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#CreditCards #CreditCardsForBeginners #CreditCardsExplainedCredit card, credit cards, credit cards for beginners, credit cards explained, credit cards 101, credit, credit utilization, payment history, credit score, how to increase credit score, how to build credit score, daniel braun
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00:00So if you're a beginner with credit cards, it can be exciting with all the possibilities to get sign-up bonuses, cashback, points, and a bunch of other cool things.
00:07But the truth is that as a credit card beginner, that's also the most dangerous time for you because there's plenty of ways that you can easily slip up and make some common mistakes that have some pretty bad consequences.
00:17These consequences include things like getting into high-interest credit card debt, big drops in your credit score, and some other general struggles with money that many people could have avoided.
00:25That's why in this video, we're going to go over the five credit card lessons that beginners need to learn because these five key lessons can help anyone to get the positives out of credit card usage without any of those bad things that some of you might be afraid of.
00:37So as always, let's not waste any time here and just get right into it.
00:40Make sure to go ahead and tap the like button down below and subscribe as well to get this video pushed out to more people.
00:45But this first lesson that I want to talk about here is easily the top thing that many people skip over, even though it's so important.
00:51And that lesson is to have an emergency fund in place when using credit cards.
00:55Now I know this might sound boring, but hear me out because the reason for having an emergency fund is simple.
01:00For the most part, we all have a good idea of what we expect to spend money on each month when it comes to expenses like rent, groceries, gas, and other typical things like that.
01:08But there's also many other unexpected expenses in life that are guaranteed to pop up that we overlook in our budgets.
01:14I know that for me in the past, I've had to randomly pay several hundred dollars to get new tires for my car, or maybe a couple hundred dollars to take my cat to the vet.
01:21Just things like that that cost extra money that I didn't plan to spend.
01:24So because of those unexpected expenses, I've made it a priority over the past few years to build up an emergency fund of six months worth of estimated expenses in a savings account.
01:34That way I'm prepared.
01:35If a random expense pops up, I can pay with my credit card to get points, but then I pay off that balance immediately because I have the flexibility to do that.
01:42Now, unfortunately, that's not what everyone does, because for most people that don't have those extra cash savings set aside, they still might use a credit card to pay for those unexpected expenses.
01:50However, they might only be relying on future cash flows to pay off that credit card balance.
01:55Now, under normal conditions, that might work if you have a rough estimate of what your income minus your expenses will be each month.
02:01But honestly, we all should know that life isn't always perfect, and things don't usually go according to plan.
02:06I mean, what if several expenses start adding up, or you have one huge expense that costs you several thousand dollars, or what if your income goes away or decreases for some reason?
02:15When that happens, you'll still be left with a credit card balance that you have to pay back pretty soon.
02:19But with those cash flow issues, that could lead you to make the mistake of paying only the minimum payment and carrying a balance, which we'll get into later in this video.
02:27So my point that I'm trying to make here with this first lesson is that life is unpredictable, and the best defense against that unpredictability is by having some sort of a cash safety net to fall back on.
02:36And if you don't think that something like this could happen to you, just think about this.
02:40Millions of people in the U.S. collectively owe almost one trillion dollars in credit card debt, right?
02:44I guarantee you that a large percentage of those people in credit card debt were just like you and me when they signed up for those first credit cards, where they didn't have the intention of carrying a balance ever.
02:54But still, this debt grows and grows because the biggest problem with credit card debt isn't the function of how it works.
03:00I mean, most of us do know that credit card debt is bad.
03:02The biggest problem with credit card debt mostly has to do with our own behaviors around how we handle our money and manage risk based on our own lives and our own experiences.
03:10So play it safe and prepare for the worst because you don't want to ever have to turn to high interest credit card debt financing as your only option to pay for unexpected expenses.
03:19Now, next for lesson number two, this is directly related to what we just talked about, but it's more of a mindset shift for people.
03:26And that lesson is to treat your credit card like a debit card.
03:28So you may have heard me or others on YouTube say something like this before, but it really is the right way to think about credit cards.
03:35Too many times I'll see people get a new credit card and they'll see that they have this new credit limit of maybe $5,000 over here.
03:40So they say to themselves, that's $5,000 of the bank's money that I can use for whatever, and then I'll just worry about paying it back later.
03:46But the mindset shift that I had early on was to almost forget about that credit limit for a minute and pretend that whatever credit card I was holding said debit on the front instead.
03:55Now, normally with an actual debit card, that card is linked to your bank account so that anytime you swipe it to make a purchase, the money is simply subtracted from your bank account to pay.
04:04That means that without considering overdrafts, in order to use a debit card, you actually need to already have that money in your bank account so the transaction can go through.
04:11Now, with a credit card, we're involving a third party with the credit card issuer.
04:16And like I said, a lot of people view this like they're using someone else's money with that credit limit.
04:20But I've never really looked at it like this.
04:22I've only looked at my credit card as basically a substitute for my debit card by making sure that I've already got plenty of cash set aside in my bank account before I use my credit card for anything.
