaker 3: lower the average age of your accounts, and that can
Speaker 3: affect your credit as well.
Speaker 2: So those are just.
Speaker 3: Two things to think about. It's not to say you
Speaker 3: should never cancel a card. An alternative to that is
Speaker 3: let's say you've got a card open, you don't use
Speaker 3: it much, or you never use it, it charges an
Speaker 3: annual fee. You don't want to pay that anymore. You
Speaker 3: can call the credit card call the number on the
Speaker 3: back of your card and say, I don't want to
Speaker 3: pay the annual fee for this anymore, but I want
Speaker 3: to keep the account open. Do you have a no
Speaker 3: annual fee card I can switch my account to. And
Speaker 3: if the card issuer has a family of credit cards
Speaker 3: that they offer, they might have something they can switch
Speaker 3: you down to. That's called downgrading your account. It allows
Speaker 3: you to keep the account open, but you're not paying
Speaker 3: for it anymore, and you can keep it in a
Speaker 3: drawer and then maybe like use that card a couple
Speaker 3: times a year, just to keep the account active, because
Speaker 3: accounts can be closed due to inactivity. So maybe put
Speaker 3: like you know, one streaming service subscription on it and
Speaker 3: then put it on auto pay, so that fifteen dollars
Speaker 3: charge is charged every month, and then you know the
Speaker 3: card is active, it's open, but you're not paying for it,
Speaker 3: and so you still benefit from the long credit history,
Speaker 3: from the increased credit limit, but you're not paying to
Speaker 3: keep this account active anymore. So that's one thing you
Speaker 3: can do instead.
Speaker 1: Okay, so sometimes credit card debt happens, but it doesn't
Speaker 1: always mean we're using our cards irresponsibly. If we find
Speaker 1: ourselves in this situation, at the very least, let's ensure
Speaker 1: we're making the minimum payment each month. We'll still be
Speaker 1: in debt, but this way we avoid late fees and
Speaker 1: keep our accounts in good standing. But enough about the
Speaker 1: struggles of credit card usage. Let's get to the good stuff,
Speaker 1: like rewards come on credit card points. Malie needs some
Speaker 1: airline miiles.
Speaker 3: I think a lot of financial products, not just credit cards,
Speaker 3: but loans in general, and different kinds of accounts can
Speaker 3: be thought of like a tool in your toolbox, your
Speaker 3: financial toolbox, and you turn to different tools for different purposes,
Speaker 3: whether you're making purchases, buying a home, saving for retirement,
Speaker 3: investing for other purposes, you want to pick the right
Speaker 3: tool for the job. So let's apply it to credit cards.
Speaker 2: Right.
Speaker 3: If you are in a position in life where you
Speaker 3: can use your card to make your purchases and then
Speaker 3: pay off your bill in full every month and you
Speaker 3: have no debt, then that is a great circumstance to
Speaker 3: look for cards that earn rewards because this way you're
Speaker 3: basically getting a percentage of your spending back just for existing.
Speaker 3: Really like, there's no additional effort really involved other than
Speaker 3: carrying the card. And there are two main kinds of
Speaker 3: rewards cards, cash back and travel. Those are the two
Speaker 3: big ones, and then there are some niche cards as
Speaker 3: well that offer different kinds of rewards, but for the
Speaker 3: most part cash back and travel. Cash back is like
Speaker 3: using a coupon every time you shop. You get somewhere
Speaker 3: between one and six percent back on every purchase, depending
Speaker 3: on which card do you use and where you use it.
Speaker 3: Travel cards earn rewards in the forms of points and miles.
Speaker 3: They're basically two terms that I sort of use interchangeably.
Speaker 3: You don't get to fly one mile because you've earned
Speaker 3: one mile.
Speaker 2: It's not like that, No, not exactly how that works.
Speaker 3: Yeah, I once had to describe that to a friend.
Speaker 3: He's like, so fly to California, that's like three thousand miles, right,
Speaker 3: I'm like, I mean distance wise, yes, but it's also
Speaker 3: it's gonna cost you like twenty thousand miles.
Speaker 2: On a card.
Speaker 3: So with a travel card, you can and earn these
Speaker 3: points and miles through your spending and then apply them
Speaker 3: toward things like flights, hotels, rental cars, even travel experiences
Speaker 3: like tours and stuff like that. So if you have
Speaker 3: a trip in mind over the next year or so,
Speaker 3: you can use your day to day spending to earn
Speaker 3: back a discount on eventual travel, which is very cool,
Speaker 3: which is how I've seen the world in a lot
Speaker 3: of ways.
