5 - I want my credit and I want it now
This is the third post in the fundamentals series (following on from posts #3 and #4), made for you to smash through the bs and confusing YouTube/Instagram/Tik Tok posts that don’t make it clear where to start out. Ofc there are plenty of good ones out there too which I’d encourage you to check out - hit me up if you want a few ;) This post is all about credit cards, what they are, why they exist and how they are actually really ease to finesse.
The Golden Rule
Historically because of all the bad press with credit card debt, credit cards have a bad rep so you may be scared to get one because you may not be sure how best to use it. But its fully within your control as to how bad or good it actually is. Little and often is the approach, when starting out the golden rule is never use it on anything you can’t already pay for on your debit card and watch your score go up.
Talk Credit to Me
So, what’s a credit card finance boy?
A piece of plastic that allows you to spend the bank’s money not yours, a v important thing to remember.
Why do I want it?
Use it to improve your credit score my g.
Wait what’s a credit score, like I know but I also don’t…?
Its a number that tells the bank if you are trustworthy. If you take money from them, are you actually going to pay it back in full and quickly or be a wasteman and take ages getting their money back to em? Every time you use the card and pay back the money you took within good time (i.e. at the end of the month), the score goes up.
Cool cool, I’m not a wasteman, why do I want a good credit score, tell me what I do get out of it?
You could potentially save thousands of pounds! Specifically when it comes to getting a house, the interest rate on your mortgage is influenced by your credit score. If its good they’ll give you a mortgage with a lower interest rate, if the score is bad they’ll slap a bigger rate on it. This could only be a difference of a small % but we are talking about repaying loans that are tens or hundreds of thousands. If you have a £100,000 mortgage to repay, having to pay 1% more because of bad credit is another £10,000 you have to pay back by the end. Getting a refund is also easier! For things like holidays if say, the airline goes out of business or you contract covid19, you are covered under section 75 which means most purchases on credit cards from £100 - £30,000 are covered (for more benefits click here).
Say no more, how do I use the card to make sure I get a good score?
Every month, make one or two payments with your card. Nothing big, £30 here and £20 there is enough when starting out, all you need to show is you can borrow money and then pay it back on time and in full. Since the bank is the one giving you the money, they aren’t going to give you access to mad stacks just yet, at first expect a limit of a few hundred quid. Its your first card so they don’t know how good you are for it, once you show you can pay back what you take, that limit can be increased about every 6 months pretty quickly into the thousands. It takes time to build up your score, over a few years to get a really good one, patience is key.
So I should use up all the credit on my card to show I can handle lots of money?
Nope, you actually only want to use roughly 30% of the credit given to you. If you keep nearly maxing out your card the bank will think you rely a lot on your credit card to actually pay for things regardless of if you pay it all back at the end of the month. The opposite is also true, barely using the card doesn’t provide enough evidence to the bank that you can pay your debts. You got to goldy locks this shit, not too little, not too much, around 30% is just right.
Banks are out here to make money, not help me out, why do this?
You’re right, If you don’t pay back the credit you spent, the bank will add interest at the end of the month. E.g. if you spent £100 and interest on your card was 17%, then next month you have to pay £117 to clear the debt, not £100. Banks make faaaat stacks from people not repaying in time (in 2021 UK households owed about £57.9B in credit card debt). They count on enough people failing to pay back in time to cover the people who do. Failing to make payments brings down your score (as well as a few other things like a company checking your score or getting new credit cards quite close to each other, anything that the bank deems suss - is someone checking your score because you did something wrong? Are you getting new cards because you are maxing the ones you already have?). The only way to build it back up is to stay good on repaying in full every month - remember the golden rule, only ever what you can already pay back.
Always pay in full otherwise that’s how they get you I got you. I’ve heard there’s pretty sick rewards you can get with credit cards though?
The better the credit score, the more rewards and benefits you get because people trust you. You can get cards that pay you back a certain % of the money you spent on the card that year or will reward you for using the card with points to use on flights or hotels. They can be a great way to pay towards a big trip you are planning for the future but don’t bother looking at these till you have a solid credit score first, these cards usually come with other restrictions and higher interest rates making it more painful if you forget / miss the payment at the end of the month. The most basic card with the least restrictions (like not forcing you to spend a certain amount each month or pay a fee every year to have it) is the best one to go for at the beginning.
Final Words
Ngl that was kinda long, summarise for me?
Credit cards improve your credit score over time
Credit scores are used by banks and businesses to see how trustworthy you are with other people’s money
Improving your credit score reduces interest rates for things like mortgages which could save you thousands of pounds
You only need to use about 30% of your credit limit per month, just on small purchases you already know you can cover, never more than you can already afford - literally do that and you’ll always be fine
Your credit card takes hits when you miss payments, when companies check your score or applying for several new cards in quick succession. The only way to bring the score back up is to use it for small easily repayable purchases.
Once your credit score is absolute fire (think maybe a year or two paying back in full at the end of the month consistently), you get access to even bigger and better benefits like cash back every year or points for flights and hotels.
Thank you for reading this post :) let me know what you think in the comments below, if you have any thoughts on what you’ve read or reach out if you want to discuss it further, peace out!
