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Everything You Need to Know About Credit Cards

So everything you need to know about credit cards. We are really digging into it when it comes to credit cards today but first I do wanna talk about the fact that credit cards can be a powerful tool and I wanna talk about this because I know that there are some people who really do not like credit cards and definitely other personal finance experts that will tell you never to carry one. This comes down to the idea of it being personal. Personal to you, and you understanding how you relate to these kind of tools. If you know that you cannot have a credit card without creating credit card debt, I basically want you to fast forward through everything I'm about to talk about because it's never, there's never a point in trying to hack the rewards system if it's just going to encourage you to create debt for yourself because there's no payoff. You're just gonna end up paying interest to the bank which frankly is kind of their goal here with some of this rewards offerings that they're doing, ...

so please be sure that you know yourself but a credit card can be a really great tool. It can help you build credit history without actually ever carrying debt if you always pay that balance off on time and in full every time the statement bill comes in. Then you are never carrying debt month to month and you're not paying an interest rate. Another thing I love about credit cards is that much better fraud protection because I personally have used at a debit card at a non-bank ATM. It was inside of a convenience store and it was actually that my bank of the time had recommended that you use because it's part of a network of ATMs that aren't going to charge you a fee if you use them and they're generally located in convenience stores. Well there was a skimmer on this ATM. You can't see skimmers with the naked eye generally unless you really know what you're looking for and so a skimmer is a device that can steal your information. So I stuck my debit card in, unbeknownst to me and a couple hours later $600 has been stolen out of my checking account. So, I never ever use a debit card anymore outside of a physical bank branch going physically inside the building of the bank. I cover my hand when I type in the pin, I wipe down the keypad when I'm done. I'm that neurotic about it at this point after what I experienced and I only ever swipe credit cards now all other points in my life because it offers much better fraud protection. For one, they've got great algorithms that is looking to see if someone else is spending your money. For two, it doesn't have direct access to your checking account, so if somebody does steal your credit card and I've had that happen too, at least they're charging things that's not pulling money directly out of your checking account, at your bank and so hopefully fraud can detect it very quickly at whatever credit card company you use or maybe you notice 'cause you have now like me, text alert set up so every time a purchase is made you get a little text message that says where and what it was and that way again, they're not stealing your money directly and usually credit card companies are pretty great about refunding any fraud that happens so you're not actually on the hook to pay it. So that is my little soapbox about credit cards. I love them, if you can use them as a force for good in your life. But if it is going to encourage you to have any sort of debt or be carrying any sort of debt, I basically want you to fast forward through this next bit and not even pay attention because I don't want you using a potential debt tool in your life. So the first thing and I've talked about it a lot already but I'm gonna reiterate it, you always need to pay off a credit card on time and in full. If you are only watching this section of this bootcamp and you haven't watched the actual credit score and reporting segment, I would encourage you to go back and check that one out where I really get into the nitty gritty about this but there is certainly a myth that exists that makes people think that it's okay to carry a balance over month to month on a credit card. They've even been told maybe that it will help improve their credit score, that is not true. I do not want you to be focused on that. Every single time you get a credit card statement I want you to pay off the entire bill on time and in full. It's a great way to be building your credit and you're not creating debt for yourself. Another thing to remember is that carrying a balance will start to negate any rewards that you think you're getting from this actual credit card. So as soon as you start paying interest, there goes the point of getting these quote unquote, free rewards from your card. Now with that out of the way, let's actually dig into the different structures for credit card rewards and how you can use them in your own life. Now there's three very common structures when it comes to rewards and that is one, rotating categories. It sounds something like hey, you can get five percent cashback on going out to dinner for this quarter and then next quarter, you get five percent cashback at Sam's Club and Costco and the big box retailers and then you get five percent cashback any time you go to the movies and it changes every quarter. So every three months it's gonna rotate. Next is flat rate. Easy, two percent cashback on everything. That's your flat rate and a sign on bonus is hey, if you spend $5000 in the next three months we'll give you 80,000 bonus points and you can use that for things like travel or hotels or cruises or whatever you're interested in. So first, rotating categories. Often work on a quarterly structure, typically you hear five percent cashback. Of course, that can certainly change depending on the card but that is generally the very high spiked reward option and it's there for about three months and then it changes over to something else. So like I just said, maybe for three months you're getting cashback every time you go out to eat, then it's cashback every time you pump gas into your car and then it's cashback every time you go to the movies. Otherwise, it's one percent back on all other