Grab a good snack and get ready to drink from the fire hose of credit card knowledge because
today we're going to make the ultimate credit card crash course and answer all of your credit
card related questions.
What is going on everyone I hope you are all having a fantastic day.
So if used properly credit cards can be an incredibly useful financial tool but there's
a ton of garbage information and confusing terminology online but I promise it is not
that complicated so today we’ll get back to the basics and cover what is a credit card,
how can you safely use a credit card, how do you even get a credit card, the advantages
and disadvantages of this product including the difference between a credit and debit
card figure out what the heck cash back and points and miles are, we'll cover the many
common credit card myths that you probably believe and of course talk about what a credit
score is and why you should bother learning about all of this stuff to begin with.
Let's start with the most basic question of what is a credit card.
Sounds like a stupid question but a credit card is simply a plastic or metal physical
payment method issued to you the card holder by a bank or other financial institution and
this is commonly confused with a debit card or a bank card but let's make it very clear
that these are not the same thing.
A debit card or bank card is tied directly to your bank account so you buy something
for $100 and that money comes directly out of your bank account.
With a credit card, you buy something for $100 and the bank who gave you that credit
card pays for that transaction and you are then expected to pay the bank back.
Now you may be thinking what's the point of that and from the bank's perspective they
get to collect interest on the money you spend and from your perspective you get signup bonuses
and purchase protection and points and miles and all of the great benefits that we're going
to talk about later in this video.
But what you need to do is maximize the advantages like points and cash back while minimizing
the disadvantages which is the interest and fees that you pay.
But how do you win this game against multibillion dollar financial institutions.
Well I guess the simple answer is you don't or we don't and I want to be very clear that
while you can use these products to get some insane benefits and ultimately come out ahead
yourself, someone else is footing that bill and I can assure you that your credit card
company is not just giving away free vacations left and right.
They are making a huge profit on these products in interest and fees and selling your information
so yes I am going to teach you how you can win with these products but let's say the
quiet part out loud and understand that the banks are always going to be laughing all
the way to the bank.
But that doesn't mean that you can't win personally and it all comes down to using these cards
safely and responsibly and this one is really simple and you just have to follow two rules
that I’ll repeat over and over.
Use your credit card as if it is a debit card or cash, and always pay off your card in full
every single month.
There's a lot of other so-called rules and suggestions and myths that you'll hear online
most of which are complete garbage but I can promise you as long as you are treating this
card as if it is cash you’ll only buy things you can truly afford and you pay it off every
single month and better yet just set up autopay so that you never forget then it is borderline
impossible to dig yourself into a hole because you’ll avoid 99% of the interest and fees
that are often associated with these cards.
And the advantage of doing this with a credit card over your regular debit card is you get
to reap all the benefits that the credit card companies offer to draw people in including
cash back and travel benefits and welcome bonuses and all of that stuff.
Now there's a million different strategies that these companies use to incentivize new
users to sign up but the most common is either cash back or points slash miles.
Cashbacks simply means that you will earn a percentage back for every dollar that you
spend and every card is different but as an example if a card gives you 2% cash back then
that means if you spend $100 you will be given $2.00 back.
Now you're certainly not gonna get rich from cash back because spending $100 to earn 2
bucks doesn't sound like a great deal however many of these cards offer 5% cash back or
more in specific spending categories and as long as you are following those two rules
that we talked about earlier, this basically means that you're getting 5% off of those
purchases in addition to the many other purchase protections and benefits that come with using
a credit card over a debit card.
Now where things can start to get really confusing and could be the topic of an entire separate
video is points and miles.
These two terms are used interchangeably but many higher end travel credit cards will offer
you points in place of cash back and you're then able to redeem those points for various
travel expenses like flights and hotels and all kinds of other stuff.
Again that's where things can get really confusing with point multipliers and transfer partners
so unless you are far into the credit card game you don't really want to touch that and
as a beginner I would just stick with cash back credit cards like the discover it card.
Okay so we understand what a credit card is, we've identified the two most important rules
to use these products responsibly, and we have a pretty good understanding of the the
advantages and differences between a credit and debit card are.
That's most of what you need to get started but as soon as you start researching anything
to do with credit cards you're going to run into a lot of garbage information and myths
that I want to dispel right now.
First of all, no you do not have to nor should you carry any balance on your credit card.
I hear this one all the time with people saying that you should always carry a small balance
to make the card provider happy but remember that if you carry a balance you will then
have to pay interest on that balance and which negates all of the benefits that we just talked
about because you might be earning 5% cash back on your credit card but that card provider
is usually charging somewhere between 15 to 25% in interest which will completely negate
any cash back that you could possibly earn.
