Credit makes the financial world turn. It’s what gets you a good or bad interest rate on a loan. It’s what screens you for paying a deposit versus no deposit for utilities. It’s what allows you to get a credit card or not. Or get the credit card that has the best rewards versus a starter credit card. But it’s also something that many people don’t fully understand, so we will work on establishing some basics in this post.
Before we get into more detail, it’s important to keep in mind that there is a difference between “no credit” and “bad credit”. Someone with “no credit” has not had the opportunity to build their credit. Someone with “bad credit” has established poor habits that have decreased their credit scores. The good news is that if you fall into either one of these categories, there are mathematical ways for you to improve your score.
Everyone knows they have a credit score, but I would bet that the only time people know their credit score number is when they are applying for something. And sometimes this is too late in the game to do anything to improve your score, if needed.
Your credit score is not a number that is set in stone. It is a moving target that can be positively impacted by responsible credit habits and negatively impacted by irresponsible credit habits. It’s important to understand that it is also not a “magical” number that someone makes up. You have complete control over whether or not your score is good or bad. Through interactions with thousands of users [on our site RewardStock.com], we have found that there is not a lot of education around what makes up a person’s credit score, so we have highlighted the 5 components of your score below:
We have a great blog post that covers each of these in detail.
Note from the percentages above that simply paying your bills on-time (or early) and establishing and maintaining a low credit utilization impacts 65% of your credit score! This is the reason we keep hitting on being “financially responsible” - because these two categories can make or break your score.
To keep up with your score, we advise everyone to sign up for a credit monitoring service like Credit Karma or go through their credit card company or bank as an alternative. These are free services and they do not impact your credit score by checking them. Keep in mind that these are not 100% accurate scores, but they are representations of what your score is based on their internal algorithms. In addition to keeping up with your score on a routine basis, you should also pull your free credit report on an annual basis. This is a report that dives deep into your credit history and is provided to every US citizen once per year.
Now that you have a clearer understanding of how credit works, let’s talk about credit cards and how you can benefit from them. Credit cards are just a means of transaction once you have the proper mindset. If you view them as “someone else’s money,'' you are going to get yourself in trouble. If you view them as simply a replacement for cash and your debit card, you’re going to come out on top.
From our perspective, everything that can go on credit cards should go on credit cards. Look at it this way: by responsibly spending on the right credit card, you can get paid for your purchases. I like the example of buying a sandwich for lunch. You and a friend go out for lunch and you each get a $10 sandwich. You use your credit card that earns 3x points on dining and your friend uses cash. You're getting 30 points for that purchase, your friend is getting nothing. Who likes to get nothing in return for their spend?
So, what purchases can go on a credit card? Typically, things like gas, groceries, utilities, etc. are all large monthly expenses that can go on credit cards. In some cases, depending on your vendor, things like daycare, car payments, mortgage, HOA fees, etc. can go on credit cards, but may charge a transaction fee. We advise folks never to pay a fee for using their card unless you are getting a higher return than the fee. For example, do not pay a 3.5% transaction fee to earn 2x points on a purchase, but if that 3.5% transaction fee is going to net you a sign up bonus of 50,000 points, then it may be worth it to you.
RewardStock was featured on the most recent season of Shark Tank. Learn more about their $320,000 deal with Mark Cuban.
Author: Jonathan Hayes, CEO & Founder of RewardStock
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Jon Hayes is the Founder and CEO of RewardStock.com, a new reward travel planning and booking site. A first-time entrepreneur, Jon was previously an investment banker on Wall Street, working in the Mergers & Acquisitions group at Citi, where he advised companies across a broad range of industries. Prior to investment banking, Jon graduated from Princeton University with a major in Economics and a certificate in Spanish Language. Jon recently appeared on the popular ABC TV show 'Shark Tank', where he secured an investment from billionaire Mark Cuban.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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