purchases that you're making. Now one of the big traps of this particular type of rewards card is usually they require you to opt in which means every time it switches, before the switch happens you have to log in and click something like, I opt in for this rotating category and if you don't proactively opt in, they won't do it for you, they'll just have you earn one percent cashback on everything else. The other thing that's kind of a bummer with rotating category credit cards is you're never quite sure what the categories are going to be year to year and because of that, it might not actually be anything that aligns with how you spend money. So I used to own a rotating category card and for two months, or for two quarters of the year they used to do Amazon which was great for me but then they would do gas. And I don't own a car, I live in New York, so I wouldn't get any sort of cashback bonus at all because I never even pumped gas in the first place. So it's kind of a fine, rookie, beginner level card if you wanna think about it that way or if you really wanna hack the game and I'll get into that in a second. But, often it's not really the best possible card for you unless you know unequivocally every single quarter it's going to be something you always get five percent cashback on. Flat rate is the easiest. If you're just looking to get started, you want a really easy credit card, you're gonna go with a flat rate card that will say something like, two percent cashback on all purchases, 1.5% cashback on all purchases, one percent is usually the baseline as low. So you really wanna be shooting for something above one percent when you're thinking about getting a good deal on a flat rate card. A lot of times these cards do not have annual fees tied to them which is also great which makes them super easy, user friendly, good rookie card. And it's something that you can just kind of go on autopilot and passively, every time you swipe your card, get a little bit back. The sign on bonus is what we often hear about when we're talking about rewards because this is where people like travel hackers. So there's people that you hear about that spend basically no money to go on a really nice vacation, how the heck did they manage that? It's usually with sign on bonuses from credit cards. So like I mentioned earlier, it's things like spend $3000 in the first three months and you'll get 40,000 bonus miles. So typically what happens is there's also maybe one other spiked spend category so every time you spend on travel, you might get two times points or you might get three times points. Everything else you just get one point. So moving forward with the card after you get the value of the sign on bonus, that's typically how they try to keep you around. Now I will say, these usually have an annual fee tied to them and we will get into how to evaluate an annual fee and if it ever actually makes sense to pay. So how do you pick the card that's actually best for you? Well for one, you might just want something simple. Especially if you're just starting out, you're new to the credit card game, do not actually go chasing rewards at any point. Easy flat rate, I wouldn't even do a rotating category 'cause it still requires the whole opting in thing. The other option is for you to maximize your common spending categories and another is of course travel hacking. So first like I said, with that something simple. Easy, just wanna a little bit back but you're not super comfortable with credit cards yet. You're definitely not ready to travel hack. You're just gonna swipe, passively get some money. Now this is really a next level up for people who genuinely enjoy this type of stuff because this idea here is that you have a different card that maximizes every single main spending category that you have and this takes a lot of thought process and work quite frankly. I don't do this and I love talking about money but some people really enjoy this. It's also kind of like people who like couponing, it's sort of in that same vein. So what you're going to do is write down what your main spending categories are. Maybe it's gas and groceries, whatever it is and you're gonna go out and find the absolute best rewards card for that particular category. They're probably two separate cards. You're gonna go find one that gives you like six percent cashback every time you buy a tank of gas, no matter what gas station and you're gonna go find something that gives you six percent or five percent back on groceries, no matter where you grocery shop. So it's not tied to a specific chain. Then every time you make those purchases, you pull out the corresponding credit card and you make sure you're maximizing your points. This is really intense stuff in my opinion but it's one great way to truly maximize reward spend and if you're gonna do it, I also recommend labeling those actual credit cards in your wallet so you don't get confused. Especially 'cause all of them kinda tend to look the same. So put a little plastic label on the front that's like gas card, grocery card, whatever it is. Travel hacking, this is also a black belt level credit card move. If you're gonna be doing this, it is super easy to fall into credit card debt if you're not really careful. So I want you to make sure that you're only doing this if you have health, you've used a credit card and you've been healthy with it for at least two years, you've never once carried a penny of credit card debt, you always pay on time and in full. Then you might be at the level where you've really earned the right to travel hack and it's a privilege that you've earned. Again, how it breaks down is it's a card that offers you a big sign on bonus and you chase that bonus in order to be able to subsidize the cost of flights or hotels or rental cars or cruises or however it is that you like to travel. There are also sign-on bonuses. This just could be cash in your bank account that people use but typically these sign on bonuses are generally for people who like to travel and that's how they're gonna subsidize the cost. This is something that I do. I actually enjoy doing. So, you know it's definitely something that you can have as part of your financial plan to underwrite the cost