Why does your credit score matter? Simply, it can help create opportunities.
We can sit around complaining about how our jobs should pay us more for our entire lives. The odds are nothing will change, so we must take steps to help ourselves. Also, many of us work at small businesses where our employer cannot afford to pay us more.
Please understand I’m not talking about those mega corporations that are the subject of every political campaign. Sure, Mr. President, go ahead and attack Amazon, so you can help the “little guy.” I know many people who would love that Amazon warehouse job! We must never forget that America is so much more than 5 huge corporations and 10 giant cities. This blog is dedicated to the rest of us!
I’m talking about the small, family owned restaurants and hardware stores that we all have in our neighborhood. These small businesses are the job providers and the real life blood of our communities. Let’s say a restaurant makes $100,000 a year in revenue. They pay their 2 employees $25,000 a year. Their loan payments and other expenses total $30,000 a year, so their profit is only $20,000. Their employees are technically making more than the owner without all of the stresses that come with owning a business. Many small business owners have other jobs to give themselves extra resources.
Yes, this can absolutely be the situation in small towns across America. Understanding this should change the perspective of any employee who feels they deserve more money. This is not an argument for or against increasing minimum wages, but it is an explanation as to why in some cases the extra money just is not there.
What can we do? We can work on raising our credit score!
The easiest way I’ve found to build credit is with a credit card. I’m going to use my own situation as an example because technically, according to the government, I live in poverty. In 2021, a family of four making a household income of $26,500 is in poverty according to Medicaid. I must stay within these limits to maintain my health coverage as I try to build my way off of the system. My point is that yes, you can still do financial planning even though you have nothing!
I get so tired of hearing rich people and financial gurus tell their followers never to use credit cards. They may walk back those comments if they were actually called out on them. They may even agree that what I’m telling you is necessary. Unfortunately, you never hear the whole story on the quick video snippets we find on social media. It’s easy for a billionaire to say he always uses a debit card instead of a credit card. Heck, I wouldn’t either if I had so much money that I never had to worry about it running out. Or if I could get any bank to give me a loan just by saying my name.
And don’t even get me started on those “experts” telling us to cash our paychecks and put all of it in different envelopes for our budgeting purposes. We may as well put a giant sign on our homes that says:
“Hello robbers we recently got paid and put thousands of dollars in envelopes waiting for you to steal them!”
Remember, the whole point of putting your money in a bank is that it can be returned if stolen. Last I checked the FDIC doesn’t cover envelopes.
I say this in jest to a point because I know these programs have helped many people, but I cringe every time I hear these “experts” tell someone they’re stupid when they call in the radio shows for help. The caller already knows they messed up, that’s why they’re asking for help! When someone spills their drink, they need a napkin, not a lecture. My job as a financial planner is to be your napkin. I want to help you get from where you are to where you want to be.
Working on your credit score can save you money while buying you time.
The reality is that most of us live month to month or even week to week. Our money runs out, so we need some time to refill our accounts. Credit cards give you this time! Yes, credit cards charge interest, but let’s do the math.
We’ll say you have a bill for $100, but you only have $50 in your account. If you use a debit card, you’ll have a nonsufficient funds fee of about $35 charged from your bank. Sure, you may have overdraft protection that goes into your savings, but do you really have savings if you’re struggling month to month?
Now if you used your credit card, you’ll pay the $50 you have and leave a $50 balance to be paid on the next statement. Even a card charging 25% interest would only cost you about $3 on the next statement. That’s $32 LESS than the debit card would cost you. By the way, my fee for this type of planning is $25 a month, so that one tweak would allow you to pay my bill while building your credit!
Your credit score shows others that you have self-control.
Let’s get back to my situation. I signed up for my first credit card in college. It was at one of those kiosks that would give you a free t-shirt or some other gift for signing up. I’m not sure if they even do this anymore considering how everything is done online now. It was what I like to call a Starter Card as it had a small limit (around $500) and was unsecured.
A secured card means you have the money sitting in the bank to pay the bill just in case you skipped town before paying your bill. That might be an option for someone with terrible credit, but right now we’re focusing on those with no credit. A starter card with a low limit should be fine for someone with no credit.
No, there isn’t much you can buy when your limit is $500, but you can still use it. You can’t pay your rent, but you can put your cell phone bill and all of your streaming subscriptions on it. Then you pay the balance off each month while building your credit history. Eventually, as you become less risky to the credit card company, they should raise your limit. As that grows, you can make larger purchases and continue building your credit history, which helps your score.
As the credit limit rises, so must your discipline. This is where the financial gurus are correct because a credit card can be dangerous when not used correctly. However, I think it’s pretty insulting that they just assume the entire human race has no self-control.
Take preparing food for an example. Have you ever thought about the dangers of cooking? One mistake and your house can burn down. Don’t wear oven mitts and you’ll seriously injure your hands. Zone out for a second while cutting vegetables and you could lose a finger! Even when facing all of these risks, we still go into the kitchen and cook every day.
If we can handle the responsibility of feeding our family and keeping them alive, then shouldn’t we be able to handle a credit card? It really isn’t that scary. We must stop believing the myths and start believing in ourselves. I believe in you and I’ll be glad to hold you accountable on your financial journey.
Why your credit score is so important.
Yes, I believe credit is a major part of your financial plan. Edmund Burke said,
“Nobody made a greater mistake than he who did nothing because he could only do a little.”
Again, I have nothing. I can’t save up resources for future needs as easily as anyone else because I cannot afford to lose my health coverage. However, I do have a pretty darn good credit score. Building credit is one of those small things we can do as we plan for a better future.
Good credit can save you thousands of dollars in interest on mortgages and other loans. Do you want to buy a new car? You might want to build credit! Do you think these “financial gurus” run to their mom to cosign any loans they need? By keeping you away from building your credit, that’s basically what they’re asking you to do.
Good credit can also lead to better jobs. I can’t speak for every employer, but where I live the only jobs that pay by the week are jobs that expect their employees to leave after a short period of time. These jobs also have no added benefits and little room for promotion, but you are gaining valuable experience for your future career.
After we qualify for full time jobs with benefits, we must remember that they normally pay once or twice a month. That’s a long time to wait when you don’t have any money in your account. A credit card with a decent limit (because you have a good credit score) can help you survive between pay periods. That cushion gives you the courage to step away from the hourly wage job and into a new challenge. Furthermore, employers may check your credit before hiring you just to be certain you are reliable. I can almost guarantee that will happen if you’re pursuing a career in finance.
If you don’t have the education required for your desired career, then a high credit score could help you receive a lower interest rate on a student loan. Sure, free education for all would be great, but you can’t waste your life waiting for that to become a reality. A student loan may be the greatest investment you ever make. Having a good credit score could make chasing your dream a little more affordable.
Your credit score is a step in a long road.
I still have a long way to go as I pursue my goals, but I truly believe I would not be as far as I am today without understanding how to manage a credit card. Like any other tool, they can be dangerous when not used the right way, but when used correctly, they can be a great foundation for the start of your financial plan. We should stop being afraid of these tools and start embracing the opportunities they can help create.
You don’t have to start this journey alone. I’ll be glad help you along the way. Email me.