04:32And this goes back to the whole emergency fund thing.
04:34I think it's a good idea to have some money set aside in a savings account for emergencies, along with some money set aside in a checking account to pay certain bills and to pay off credit card balances.
04:43So because I keep several thousand dollars in cash in my bank accounts that I can easily access, it doesn't matter if I have a $100 trip to the grocery store or I need to make an $800 tire replacement.
04:54I know that I can use my credit card to pay for those things because I can pay off that credit card balance whenever I want.
04:59And because of that, I get a few benefits by simply substituting my debit card for my credit card as my preferred method of payment.
05:05First, I earn points or cash back that I can put towards my travel expenses.
05:09That way I travel almost completely for free.
05:11I also have increased my credit score pretty quickly so that now it sits in the high 700s because I've learned the importance of payment history and credit utilization.
05:19Those are two things that I'm going to get into in just a minute as well, because in this video, those things are so important for beginners, especially to understand.
05:26And additionally, I don't pay any interest from credit cards because I pay off my cards in full each month, which leads me to lesson number three.
05:33And that is actually to ignore the APR and minimum payment amount on your credit card statement and just pay off your balances in full every month.
05:40Now, I'm not saying that your APR is not important because you should see that number and see that it's anywhere from 15 to 25 percent.
05:46And that APR should scare you.
05:48If you do carry a balance, you want the lowest APR possible.
05:51But as a beginner, we're trying to avoid ever carrying a balance in the first place.
05:55So the reason we actually want to ignore that APR is because that number is irrelevant when you pay your credit cards full statement balance each month by the payment due date.
06:03When you pay your statement balance in full, you won't be charged any interest.
06:07So the APR doesn't matter.
06:08It could be 1,000 percent for my credit cards or it could be 15 percent.
06:12It doesn't affect me because over the past six or seven years of using credit cards, I've paid off every single one of them on time and in full.
06:18Now, I have a full video here on my channel simply explaining the whole process for how and when to pay off your credit card bill, which I'm going to link to down below.
06:25But here's just a few things to know.
06:26First, you're going to have a billing cycle with an opening date and a closing date.
06:30And on that closing date, whatever your balance is on that day is going to be called your statement balance.
06:35Now, along with that statement balance, you're also going to see a minimum payment due amount.
06:39And that is likely going to be significantly lower than your statement balance.
06:42You'll also see a payment due date, which is typically at least 21 days after that closing date for this statement where you have to pay at least the minimum payment.
06:50But like I said before, we want to ignore that minimum payment amount because paying the minimum is what the credit card companies want you to do.
06:56That way, the remaining unpaid statement balance can carry over to the next credit card statement and they can start charging you interest at those high interest rates.
07:04It's a common myth that carrying a balance helps your credit score, but that's just not true at all.
07:08We want to be paying the full statement balance instead by that payment due date.
07:11All right, moving on to credit card lesson number four, which is about another thing that easily gets overlooked by beginners because they're not always aware of it.
07:19And that lesson is to keep credit utilization low.
07:21So payment history and credit utilization are the two most important factors affecting your credit score.
07:26And credit utilization basically focuses on two things, your credit card balance and your credit card's credit limit.
07:31It's calculated as a percentage for each individual credit cards as well as across all cards combined.
07:36The calculation for this is pretty simple to understand.
07:39You just take your credit card's balance and then divide it by your credit card limit to see how much of your available credit you're utilizing as a percentage.
07:45Now, this calculation is typically done on or right around your statement closing date each month when your statement balance gets reported to the credit bureaus.
07:52So, for example, if my credit card statement closed on May 15th and my balance on that date was $500 and my credit limit was $1,000,
08:00then my credit utilization would be reported as 50%, which is actually too high and likely going to hurt my credit score.
08:06Now, a general rule of thumb is to keep this percentage below 30%, but ideally below 10% and the lower the percentage, the better.
08:13So for me, I don't end up using every single one of my active credit cards every month.
08:17But for the ones that I do end up using, I try to keep my credit utilization maybe around 1% to 2%.
08:22I'm able to intentionally manage this and keep this utilization percentage so low because, like I said,
08:28that calculation is done and reported to the credit bureaus on the statement closing date each month.
08:32So I know that if I actually prepay some of my card's balance before then, I can get a lower utilization reported.
08:38If we go back to my example, if my statement closing date on my card was May 15th and I had a $500 balance with that $1,000 limit,
08:46I would want to prepay so that my utilization wouldn't be reported as too high.
08:50So what I would do is maybe a few days before that, on May 10th, I would prepay an amount that would decrease my balance.
08:55So let's say that on May 10th, I prepaid $490.
08:58That would bring my balance down to just $10.
09:01And when May 15th rolls around just a few days later and my statement closes,
09:04that $10 balance would get reported, not $500.
09:07So as far as the credit bureaus know from the information that they receive on my closing date,
09:12my $10 statement balance on a $1,000 limit is only a 1% credit utilization.