of international travel or domestic travel as well. I keep reiterating this point of if you're carrying a balance, you're really making it so the whole point of doing this is moot because hey, you are now paying interest which means you're paying money back to the banks, you didn't actually get free rewards at any point. So please do keep that in mind if you're gonna start travel hacking. Lots to remember, yes. This does impact your credit score. Every time you apply for a credit card, it's gonna be a ding on your credit report that in turn could drop your credit score a couple of points. Could be five to 10 but if you're doing it a lot, it's hard to say. So if you're at a life stage where you're maybe doing something like applying for a mortgage, probably not the best thing for you to be doing as well. Yes, question. With regard to travel hacking and potentially applying for let's just say, an additional card to get a flight somewhere, and let's say you're in a position to where your credit score can take a 10 point hit, what is kind of a general window for when you could expect to see that recoup provided you have good behavior with your credit? I would say just a handful of months. You're usually gonna see it go back up 'cause if you have good behaviors, and it was just one inquiry, it doesn't usually weight you down for very long. So I'm, I've been looking at this travel hacking and some of it does seem really complex although some of it kind of reminds me of the envelope system we talked about in a previous class. Where if it's just for groceries or just for gas you could just like, that's almost like your expenditure account. And I get that it's like a higher level thing. I'm curious about I mean if you, for these people that have these cards 'cause I've been reading blogs and it's like, why would you use this card for restaurants when you could get six percent back? And what does that look like on your credit? I mean, that to me is like way too complex and I'm reading these blogs and I'm like, wow that's a lot of cards. Like, I can hardly imagine that. Two percent back's great. But what does that look like on your credit report? I mean, I can't imagine how that would impact 'cause we talked about a diversified credit report and if somebody has like six cards 'cause it's like for gas, Amazon, and you know travel and hotels. I mean how does that impact the way that that looks in your credit score out of curiosity? Well I mentioned earlier, I've only ever used credit cards and I will say, getting multiple credit cards isn't creating diversity of credit, it's about different types of credit. So every time you apply for a credit card it's not like, oh a different type of credit. It's just a different type of the same piece of the pie. I have eight credit cards in total right now and I have a 798 today credit score. We'll see what it looks like in the next a couple of months. So you, I wouldn't stress too much about it as long as you are paying on your time, your utilization is low, so the total amount that you're using of your available credit limit isn't crazy, it doesn't do all that much harm but you do have to think about the fees which I'm about to get into in a moment. That's definitely another piece of that travel hacking puzzle that you have to figure out. I wouldn't stress about it too much. There are people I know that have opened up to 20 cards open at a given time and they also open and close, open and close and you're right, this all does impact your credit score but if you are in the very high 700s, the amount that it impacts, it can be negligible, because you're still staying above 720 most of the time and 720 kind of being a magic number for you to unlock the top tier financial products. But that is also why I say, if you are getting to a phase of life where you need to apply for some sort of loan, especially things like a mortgage and you want your credit score in the best, strongest possible shape, don't be opening any financial products but definitely don't be turning credit cards either. And if you get into this, I would start slow. I wouldn't go and open three cards all at once and then close them down. I would try doing it once and see how it feels and the other thing I personally try to do, especially if it's a heavy sign on bonus. So for example, a couple of years back and I'll actually dig a little bit more into this card when we talk about evaluating annual fee but there was a card that was offered, it was 100,000 points if you spent $5000 in three months. Now this is one thing I wanna get into with travel hacking is, is that part of your normal spending pattern? Or are you going to be spending more than normal? 'Cause they really are trying to tempt you to overspend if we're totally being honest with ourselves, that really is the endgame goal for banks. Because like I've mentioned before, debt is very lucrative for them. You're paying interest rates. So for me, $5000 in three months was a little bit above what I normally would be spending, however, it was a point in time that I needed a new laptop and I had been saving up for that. So I took out that card to help also. I bought the new laptop, immediately paid it off. I wasn't financing the laptop on that credit card but I knew that I could hit that $5000 threshold without really blowing up my general spending budget. That's exactly what I was, it was like 3000 in three months and I'm like, or 90 days and I'm like, okay but then I was like, oh I'm gonna have to pay for all these workshops and I'm already gonna be paying for my debit card, so I was like, it might be a good opportunity to actually take advantage of that so yeah, thank you. Weddings are another good opportunity to travel hack for people, if it's not gonna create debt for you and you know you're putting a lot of things on credit cards here for a period of time, is a great way and then you can help subsidize your honeymoon if you wanna go on one. So that is also a very common time that you hear about people doing this as well. Any other credit card related questions before I move on to evaluating annual fees? Alright, I will talk again actually about the annual fee that I referenced with that first card and people who are travel