What Is Credit?

I know I’m not the only person who thought credit cards were a mythical source of infinite money. I mean, come on. I saw my mom swipe the card, put it back in her wallet, and get the groceries. I understood it had to be some form of payment since it was in her wallet, so naturally, as any logical 6 year-old would assume, I thought it was adult-exclusive magic.

Now that I’m a little older , I’ve come to understand credit is not as simple as I initially thought. There are various types of credit and creditors, all of which offer different rates, have different fees, and are evaluated differently.

With countless different companies and credit types, how on Earth can creditors keep track of each individual person’s borrowing and repayment habits? Two words my friend, credit score.

Your credit score is a numerical measurement of how reliable you are as a borrower.

This score is determined by these programs called scoring models, which compile the data from your credit report and use statistical analysis to determine what your credit score is.

This score is usually in a range from 300-850, with 300 being poor and 850 being excellent

Having a stronger credit score comes with a multitude of benefits: waived fees, lower interest rates, higher credit limits, and waived deposits on things like phones or computers, to name a few. Inversely, a lower credit score will result in higher interest rates and less incentives.

Now that you know what credit is, I’m sure you’d like to know what exactly is being considered when calculating your credit report. After all, how can you improve your score without knowing what affects it?

What Factors Affect My Credit?

Your credit score is mainly a culmination of 5 elements: credit usage, payment history, credit history length, credit mix, and derogatory marks.

In other words, how much of your credit limit is being used , how well you’ve been doing with paying off any accrued debt, how old your credit is, the amount of different lines of credit you have (ie. a loan, credit card, or a payment plan), and if you’ve experienced any major credit events like a foreclosure or declaration of bankruptcy.

Credit Usage

Which Credit Card Suits You Best? | SoFi
Higher total credit utilization negatively impacts your credit score, as it shows lenders that you are a frequent spender.

Credit usage is fairly important, with it being about 30% of your score. This is determined by measuring the percentage of your credit limit that is being used. So if your limit was $2,000 and you used $1200, that’d be 60% usage.

The reason for this is that higher usage indicates to lenders that you are spending more, and therefore a higher risk borrower. It makes sense, if you spend more credit you have to pay more money, the more you have to pay the less likely you are to pay it all.

Its for that reason that experts recommend staying near the 30% utilization mark. So if your credit limit is $200, you’d want stay around $60. It won’t be the end of the world if you have a high utilization in the beginning, as you’ll likely have a card with a small limit. Just try not to build a habit of using most of your credit limit, as over time the points you’ll lose will add up.

So for those of you just starting with a secured credit card, try to use it to pay for a Netflix subscription or something of a similar nature.

Since your usage is calculated with all of your types of credit, your utilization should go down as you get more cards and higher limits. So if you have a $5000 card and a $4000 card and use $2250 combined on them both, your utilization is 25% (which is the average American credit usage) , which looks way smaller than something like $160/200, which is 80%.

Payment History

How To Pay Your Credit Card Bill & Avoid Interest Fees [2021]
It may be tempting to put off paying the credit card bill until tomorrow or the day after, but missing or late payments can be very harmful to your credit. Always try to pay off your balances in full and on time.

Paying bills on time accounts for around 35% of your FICO® score, so it is safe to say punctuality is pretty important.

Repeatedly missing payments or being late will reflect poorly on your credit report, so try to pay off debts as soon as they’re posted. Luckily, most major lenders make tracking your balance and repaying it very simple with their mobile apps.

Credit History Length

My Credit Score: Why I Don't Care and Neither Should You | Club Thrifty
Lenders love when people have long credit histories, the older the better.

Your credit history is a complete report of how you’ve managed all of the debt you’ve incurred so far. It will show how much you’ve paid already, the consistency, as well as any remaining balances.

In terms of improving your history, make a habit of repaying your balances in a timely manner, ideally fully repaying them when possible. There is very little you can do to change this in the short term, but if you build good repayment habits you’ll find that over time, your credit history will have an increasingly positive impact on your score.

