This might be the most complicated thing that I write here. I will try to keep it concise.

First of all, Credit is marketed as a means of wealth and power and credibility as a person. Everyone seems to know that you are not reliable or trustworthy (Even as far as apartment rentals, insurance companies, and some places of employment) if you don’t have a good credit score. I will get into definitions shortly, but Credit/Credit Cards are one of the biggest money makers for corporations ever. Have you noticed that even your local grocery story has a credit card you can sign up for and get 10% off your order today?

Credit Score

What is a credit score? This credit score is a single number that sums up your history of credit usage and runs a formula of some sort that calculates to a single number between 300 and 850. While very few people actually know the algorithm for your credit score, here are the things that we know are relevant to create it.

• Payment History: How long have you been making payments consistently. And where have you been late, or simply didn’t make payments.
• Amount Owed: How much money you owe to other people or companies.
• Length of Credit History: How long have you been borrowing (or making consistent payments)?
• New Credit: What credit have you recently applied for? Have you been applying to many?
• Credit Mix: This is more about the different places ways that you hold credit. Loans (Retail, Personal, Mortgage) and Credit Cards (Retail, Personal)

Those are the official items and can be found at: FICO

The things I have found to be relevant that is not talked about as clearly

• Current Credit Available: This is a question about how much credit do you have access to that you are not using. Like: You have a $20,000 credit card, and $18,000 of it has been used. This doesn’t look great.
• Current Credit Load: This is slightly different from the above. It is: How much you are paying out a month due to the amount you currently owe in debts.
• Late payments from Credit Cards, Loans, Utilities, Hospital Bills. This is covered in the list above but it is worth noting again.
• Consistency over time of paying off your loans: How long do you go between a late or missed payment over time.

Your Credit Score is often used for checking if you can rent an apartment, or getting a discount on your car insurance. It is slowly becoming synonymous with reliability and wealth. But here is the catch. Most people I know with large debts are NOT because they were unreliable. It is because they simultaneously lost a job, and partner, and home, and a car, and had to figure it out. Or their partner left them with the debts from a marriage where too much was not shared. And the wealth part is really easy to disprove. If you were to give someone $10,000,000 today. Their credit score wouldn’t change at all. If they had a 300 before, they will have a 300 later.

The Credit Score is also like a game that you can choose to opt out of. (They don’t tell you that.) If you do not use credit. if you save up money and pay for everything you own with cash, you will have a 0 credit score. “I can’t rent an apartment, but I can write a check for the whole complex”. – Dave Ramsey (Evangelical Money Guru) (If you can sift through the religious parts of the conversation to the money parts, I recommend the course.)

Unfortunately, it is so hard to start out right now, that I think I recommend opting into the credit system, and trying to be smart and diligent about it. Education is the most powerful we can have when it comes to our finances.

Interest

I personally feel as if Credit is a very dangerous game that we are really pushed into playing. The Wealthy DO NOT USE CREDIT. And that is because of Interest.

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein

Interest is at its most-simplistic: Money you pay, for the privilege to buy something before you can save up for it. I say this without judgement. It is the game we are all thrown into. I have 2 mortgages.

And I fear it often sounds so much less dangerous than it is. In math, do you remember talking about percentages?

If I am asked to pay 15% of $1,000, we are just paying $1,150, right? RIGHT?

No. (This next part gets into math and details, I have tried to make it accessible, but please read it.) What actually happens, is you charge $1,000. The next day, the will break out the 15% down to a very small number that is 15/365 and add that to your total owed. So everyday, this calculation happens again. It is a very tiny amount, but it is adding up. It means that everyday, not only is it adding your daily interest cost, but it is also charging you interest on the total, including yesterday’s interest. And the monthly bill is roughly this month’s total interest plus 1-3% of what you charged. I feel as if they are generous, they will use 3. Most use about 2%. So I will too.

Let me break down the numbers.

