Since we’re not in a world of just gold and silver, and since most people’s liquid cash has its limitations, to be able to come up fast, credit is key. Imagine relying solely on your cash for education or business ventures or housing. It may not go that far. But having good credit puts you in a position to have access to the capital needed as your foundation to start building wealth.
Your credit score is considered when getting a house, a car, a business loan — basically whenever someone is willing to give you money and wants to know if you’re a worthy borrower.
The drawback to taking loans that you can’t afford to pay back is the obvious vicious cycle of taking one loan to pay off another, and then taking a third loan to pay off the second — a cycle that may never end. But if you’re taking a loan with a set plan, it may get you off the ground, such as an education that will impact the rest of your life, or a business venture that would not have been possible without the needed capital.
One of the easiest ways to build credit is by using a credit card. The more you use it, your credit score improves. Other than the discipline to control spending (which is for another topic), it makes no sense to use a debit card when you can be earning airline miles or cash back on purchases, while increasing your credit score at the same time. And paying interest on the credit cards is not really an issue because you can simply pay off the entire balance every month and not be charged a penny in interest.
So as you improve your credit score, you will be offered credit cards with better rewards. For example, American Express often offers 50,000 Delta Skymiles for signing up, as long as you spend $3,000 within the first three months of opening the account. Again, simply use the credit card instead of your debit card and it should be fairly easy to spend $3,000 in three month by using the card for groceries, gas, and all other essentials. 50,000 Delta Skymiles can easily get you two round trip tickets anywhere in the U.S. (depending on the season).
If you’re not much of a traveler, Capital One is one of the better credit cards for receiving cash back for every dollar spent. And some promotional offers were offering an entire $1,000 of credit after spending $10,000. That’s literally free money. But it’s not offered to everyone. So it’s good to improve your credit score to get the best offers.
And what if you’ve never had a credit card and are constantly getting rejected because you’ve never established credit? Well, you’re not alone. According to a survey, 13% of Americans have no credit history, and 20% of Americans say they are not sure how to start building credit. And the solution is simple: get a secured credit card.
A secured credit card is backed by a cash deposit that you have to make. So this works by you depositing, let’s say $300, into your bank account. Then you receive a credit card with a $300 limit. Then when you spend the $300 within the month via your credit card, you have the cash in your account to easily pay the bill in full. Do this every month for a year, and you’ll see soon how much your credit score will increase. These secured credit cards are offered at Wells Fargo, Bank of America, and many others banks.
Once you establish credit and start using your credit card to increase your credit score, you’ll be surprised at what you’re offered, like 0% APR for a certain period of months. For select customers, for example, Bank of America offers credits with 0% APR for 12 months and sometimes 15 or 18 months. Meaning, you only have to pay the minimum due every month (usually less than $50) and don’t have to pay the entire balance until the end of the promotional offer and will not be charged any interest. For those with good credit, that entire balance can be $10,000, and you have an extended period of time to pay it off.
Obviously credit card lenders prefer that you pay the minimum due every month for them to collect interest, generally speaking. But in the case of 0% APR, that factor is eliminated.