Speaker 2: Same. I saved up points for a couple two years
Speaker 2: and I went to Thailand and southat Asia for a
Speaker 2: couple of weeks and it was amazing, and yeah, I
Speaker 2: didn't pay for any of the flights.
Speaker 3: Yeah, it's great. I went to like Australia and New
Speaker 3: Zealand and then later to Japan, all in one calendar year,
Speaker 3: and the flights were free, but yeah, it's been very
Speaker 3: nice to have that stockpile. I almost think of my
Speaker 3: travel points from credit cards as my travel savings account. Yeah,
Speaker 3: and so I know what I have to spend on
Speaker 3: this airline or that airline, and it helps me book
Speaker 3: travel and it's something that brings me a lot of
Speaker 3: joy because I really love traveling. So basically, that's how
Speaker 3: you can use credit cards for good for yourself.
Speaker 2: Are there any other ways that you can think of
Speaker 2: to get the most value out of your credit card?
Speaker 3: Yeah, So some credit cards earn the same amount of
Speaker 3: cash back or points no matter where you use them.
Speaker 3: You might see cards that earn one or two percent
Speaker 3: cash back everywhere, or one to two points per dollar
Speaker 3: spent everywhere. But if you're willing to carry more than
Speaker 3: one card and let things get a little bit more
Speaker 3: complicated administratively for yourself, some cards will earn more on
Speaker 3: certain kinds of spending. So you might have a card
Speaker 3: that earns more at grocery stores or at restaurants or
Speaker 3: on gas or if you let's say you carry a
Speaker 3: card for a certain airline, you earn the most points
Speaker 3: when you buy tickets on that airline with that credit card,
Speaker 3: and so that's where you can earn even more. So,
Speaker 3: like let's say you carry three cards. You've got the
Speaker 3: card that earns you know, five or six percent at
Speaker 3: the grocery store, another card that earns you know, three
Speaker 3: or four percent at restaurants, and a card that earns
Speaker 3: two percent on everything else. If food is your biggest
Speaker 3: budget item besides housing, then use the grocery card at
Speaker 3: the grocery store, the restaurant card at restaurants and everything else,
Speaker 3: card on everything else, And that way you're earning at
Speaker 3: least two percent back, but at most six percent back
Speaker 3: on some of the purchases you make most often.
Speaker 2: Are there other situations in where it might be beneficial
Speaker 2: to have multiple credit cards.
Speaker 3: So another thing you can get with rewards cards. You
Speaker 3: might hear them called sign up bonuses, welcome bonuses, welcome offers,
Speaker 3: things like that. In the first year of carrying rewards
Speaker 3: credit cards, if you hit a certain spending minimum in
Speaker 3: the first three to six months. So a common one
Speaker 3: is spend three thousand dollars in the first three months,
Speaker 3: and you'll get anywhere from like twenty five thousand to
Speaker 3: seventy five thousand points in addition to the points that
Speaker 3: you aren't on your spending. That gives you a lot
Speaker 3: of value on a card in the first year you
Speaker 3: carry it. And if you carry multiple cards, you're earning
Speaker 3: these multiple sign up bonuses. And this is how you
Speaker 3: build up what I call the travel savings account. Is
Speaker 3: you might have an airline card, a more general travel
Speaker 3: rewards card, and some banks issue multiple cards that all
Speaker 3: feed into the same rewards system. You see this with
Speaker 3: American Express, with Chase, So you can carry multiple cards
Speaker 3: from the same bank and then combine all those points
Speaker 3: into one rewards account, one pool of points, and then
Speaker 3: you have this big pool of points to spend on yourself,
Speaker 3: to spend on travel, or to spend on reimbursing charges
Speaker 3: you made on your credit card.
Speaker 2: Huge. That's huge, Sarah. I wanted to thank you so
Speaker 2: much for taking the time to chat with us today
Speaker 2: and also wanted to ask you if you have any
Speaker 2: final words of wisdom and where our listeners can find
Speaker 2: you and find nerd Wallet.
Speaker 3: I will leave you with this. If you have credit
Speaker 3: card debt and you're paying interest on it, ignore rewards
Speaker 3: cards for now. Don't do it because the amount of
Speaker 3: interest that you're paying is far offsetting the value of
Speaker 3: any rewards you'll earn. So number one thing, focus on
Speaker 3: pay down that debt and then when you're debt free
Speaker 3: at some point in the future. I hope it's soon,
Speaker 3: because being debt free feels amazing. Then you can turn
Speaker 3: your focus onto rewards points and cash back and miles
Speaker 3: and all that fun stuff. But until you get to
Speaker 3: that point, pay off your debt. Trust me, like that
Speaker 3: will serve you so well in life. So that's my
Speaker 3: number one tip because so many people are like, well,
Speaker 3: I'm gonna like going into debt for this, but I
Speaker 3: really want to get this sign up bonus and I'm like,
Speaker 3: h sign up bonus is irrelevant. Focus on interest rate,
Speaker 3: Focus on how much you can put towards your debt
Speaker 3: every month. Focus on what's going on in your budgets.