Derogatory Marks

How to Dispute Credit Report Errors Easily – Forbes Advisor
Do your best to always pay your balances in full and on time. If you don’t, you could end up with one of these stuck on your report for a few years.

These intentionally bring your credit score down. You will receive these for instances of undergoing foreclosure, bankruptcy, defaulting on a loan, missing payments, or a similar debt event.

These stay on your report for seven years, or ten in the case of Chapter Thirteen Bankruptcy! So when you can, definitely avoid these.

An additional factor to be aware of is total inquiries. When applying for a credit card or loan, the lender will always check your credit score. If you apply for too many lines of credit in a short period of time, it can count against you.

From the lender’s perspective, you seem higher risk because you are applying for several lines of credit within too close of a timespan. These go away quicker than derogatory marks though, usually after just two years.

Credit Mix

2,301 Lots Of Credit Card Stock Photos, Pictures & Royalty-Free Images -  iStock
The more types of credit you have, the more responsible you appear to lenders. Being able to pay off a car loan, two credit cards, and a mortgage will do more for your score than just paying off one credit card.

Taking up 10% of your score, it is represented by your total debt as well as by evaluating the different ways that you receive and use credit. Normally lenders prefer when you have different types of credit.

But what are those types of credit?

What Are The Main Types Of Credit?

When you receive credit, it will be one of these four types:

  1. Installment Credit
  2. Revolving Credit
  3. Open Credit
  4. Non-Installment Credit

Installment Credit

Installment credit is, in layman’s terms, similar to a fixed loan. You provide at least two separate payments until your balance is rectified, and this will normally be at some form of interest rate.

Typical examples of this would be a mortgage, auto loan, or personal loan.

Since this credit type doesn’t allow a balance to be carried over from month to month, late penalties are usually the only fee being charged, but in the case of a mortgage an origination fee might also apply.

If you’re just getting started with building your history, I would recommend avoiding these lines of credit for now. You’ll get much better mortgage rates and auto loan rates if you wait until you have a “good” or “excellent” score.

Revolving and Open Credit

Revolving credit is a credit type where the borrower’s balance can “revolve”, or carry on to the next month. There is normally a monthly minimum, with the remaining balance likely having some form of interest applied to it. Open credit allows the borrower to make repeated withdrawals up to a certain amount, and then make payments until the amount is returned in full.

These credit types may sound familiar. If they do, that’s because credit cards fall into this category.

I spoke with a couple people and asked about their first credit card stories, only to find they both had a fairly common theme: they got the card, bought something that was unaffordable to them with only the cash they had on hand, and then subsequent months of paying off a purchase that either maxed out their credit limit, or came very close.

My manager went on a vacation to Hawaii with his girlfriend when he got his first credit card, quickly racking up a tab of over $2300! When he returned, the credit debt he incurred followed too. He didn’t get to go on any vacations for a while after that.

My friend decided the first thing he’d buy with his new credit card was a completely kitted out PC and a bunch of electronic accessories. You’d swear he was a gaming streamer with his double monitor setup, multi-thousand dollar computer, and color-changing LEDs. But in fact, he was just a normal busser, who spent the next several months paying more than what he originally spent on his setup thanks to interest.

Revolving and open credit can be a wonderful way to build your credit history in a manner that you are in much more control of, but it also gives people a false sense of security. Just because you can buy a lot of things with your credit, doesn’t necessarily mean you should. You may not be paying for it directly out of pocket in that moment, but you are still paying for it, and often you’re paying more over time than you spent in that moment anyways.

Non-Installment credit

This is the most simple form of credit. Non-Installment credit, also referred to as service credit, allows the borrower to pay for the balance for the service or membership at a later date, usually the end of the month. Missing payments will result in a late fee, penalty, or cancellation of that service.

This is the category that utilities, your phone bill, and retail store charge accounts fall into.

As you get older and progress to different stages of your life, your credit mix, limits, and needs will all change. Regardless of what those amounts are, it is imperative to remember that the spending decisions you make in the moment can have long-term consequences.

Avoid letting balances carry over from month to month, and do your best to pay more than the minimum if you can’t afford the full amount yet. Developing good spending and payment habits early on is one of the best things you can do for yourself, which is why it is so important to understand how the system works.