• Daily Interest is 15/365 = 0.0004109589041
• So everyday the amount you owes increases by that percentage of your debt.
• By the end of the first 30 day billing cycle, your $1,000 is $1,012.818571. So your interest is only $12.82 that month. And your monthly minimum payment is only $20.26. Not terrible, right?
• Remember that this only paid for $20.25637143 of your loan after interest is paid. So after paying $20.26, you still owe the credit card company $992.56.
• Following this same math, after 2 years of making these minimum payments, You will have paid $429.69. $271.92 of. that is interest. So after paying $429.69, you now still owe the credit card company $859.42

Actually, an interesting comparison: We thought at a quick glance we would pay a total of $1,150 in this situation. After 6 years and 4 months, you will have paid $1,156.00 and still owe $587.28. (You can review here if you like: SpreadSheet)

So, like I said, it is not a game we win.

So what do I do?

Caveat: Do your own research. Do not simply take the word of ANYONE on the internet. Even Dave Ramsey, who I learned from and respect for his advice. You are not him, he is not you. You make your choices. You are the only one that has to live with their consequences.

I really feel as if we HAVE TO PLAY THE GAME. (I don’t like it, and I recommend against it if you have the any options.) In order to rent an apartment, or in order to get lower insurance premiums, or get that job at the bank you are thinking about ~ you need a decent credit score. But I also want you to think about who you are. If you do not think you can do this diligently, and make sure you allocate funds every single time you use a card, while also controlling your use to 1 thing a month, you are starting to gamble in a rigged game. If you try this, act as if every dollar you spend is a life-or-death experience.

My advice is this: The first three steps of Dave Ramsey’s Baby Steps are:

1. Build a starter emergency fund of $1,000.
2. Pay off all of your debt other than your home loan.
3. Build a full emergency fund of 3-6 months of your bills.

I think that these 3 steps get you to ground zero for safety. When it comes to raising funds for #1, #2, and #3, it is a grueling effort. This is: What can I sell? How many extra hours can I work? What is the cheapest meals I can get by on until you have accomplished all goals. The program I followed said that if you have debt, pay minimum on everything, other than the debt you owe the least on. On that one, you pay every extra penny you can wrangle to that debt. And when you pay it off, you take every penny you were paying towards that, and any others you can make to the next smallest debt.

I know I first looked at that and thought that $1,000 feels impossible. it is amazing what you can do. Some people are in nearly impossible situations where they simply don’t make enough and cannot make more. Outside of those cases, it is amazing where funds can come from.

Once you have $1,000 in savings, you have a safety net in case something goes sideways. And when something DOES go sideways, Deal with it, and roll back to step #1. Refilling that starter emergency fund. Then back to #2, until you get to completing #3.

If you don’t know, your monthly expenses are money you must pay to survive on a minimum level. So, if Rent, utilities, basic food add up to $3,000, then your 3 month Emergency fund is $9,000.

After this, you have options. If you lose a job, you have funds to get you by in the short time until you get a new job. Then your first task is refilling back to ground zero.

Once you are safe, you can start with a credit card or loan. Do 1 at a time. Agree to pay gas for your car (or something) on your credit card that month. Whenever you use it, make sure to allocate money in your bank account to pay that amount ~ this is NOT free money. The moment you receive a bill, use your allocated fund to pay off that card. Every month. This is a low stakes way to start building a credit score.

If you are actively paying for something to your parents because they bought it for you on their card: You are not building a credit score.

If you are actively paying for a loan to your parents because they took out the loan for you: You are not building a credit score.

A credit score will build when you have a debt or utility in your name.

I wish you the best. If you do not feel you can only use it for fuel, and cannot allocate money for it in that moment, DO NOT TRY THIS GAME. I would rather have a 0 credit score, than a 300 with $5,000 in debt. The final thing to add, Credit Cards are a head game all on their own. When you use a credit card, your brain doesn’t register the cost of something. You will spend more every time if you are swiping a card vs using cash.