Speaker 3: You can apply as much money as you can, be
Speaker 3: as aggressive as you can, and get out of debt
Speaker 3: as quickly as you can. So that's my big nugget
Speaker 3: of wisdom.
Speaker 2: Huge.
Speaker 3: But you can find me on nerdwal dot com. You
Speaker 3: can also find me on nerd walle It's a smart
Speaker 3: money podcast which you can get wherever you get podcasts.
Speaker 3: And we hope to have you as a listener and
Speaker 3: a reader of our work. If you have not heard
Speaker 3: of us before.
Speaker 2: You heard the Woman the Smart Money podcast is fantastic follows.
Speaker 2: Subscribe if you know it is good for you and
Speaker 2: Sarah out there. Thank you so much for spending time
Speaker 2: with us today.
Speaker 3: Thank you for having me.
Speaker 1: Like many things in life, credit cards come with both
Speaker 1: risks and rewards, but at the end of the day,
Speaker 1: they are an important part of building a credit history,
Speaker 1: which can help you buy your first car, home, and
Speaker 1: even set you up for starting your own business. So
Speaker 1: here are some of the more important takeaways that I
Speaker 1: learned from mass conversation with Sarah. Credit cards are not
Speaker 1: linked to checking accounts, which make them much safer to
Speaker 1: shop with. While a fraudulent charge on your debit card
Speaker 1: is taken directly out of your bank account, a fraudulent
Speaker 1: charge on your credit card is just added to your bill,
Speaker 1: keeping your cash safe while you file acclaim. Pay attention
Speaker 1: to your spending habits, and choose a credit card that
Speaker 1: will give you the most reward bang for your buck,
Speaker 1: be it cash back or travel points. Racking up enough
Speaker 1: cash or points can be thought of as a little
Speaker 1: rewards savings account to be used however you see fit
Speaker 1: and finally, think twice before you cancel your card and
Speaker 1: make sure it's necessary. It may have more of an
Speaker 1: impact on your credit score than you think. And remember
Speaker 1: you can always ask your card provider about downgrading your
Speaker 1: account to another card as an alternative option. That's all
Speaker 1: for this episode. Be sure to join us again in
Speaker 1: two weeks as we continue this journey to being more
Speaker 1: responsible adults and healthier humans. Matt, what's our next stop
Speaker 1: on the World of grown Up Stuff?
Speaker 2: Next up, we are learning about finding an apartment, how
Speaker 2: to look for one, negotiating your lease, and what you
Speaker 2: should look for when you're checking out potential places in person.
Speaker 1: Oh, well, that's easy. It's water pressure. I can't move
Speaker 1: into an apartment with bad water pressure. It's just a
Speaker 1: it's a deal breaker.
Speaker 2: It's one of those things you don't think about, but
Speaker 2: when you're in the shower, you gotta have that pressure
Speaker 2: for sure.
Speaker 1: And flushlows toilets.
Speaker 2: Make sure that work.
Speaker 1: And remember you might not be graded in life, but
Speaker 1: it never hurts to do your homework.
Speaker 2: We'll get to it all next time on grown Up Stuff,
Speaker 2: How to Adult.
Speaker 1: This is a production from Ruby Studios at Iheartmatia.
Speaker 2: Our executive producers are Malli Soshia and Matt Stillo.
Speaker 1: This episode was engineered by Matt.
Speaker 2: Stillo and written by Molly Sosia. Special thanks to the
Speaker 2: Ruby team, including Eden fixelm Rachel Swan, Krasnov, Amber Smith,
Speaker 2: nikiath Swinton, Sierra Kaiser, Sierra Spreen, and Andy Kelly.
Speaker 1: The views, information, and opinions expressed during this podcast are
Speaker 1: solely those of the individuals participating in the podcast and
Speaker 1: do not represent those of iHeartMedia It's affiliates or employees.
Speaker 1: This podcast does not constitute financial, legal, or other professional
Speaker 1: advice or services. Material contained in the podcast is for
Speaker 1: general information purposes, only available at the time of publication,
Speaker 1: and no assurance is given that the information is comprehensive
Speaker 1: or individually applicable. Listeners are encouraged to seek independent financial
Speaker 1: and legal advice from reputable professionals concerning all matters discussed
Speaker 1: here in