Eager to learn more about financial literacy? Subscribe to my email list so you always know when I make a new post! Thanks for reading!

What Can I Do Once I Turn 18?

Yesterday was my 18th birthday. Woohoo! Finally legal. Like most other people, I had been eagerly anticipating becoming an “adult” under the eyes of the law. While I didn’t feel any different, I could now do a lot more for myself than I could just 24 hours before. Here are the first four things I did on my 18th birthday:

1. Open a Bank Account

If you haven’t done so already, now’s the perfect time to open a bank account. Having a bank account makes keeping track of your finances more convenient and keeps your money safe (and it’s necessary for the other steps).

Most major banks are FDIC insured. What does that mean? It means that your money is perfectly safe, even if the bank were to get robbed or experience some other financially damaging event. There is a limit to this insurance though, $250,000 per bank. If you’re starting off with upwards of $250,000, make sure you keep the FDIC insured maximum in one bank and then deposit the rest in another insured bank.

Having a bank account doesn’t just keep your money safe, but is also essential for most actions involving your money. While the rise of blockchain has caused some people to favor holding their money in cryptocurrency wallets, a bank account is still needed for depositing paychecks, applying for loans, getting a debit card, and investing, to name a few. Mobile banking has made all of these things much easier, as they can all be done in the palm of your hand.

To add the icing on the cake, many of the banking giants offer new account bonuses in the form of cash rewards. They usually require you set up direct deposit or have a minimum amount in your account, but some banks, like Chase, don’t require either.

2. Apply for a Secured Credit Card

Lines of credit don’t just appear out of thin air. Like most things in the adult world, they require time and effort. Unless you’re one of the lucky few who had their name put on a parent’s card as an authorized user before 18, you need to build your credit. That’s why the first thing I did was put in an application for a secured credit card.

For those who don’t know, a secured credit card is essentially a credit card with training wheels. You deposit a minimum amount (which varies per card) which the company can use as collateral. That collateral amount sets the limit for the card. The credit card companies know that in the event you fail to meet payments, they always have your initial deposit, ensuring they don’t lose money.

The main difference between secured and unsecured cards, aside from the initial deposit, is the interest rates. Due to your nonexistent or poor credit history, companies are going to charge higher interest rates on a secured card, with an average of about 17.75%. For reference, the average interest rate for ongoing cardholders with decent credit sits near the 15% mark.

There are plenty of cards to choose from. Normally you’re going to want to look at the interest, any benefits for opening an account, as well as any annual fees. Personally I despised the idea of paying to spend money, so any card with annual fees was an immediate “no” from me. With that criteria sorted, I was mainly just looking for a card with a good rewards program. I wasn’t concerned with the interest rates as much considering I never planned to allow my account to accrue any.

The card would be used for something like gas or groceries and then immediately paid off. I was going to treat it like my debit card basically, swiping it for the necessities and nothing else. That way I could never lose control of my debt. If I only spent the money I had, I would never run into a problem with paying back money I owed.

By the time I had finished my research, there was only one clear option: the Discover it® Secured Credit Card. Remember how I said I was looking for the best rewards on a card? I think I found them. With this card, Discover gives you 2% cash back at gas stations and restaurants (with a limit of $1,000 each quarter. While already rare for a secured card, it actually gets better. They match every dollar you’ve earned from your first year with NO limit. Of course, 22.99% variable APR isn’t the best in terms of rates, so I see why they wanted to offset it with some benefits.

That being said, I highly recommend that anyone who has poor or no credit opens a Secured Credit Card. Building a good credit score is necessary if you want good interest rates on loans, access to the best credit cards, insurance discounts, and so much more. Considering the time it takes and the benefits you can reap, it is best to get started as soon as possible.

Disclaimer: I am not associated with Discover in any way. My opinions are my own. Please consult a professional and/or do your own research before choosing to open a new line of credit.

