Credit 101
Credit! This is the topic for today's blog. This is the perfect topic after the last one, where I give you strategies to save money. So how does it tie in? For most of the masses, their credit is most likely shot. To clear your credit you will need money. But firstly why are most of the population credit shot? Because they were never taught how the credit system works. The credit system in this country is designed for the masses not to succeed financially. It is designed to keep the masses in debt until they reach their grave. How?
First of all you were never taught in school or by your parents, who also were never taught. Just like you were never taught how to develop a budget or given the tools to stick to the budget. So how do you establish good credit? Credit is a must in this country for financial success. Without credit, you may as well throw in the towel and stay poor. Poor is where the ruling class wants you to be. You will hear me say this over and over again not because I am a conspiracy theorist, and I am, but because it is the hidden agenda behind everything financially. Think about it. If too many of the masses rise up, what happens with the few that rules? There are less folks to rule and more folks to share their "seat" with. Sharing their "seat" is sharing their power. Do you really believe they want this? NO.
So what happens to the common folk? As soon as you turn 18, you apply for credit only to find out you can't qualify because you have no credit. No credit is as bad as bad credit. Because of this, you end up getting a credit card with some high interest rates, with a low credit limit and an annual fee. This fee is hidden in the language so you don't even pay attention to this. You are just elated to get a credit card even though it is only for $250. You go out and charge $250 only to find out you went over the limit because of the annual fee charge that you didn't think about, didn't know about or didn't know would be charged immediately instead of the end of your first year. So now your balance is the $250 you charged, the over limit fee which typically is $40 and the annual fee that is typically $99. You now have to pay $400 for spending $250. You have no funds to pay this and were looking to pay the minimum due so you are pissed and you choose not to pay anything. This is the start of a downward spiral for your credit. This is one scenario.
Let's look at another. Your first day in college and on open house day, there's a zillion booths with companies trying to give you "money". They coax you into applying for their credit card and each of them promises you a $1000 limit. Maybe you get approved for multiple credit cards. What does a young adult in their first year do with all this "money"? WooHoo! Party time! Drinking Time! Clubbing Time! So you charge up your credit cards and find yourself in a jam when the bill comes due. You ask your parents to help and they say "Hell No!" they won't help you. Or maybe they don't have the money to help you so they can't. So what happens? There goes your credit. Down the toilet! This is what the common folk, the masses go through. This is not what happens with the ruling class.
They know how the credit system works so the first thing they do is put their under 18 children on their credit card as authorized users. As an authorized user, their children get credit for timely payment made by the parents. These parents also allow them a certain amount, typically 1/3 of the credit limit or they will take away the card. That is motivation for self discipline. Two birds with one stone; build good credit and good discipline for credit. That child turns 18 with an automatic good credit and now can get a good credit card with low interest rates but also with self discipline on charging only 1/3 of their limit. This is the rule of thumb to build and maintain a great credit score.
Okay, you are not the ruling class and you didn't know before. Now you do. So here is what you do no matter what your credit is like. Start with getting your FREE credit history from all 3 credit bureaus from the national credit reporting agency, a government agency. Please don't get scammed by a private company pretending to be this government agency. There are so many of these scammers pretending to be the government. From financial aid to getting an EIN for your business, there are scammers who will charge you for stuff the government provides for FREE. Don't get trapped. Always read the fine print. They have to have a disclaimer that says they are not a government agency. Ok, so back to getting your credit report. Now calculate how much you owe and look at how you can pay off these debts. Does it mean you have to save more money each month? Make a projection of when you will have the money to pay off these debts.
The first debts to pay off are those held by collection agencies. If you see multiple collection agencies for the same account you need to dispute them. If they are for debts that are older than 7 years, you need to dispute them. All the rest, if held by collection agencies, you can negotiate a lower amount. Call them and make an offer to pay if they remove the debt totally from your credit report. Make sure you get this in writing. They have to abide by the agreement. Most of the time you can negotiate down to 1/3 the total owed or the actual original amount you owed. Most of these companies paid pennies to the dollar for what you owed the original lender. The rest of the bills are probably small so pay them off. Clear your credit yourself. You can do this. Stop relying on companies that promise you to clear your credit for a small fee because chances are they only clear it for one month. After the month is over, they are all back. Why? Because all these companies do is to dispute every transaction and it is up to the debtor to prove the debt is legitimate. While it is being disputed, the credit bureaus have to remove them. Of course there are companies that do the right thing but it is not any different than what you can do yourself. And please if you don't have more than $50K in outstanding debt, don't go filing bankrupt. Poor people file bankrupt with $10k and less in debts and rich people file bankrupt with over $100K in debts. You will be in a worse position after a bankruptcy than before. You are better off trying to work out plans to pay these debts off. It is amazing to me to see in my line of business people getting thousands in tax refunds and the last thing they are thinking about is paying off their debts. Remember my advice about what to do with tax refunds. Add this to that strategy. Splurge some, save some and pay off your debts some. But why?
Credit is important in this country to build wealth. One of the easiest ways to build wealth is real estate. To pay towards owning your own house is better than paying rent that pays someone else's mortgage. Today it is cheaper to own your own house than to rent. Yes, with ownership comes responsibility but that is what adults do. If you want to stay a child and not have responsibility then that's your prerogative but you are here on my blog because you are an adult and you want to learn how to be financially successful. Good credit is very important in your move towards financial success. If you ever heard of building wealth through using OPM i.e. other people's money, that is what good credit allows you to do. So for starters let's get your credit straight. Once that happens, let me share with you how to maintain good credit.
Once you clear your credit, the first credit you can possibly get is store credit like Ikea, Macy's or Lowe's. For starters, the credit limit is low but understand that this is “baby steps”. The strategy is to use the card only for things you need that you have the cash to pay for now. But instead of using the cash to pay for them, you use the card and set the money aside. When the bill comes due, take that cash and pay it off. If you absolutely don't have the cash, then leave only 1/3 of your credit limit but pay off the rest. Maintaining 1/3 balance on all cards is a great way to keep your credit score from dropping. If you can get a visa, mc or amex, then use the same strategy. Put aside your income that you would normally spend on basic necessities and use the cards. When the bill comes, take that income and pay it off. Paying off your balance every month will increase your credit score very quickly. Before you know it, your score will be in the 700s and you are on your way to build wealth using other people's money. That's it for today's blog. If you need one-on-one coaching, you know what to do. I am here for you and will see you next time. Bye for now.
Signing off,
Dr. KnowItAli