Follow those rules that we identified earlier and pay off your card in full every single
month.
The second myth I commonly hear is that you always need to have revolving credit on each
account meaning you need to constantly be using these cards otherwise you should just
close them and while there is a sliver of truth to that myth, trust me closing an account
especially in older accounts is a terrible idea because it decreases your total number
of accounts and decreases the average age of your credits which is going to have an
impact on what's called your credit score.
What’s a credit score you may ask.
Well again credit scores can be an entire separate video but one of the biggest advantages
of using a credit card over a debit card is that it helps you build a credit score which
is simply a number between 300 and 850 which in the eyes of a lender represents how you
handle your debt and how responsible of a borrower you are.
And if you don't have a credit card right now you may already have a credit score because
all other types of loans will factor into your credit score and even utility payments
and other financial metrics can impact your credit score so even if you don't have a credit
card right now you might want to go ahead and pull your credit report which you are
legally allowed to do for free three times per year from Experian, TransUnion, and Equifax.
Each of those three companies can give you your credit reports which is not necessarily
the same as a credit score but nowadays most free banks and financial products will allow
you to view your credit score for completely free at any time.
So without bombarding you with too much information all you want to remember is to always make
on time payments which we already established earlier as a core rule of using credit cards
responsibly and secondly you want to keep your utilization low which just means not
using all of the credit that is available to you which as you probably connected ties
back to our second rule of using this card as if it is cash…kind of funny how all of
those things overlap.
And that credit limit is essentially the spending limit that the card provider puts on your
credit card.
So with a debit card or bank card you can obviously spend all of the money that is in
your account so if you have $5000 in your bank account then you could technically spend
$5000 on your debit card.
But with a credit card remember that the bank is actually making the purchase for you and
you then pay the bank back so in order to keep you from spending all of the banks billions
of dollars they give you a credit limit which again is just a spending limit on that card.
Now your credit limit is going to vary depending on a number of variables but usually with
a beginner product you're looking at maybe $500 to a few $1000 most intermediate products
are probably $10,000 and up and then of course you also have charge cards like the American
Express platinum card which technically has no hard credit limit but that's a bit outside
the scope of today's video.
All you need to worry about is if you have a card with say a $1000 limit then you are
able to spend up to $1000 on that card and obviously once you pay off the balance it
goes back to zero and everything restarts.
Okay deep breath I know I just threw a ton of information at you so let's boil this down
into a very simple step by step process.
Assuming you are starting from square one the first thing you'll want to do is go ahead
and get a credit card and I'll save you the trouble, if you're brand new to this stuff
the discover it is the best option hands down.
They're not a sponsor they're not paying me to say that it's just the plain and simple
truth that most people would probably agree with and if you want to learn about the different
cards that discover offers you can check out this video.
Once you get your card you'll then want to use it just as you have been your regular
debit card and that means buying your groceries and paying your regular bills and all of that
stuff.
What healthy credit card use does not look like is learning that your card has a $5000
limit and immediately running to Amazon to spend $5000.
That's not how this works please don't do that you will get yourself into a huge mess.
Once you've used this card for those regular everyday purchases you'll of course want to
make sure that you pay off the card in full every single month.
Most products will let you set up autopay so that this happens automatically but each
month the credit card company is going to send you a statement showing how much money
you spent which is called your balance and on there they'll probably tell you that you
only have to pay back say $20 of your $300 balance for example which is referred to as
your minimum payment but again completely ignore that do not fall for this trap because
if you are just making minimum payments you're going to rack up an insane amount of interest.
If you spent $500.00 then your balance is $500.00 and you better be paying off $500.00
otherwise you should cut up the card because you haven't heard anything I've said throughout
this video.
Once that card is paid off in full your balance resets to zero and after doing that a few
times you'll quickly build up a great credit score learn how to use this product responsibly
and open yourself up to some more advanced credit cards that can give you even better
benefits and rewards.
Most beginner credit cards will have no annual fee so if you're using it responsibly that
means it will literally cost you nothing.
I know this can all be really confusing and yes swiping your debit card is for sure easier
but beyond the many benefits of using credit that we identified in this video, building
that credit score can save you thousands if not 10s of thousands of dollars in interest
because a better credit score means a lower interest rate meaning that “dangerous peicee
of plastic” could save you tens of thousands of dollars if used properly.
Be sure to check out this recent video on the top 15 best credit cards right now or
this video to learn about the Discover It credit cards.
Please use your credit card responsibly and of course take it easy and I'll see you in
the next one!