3. Increase Sources of Income

I know what you’re thinking. “But Antonio, I didn’t need to wait until 18 to apply for a job.” Good for you hypothetical person I made up to prove a point, good for you. Even if you’re already employed by the time you turn 18, it never hurts to look at new opportunities.

Being a legal adult means certain career options have opened up to you. Want to serve your country? Join the military. Want to serve your community? Become a police officer. Want to be awesome and save lives? Become a fireman (or woman) or an EMT.

Aside from government jobs, opportunities for higher paying positions in your field may have opened up as well. If you work as a busser, you may be able to work as a server now (depending on your state’s labor laws). Who knows? You may even be able to become a sales associate for a certain family-owned company (shoutout to FarmFreshtoYou).

Aside from the traditional 9-5’s, you can also become a freelancer now. Uber, Postmates, Grubhub, Fiverr, etc. all provide opportunities for supplemental income. The cool thing with these is that their profitability is limited only by how much work you put in. If you really like doing Ubereats or a similar delivery service, you could put in 8 hours a day just like a normal job.

In another league of its own, you can also do ecommerce. You can take advantage of the whole “being 18” thing to either build a brand or begin selling on websites like eBay, OfferUp, Amazon, etc. This is definitely more oriented towards being a side hustle, but with enough commitment, it could definitely become a full time job. Even if you don’t plan to sell things as a source of income, having access to services like ebay or offerup can help you snag deals on items you already wanted, so it’s a win-win.

4. Open a Brokerage Account

“An investment in knowledge pays the best interest.” — Benjamin Franklin

It’s no secret that one of the quintessential tools for wealth-building is having a brokerage account. With one, you can trade ETFs, Index Funds, Stocks, and Options. While there are many trading platforms to choose from, I went with Robinhood.

The signup process was next to effortless. All I had to do was put in my email and choose a password. I had to submit a picture of my ID to verify my address and my SSN to verify my identity. It also asked about my investing experience/goals. If you inform Robinhood that you are an intermediate or advanced investor with 1+ years of experience, it offers options trading in addition to the platform’s default services.

Don’t lie about this though, as options aren’t for everyone. The community of r/WallStreetBets has shown plenty of nasty losses that would discourage any inexperienced investor from making the same mistakes they did. As with anything related to personal finance, do your own research or speak to a professional before making any decisions.

The convenience of being able to trade on your phone in combination with the beginner-friendly interface makes Robinhood ideal for new investors to learn on. It has a Discover feature which includes simplified information about various options trading strategies for beginners, and even a probability estimate to show you how likely the investment is to profit. Regardless of the prediction, please be certain to make a decision off of more than just the computer-generated margin. It can’t guarantee anything.

For those of you not interested in options, Robinhood also offers a free stock to new accounts, and offers another each time someone opens a new account from your invitation. They basically pay you to start investing, so why not?

Other platforms also offer different bonuses for signing up, but I’ll go into greater detail on those brokerages here.

18 year-olds may not be ‘adults’ just yet, but they are in the eyes of the law (well, sort of). At the very least, everyone should know what options are available to them once they cross the threshold into the real world. I understand a lot of people at this age aren’t focused too much on retirement or their financial future, and would rather do things that are of greater interest to them. Eventually though, they’ll hit a point in life where money starts mattering, and this post will be here.

Whether you’re on top of it at 18 or needed a few years to realize the importance of your financial future, you’re probably reading this because you wanted to know where to start. Well, if you’ve got this far, the only step left is to take action. Good luck!

The Beginning

In case you missed the title, this is the start of the greatest blog of all time. My name is Antonio Todd, aka, The Toddster. As of writing this, I have just recently graduated high school with plans to start college in the Spring. I have a passion for physical fitness, financial literacy, and personal growth, so that is what most of my writing will be about.

Why Now?

I’ve been interested in making something like this for the past few years, but I was either too busy or simply not motivated enough. Today I finally decided to take the leap and commit to this project. What better time to start something new than during my gap semester?

What’s the Plan?

While I’m getting this started, expect a new post each week. As I write more and more, I’ll create a separate page with all my blog posts so new visitors can get caught up, but for now, just tune in to the home page for my most recent article. Thanks for visiting!