hackers know exactly which card I am referring to but a high annual fee might sound absolutely insane to you when you first hear it. Such as $450. That sounds like insane money kind of annual fee and I definitely, I was like no way. I would never spend that kind of money for a credit card but you have to break it down and how does it actually work? So research all the benefits of the card itself in order to figure out, is this fee actually starting to pay off? For instance, with that $450 one, you pay the 450 annual fee but then you immediately also got a $300 travel rebate. So in addition to trying to get those 100,000 points if you hit the spending threshold, you also automatically get $300 rebated on your credit card. For anything related to travel, so a hotel, even Ubers and Lyfts and any other rideshare service counted too. And it just automatically would deduct off the credit card when you would swipe that card, it would just pay itself back real quick. So that knocks a $450 annual fee immediately down to and then the next thing that I did, one of the other fees that, or opportunities rather that you had with this card is, if you applied for TSA PreCheck or Global Entry it would rebate the fee for that. So I did not have Global Entry yet, it's a hundred dollar fee, I paid for it with the card, the card rebated it for me so I didn't actually pay it, quote unquote and that then knocked the card fee down to $50, then one of the other perks is you got access to something called Priority Pass which gives you access to airport lounges around the world. So now when I travel I can go into an airport lounge and it's a perk of my credit card and that to me recoups that $450 value in addition to the fact that I was going to earn 100,000 miles which was equivalent to about $1300 of travel money if you then booked through this credit card's online travel portal and this might all sound absolutely like insane talk, the way I'm talking about it right now but this is how you have to think if you're gonna be travel hacking. You have to evaluate all the different fees, decide if it's a good decision. But in year two, it might not make sense anymore for you to carry that fee and that's why people tend to close down those cards because while you still might get that $300 rebate you know, you already paid for Global Entry, you're not getting that perk anymore so now you still are paying 150 bucks. Is this card now worth it to you? So you do have to keep evaluating fees on these kind of cards, years after year. Now that is a big annual fee. And not all of the cards are like that. Some of them are about $95 a year. That's a pretty common one you'll hear and that might be an example of a fee that might be worth keeping for you because one of the perks of that card perhaps it's tied to an airline and you then get a free checked bag and let's say that perhaps you check a bag on at least three flights a year, well that's more than $95 in a year. So you actually are getting and using the benefit, so in that case it makes sense for you to pay for the fee. So just if you are getting into this quote unquote game of travel hacking, it's totally okay for you to pay fees and it actually might make sense, you might recoup them but if it's just something that just really stressed you out, don't mess around with it. Just have a flat rate cashback card and that's totally fine too. Yes. I know exactly which one you're talking about because I've been looking and researching. And that's an interesting perspective as far as the TSA and that and I yeah, I looked at that and then like oh my gosh 450. Can you, I don't know for sure if you're gonna speak to this but having to book through their portals and the equivalency of like what a point means to a dollar, I don't know if that sort of fits in here because I have been looking at that and I know some portals, like they'll charge you more than what you would like, if you would Google a flight, it would be a very different you know, amount that you would pay for a flight versus like your points and it can be a way, I think it's what you were saying before, predatory. Like gouging where you're not actually getting a good deal but maybe you thought you were getting a good deal. I was not going to dig into that because that's deep level travel hacking but to kind of briefly touch on this topic and to also explain it to people who are not travel hackers or haven't been researching, part of the method behind travel hacking is also looking that certain credit cards, their things offer what they call an online portal, so if You're going to go book travel, you do it through that particular portal and they'll say hey if you use this to book your flight, then it's going to be worth like 1.3 times points as opposed to just one point, you get a better ratio. But yes on the back end they may be increasing the cost of the flight so it really kind of negates. It is something that's good for you to know. You just have to do your research but people who are generally hardcore travel hackers geek out over this stuff anyway. So they find it enjoyable and they kind of like playing the game and playing the system. You also could find cards that it doesn't matter what you book it through, you could just click a button and it just rebates that particular purchase. So it's just good to know yourself and how much advantage or how much you don't wanna have to be focused on those kind of points and rewards and portals and games and systems if that's something that's just like ugh, no thank you. That's totally fine, you can still get a sign on bonus and just use it as base miles to rebate purchase or you could even just cash it out as just cash as opposed to applying it directly to travel. It might be slightly less of a value but it's probably still pretty good for whatever your sign on bonus was if you are not carrying debt month to month. Again, it doesn't matter what your credit card reward structure is, I don't care if it's rotating, basic flat rate cash back or if it is a big sign on bonus. If you are carrying debt at any point, you are completely negating the entire point of going through the rewards system. I know I've said it about four times at this point but it's really important.