09:17And that looks like I'm being way more responsible with the credit that I've been given.
09:20Now, I usually don't get this exact with prepaying my credit cards because now at this stage in my credit journey,
09:26my credit limits are much higher than just $1,000,
09:28which gives me a lot more room to spend without having to worry that much about what my utilization is.
09:33But as a beginner, the challenge is that you usually get started with a low credit limit,
09:37whether that's a limit on a secured or unsecured card.
09:40So maybe you only have a secured credit card as your first card right now,
09:44and you had to put down a $250 deposit to get a $250 credit limit to start off.
09:49That doesn't give you much room for spending a lot when thinking about that card's credit utilization.
09:53So the best way to use a secured card or any card with a low credit limit in a scenario like this
09:58would be to either use that only for a small purchase of a few dollars each month
10:02and then pay it off after the statement closes but before the payment due date.
10:06Or if you spend maybe $100 on something,
10:08you could make a $95 payment to partially pay down that balance before the statement closing date.
10:13That way, a much smaller credit utilization gets reported,
10:16which looks good for your credit score early on as a beginner.
10:19So with credit utilization, just be aware of how that's calculated,
10:22what your balance is, what your credit limit is,
10:24and what your statement closing date will be
10:26because then you can manage what utilization gets reported to boost your credit score.
10:30All right, now finally, for the fifth lesson in this video,
10:33we're going to move over to payment history,
10:35which is that other factor of your credit score that's so important.
10:38And that lesson is to never miss a credit card payment.
10:40Now, actually, payment history is slightly more important for your credit score than credit utilization
10:45since payment history makes up about 35% of your FICO score
10:49and utilization makes up about 30%.
10:51Basically, payment history is important because future lenders looking at your credit report
10:55want to make sure that you have a strong history of paying back things that you owe.
10:59And credit utilization is important because future lenders want to make sure
11:02that you're not being too risky and using too much of the credit that you've been given.
11:06Now, luckily, payment history is more straightforward to understand,
11:09but there's still some hidden things to know
11:10that can help you to stay ahead of your credit cards as a beginner.
11:13So back to your credit card statement,
11:15I explained earlier in this video that there's going to be a payment due date
11:18that's typically 21 days after your statement closing date.
11:21The simple thing that you have to do to positively impact your credit score
11:24with payment history is just remember to pay at least the minimum payment
11:28by the payment due date for it to be considered on time.
11:31Now, again, the minimum payment is the bare minimum,
11:33so I do not recommend paying only that amount.
11:36You should pay the full statement balance by that payment due date
11:38to avoid carrying a balance and paying interest.
11:41But when you have a perfect 100% record of on-time payments,
11:44that's the best outcome for payment history on that portion of your credit score.
11:48Now, with each payment that you actually miss,
11:50you'll start to see negative impacts to your score.
11:52And even just a couple of late payments can be a bad thing
11:55since those are going to stay on your credit report for about seven years.
11:58Missed payment is also probably going to get you hit
12:00with a late fee of maybe $30 to $40.
12:03But if you realize that you missed that payment
12:05within about 30 days of your payment due date,
12:07the credit card issuer is likely not going to report that
12:10to the credit bureaus just yet to hurt your credit score.
12:12So just make sure to pay that payment as soon as possible,
12:15and you should be fine.
12:16Also, if you want to make sure that missing a credit card payment
12:18never happens so that your payment history can remain perfect,
12:21there's a few things that I like to recommend that people do.
12:24First, you can set up automatic payments on your credit card account
12:26so that your statement balance gets automatically paid
12:29on or before the payment due date each month.
12:31Now, there are two small downsides to this,
12:33with number one being that if you don't have the money
12:35linked in your bank account already,
12:37then the automatic payment is either going to get rejected
12:39or you could overdraft on your bank account
12:42and have to pay some fees from that.
12:43So if you do set up payments like this,
12:44then make sure that you always have enough cash
12:47in your bank account.
12:47But downside number two is that automatic payments
12:49could lead you to having less oversight
12:52over your credit card account,
12:53which could cause you to either overspend on your credit cards
12:55or it could cause you to miss charges
12:57that aren't supposed to be there.
12:59That's why personally, I just like to set reminders on my phone
13:01to check my credit card accounts on a regular basis
13:04a few times a month.
13:05That way I make sure that I'm on top of everything.
13:07Automatic payments can be a good backup plan,
13:09but in my opinion,
13:10having visibility over your accounts is also very important.
13:13So just find a system that works for you.
13:15That way you don't miss any payments.
13:17And once again,
13:18pay off those statement balances on time
13:20and in full each month.
13:21I know that keeps saying that,
13:22but it is something to always remember.
13:24Now, since this video was really focused
13:26on credit cards for beginners,
13:27next, you'll also want to check out this video over here
13:30on common credit card mistakes to avoid,
13:32or this one over here that I mentioned earlier
13:33about when to pay your credit card bill.
13:35But as always, thank you so much for watching.
13:37I hope you have a great day
13:38and I'll see you in the next one.
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