- When I hear the word “credit,”
I think “shopping.”
This glorious plastic card
that allows me to get what I want when I want it.
It's amazing—
an outfit here, an outfit there.
I get to tap my card,
and think about the money later.
But if I'm not careful,
I can get into some serious debt.
Let's see what people have to say
about their finances:
Do you have a credit card?
- I have just a debit card right now.
I don't trust myself
with a credit card at the moment.
- What do you know about credit?
Do you understand how it works?
- Actually, not really.
- I don't know much about credit.
Yeah.
- I am clueless on that.
- Do you know why it would be good
to have a good credit score,
like, why it's helpful?
- Yeah! It’s like everything—
so you can, like, get a car,
get like a place to live, like,
be able to purchase things.
- It kinda kills me that, like,
you have to have credit
to, like, survive in this country.
I'm like, “Why can't I just live off my debit card?”
- So, what is credit, and how can you make it work
for you and not against you?
This is your world on money.
What is going on?
So, I did some digging to
find the credentials of credit,
and this is what I found.
Credit is the ability to borrow money
or access goods or services
with the understanding that you'll pay up later.
There's an agreement
between the borrower and the lender.
Having credit enables consumers
to buy goods or assets
without having to pay for them
in cash at the time of purchase.
Believe it or not,
credit was even a thing of the past,
before banks, retailers, and others
extended credit to people.
One of the earliest records of credit
and the concept of lending can be traced
back to ancient Mesopotamia.
Back then, planting a single seed
would yield a grain plant
with hundreds of seeds on harvest days.
So, farmers began to borrow seeds
issued against a later payment.
This was used in a similar manner with animals,
where the repayment was issued
with the birth of a new calf.
Instead of borrowing grains or animals,
today, we can borrow money and pay it back later.
Now, there are many different types of credit,
and I'll mainly be focusing on consumer credit
because it pertains to most people today.
Consumer credit means, for example, credit cards—
and as a good, neutral Libra,
I won't be recommending you to be for
or against credit cards,
we'll just be discussing it because...knowledge.
Well, hello, Joe.
Thank you so much for joining me here today.
- I had to learn all this stuff the hard way,
so I'm super happy to help
everybody learn it in an easier way than I did,
‘cause if I can come back from that, so can you.
- All right,
so since you're a money management expert,
could you tell me about credit?
Do I need it?
- Well, I know about credit
because I messed mine up myself.
And the biggest lesson
that I think we all need to learn
is that credit is a paradox.
We certainly need it to buy things like
a car to get to work, maybe,
or a house for a roof over our head—
but we want to try not to use it
as much as possible.
In essence, credit means
we're trying to use other people's money
instead of our own—
and that can be really, really dangerous.
- Specifically thinking about credit cards,
what are the main ‘do's and don'ts?’
- The basic credit card rule is this:
Do not use the credit card,
if you don't know where the money's
going to come from to pay it.
If you don't pay off your credit card on time,
they're going to charge you
this ginormous interest rate:
often 18, 21, 25% or more.
So, you want to have some systems in place.
I like setting up automatic payments,
so at the very least,
you don't get behind on your payments.
- That makes sense.
Can you define what a ‘credit score’ is
and why is it important?
- A credit score is the way that any company
issuing credits decide whether you are somebody
they should be loaning money to or not.
There's three main factors
that make your credit go up or down:
The first one is paying that bill on time.
If you at least pay the minimum payment,
you're going to be great.
The second is utilization.
If they let you borrow $500,
have you already borrowed all of it,
or have you borrowed very little of it?
If you borrow very little,
they're much more likely to think
that you don't need the money;
making them want to loan you more.
And then the third is
how long you've actually had credit history.
If you've had it for a long time,
that's going to make it go up quickly.
If you haven't had credit very long,
it's going to take longer to build.
- So, should I be using my credit card for everything,
or just small versus big purchases?
- Using your credit card
means using it responsibly,
and a great way to get started with credit
is to use it just for small purchases,
not for big purchases.
If I'm buying big things on my credit card,
it's so easy to get behind on those payments.
But if I'm using it for little things
on a monthly basis,
I'm showing the credit card company
I'm responsible, number one.
And then the second thing that it does is
you're not going to owe
these monster interest rates,
sometimes, to some credit card company;
that's extra money coming out of your pocket
you don't need to spend.
But the third thing is,
and maybe the most important
when you're young,
is that allows you
to build a great credit history
so that you get higher amounts of credit later on
when you might need more.
- That makes sense.
Thank you so much,
that was such a helpful answer.
I am fulfilled with credit wisdom now.
- Woohoo, high five.
- The most important thing about credit
is it's very useful to build a good credit score,
but it's equally important that you pay off
your credit cards in a timely manner.
As much as possible,
it's better to avoid going into any sort of debt
or having to use your credit card
in the first place,
but that simply isn't realistic
for most Gen Zers and millennials.
So, I would encourage less spending on things
you don't really need in the first place.
Put things in your online shopping cart,
but then let it sit
over the next couple days,
and then think if you really need it.
The less money you spend, whether it's yours
or on credit, the better.
Personally, I have a shared credit card with my mom
because my parents do not trust me
to have a good credit score,
but I need to build my own.