Credit and how to win at it

Credit is one of those things that sounds beneficial on paper but in real life it can be pretty awful. So, of course, let’s learn how credit works.

Credit, not to be confused with debit, is the borrowing of money from an institution and agreeing to later on return that amount plus extra. The extra you give back is for the amount of time the institution did not have that money, so the amount grows depending on the length of time before you repay the debt. In other words, if Suzy has 35 watermelons and I borrow 5 from Suzy because I can’t get to the store this week, then next week when I go to the store I now have to buy 7 watermelons to repay Suzy with.

So on paper, it seems simple. In reality, credit is a type of invisible quicksand because people easily ignore how the extra amount can build up. If you read the section on loans, this might feel similar, because loans are a hyper specific form of credit. Loans can be granted for cars, housing, and university.

The other form of credit we use is on smaller purchases. This smaller money borrowing method was introduced during the great depression (come on another history lesson? Hush now, children, this will help). American banks and stores began offering middle class families ‘lines of credit’ in hopes of restarting the economy. If people could purchase new appliances, clothes, or other life necessities then maybe they could get a better job and pay back the creditor more than they borrowed. At first, these new ‘lines of credit’ were a lifesaver to families who needed help getting out of poverty but those people were paying sometimes double the amount for an item this way.

And that is true to this day. Credit is very helpful to people who are struggling to make big purchases like cars as well as smaller things they need day to day but can’t wait for their next pay check. People still end up paying more overtime because they continue borrowing before they pay back the original amounts.

And before you go all anarchy and just avoid credit, loans, and money borrowing, you need to understand that American society calculates something called credit scores. A credit score is some magical equation that adds up to 800. If you have a credit score of 800, that is the perfect score. Most people aim for above 700. The exact formula for how credit scores are calculated is kept secret, but FICO shows that the overall score is composed of these variables.

You need to have a good credit score if you ever plan on renting an apartment or want to set up a payment plan for medical treatment. If you have never borrowed any amount then you have no credit score which is seen as a bad credit score. When that happens, you get denied apartment applications, hospitals and clinics won’t let you set up payment plans, you might have trouble renting a car, and some jobs also check your credit score as part of the hiring process.

So you have to borrow money but you also need to not borrow money because that is expensive. Not complicated at all (eye roll).

We can do this in an educated way, borrow amounts that you already have and pay them back within days. To start, look at major credit card companies, if you have to have a credit card then might as well make sure you get one with incentives.

The big credit card companies are American Express, Bank of America, Capital One, Discover, Chase, Citibank, and U.S. Bank. Go to their websites and read through their credit card options. Pick the card that has incentives you would use. If you go on planes a lot, maybe consider a credit card from the airline you use most. If you use Amazon a lot, consider an Amazon credit card. Every store also offers credit cards now, so if you depend on Ultra Beauty or Walmart, consider their credit card options.

I did this the week before I turned 18, finding that Discover had a 0 APR for university students. Since I was currently enrolled as a high school dual credit student, I signed up the day I turned 18. I also had a small car loan cosigned by my parents and me at 17, already being paid off. This was important because the length of your credit history impacts your overall credit score. You can start officially borrowing at 18. You can be put as a cosigned minor or even have your name put on a credit card that your parents are responsible for as a minor. However, those two options are not entirely within your realm of control, so we are going to focus on what you can do by yourself.

Starting with a credit card allowed me to start small. The car loan was my parent’s responsibility, so I just worried about the credit card. Most companies start you off with a $500 spending limit. I used it to pay for gas once a month, which was somewhere between $25 to $30 depending on the week. Then I would go online a few days later and pay back the exact amount the gas was. Since my starter card had 0 APR, there was no consequence if I was a little late or passed the end of the month before paying back an amount. The APR is what is determining that extra amount or interest you owe in exchange for borrowing money.

While we don’t know for sure, most people think that if you borrow between 1-9% of your total credit line, it is more beneficial than using the whole amount. On my baby starter card, my total line was $500 so if I decided to spend 5% each month that means $25. Leading to my decision to pay for a single tank of gas each month.

Later on, once I felt a bit more solid on my routine, I set up the automatic payment for my credit card. I set it up so every month, 3 days before my credit period ended, my full amount would be paid off from my personal bank account. I did not do this in the beginning because I wanted to keep an eye on the amount and I felt like I would ignore it if I always had the automatic system in place.

Now the key to making this work? Put that credit card in the back of your wallet. Or better yet, put it in your digital wallet and then tuck the physical card away somewhere out of sight. That way the impulse to use it goes away. Credit cards felt like fake money to me, so if I had left the card somewhere accessible, I would have been tempted to use it.

After a year or so doing this, using your card for a tank of gas or maybe to purchase food, your credit line will probably go up. As soon as it does, you need to recalculate how much to use each month. If your bank does not automatically up your line after a year, feel free to call them and request a raise in your credit line.

My first increase was for $1,500. That amount felt insane to me, the financially unaware 19 year old. But, 5% of that is just $75. So I used it for all my gas in a month. The automatic payment method made sure I did not get any interest, and I earned money back every month.

An alternative to this for anyone who wants even less contact with their credit card, is to use it for automated payments. Things like a phone bill or subscriptions charge the same amount every month. If you put them on your credit card and make sure they add up to 1-9% of your credit line, then you can just let the computers do all the work for you.

If you have an emergency like a vet bill or car crash, you can pay with that credit card and change your automatic payment to X amount a month. Just make sure X amount is over the minimum they show you, because that minimum will mean more interest building up. If you pay over the minimum, you are paying back the borrowed money and paying off the interest. It will still cost more than if you had just used cash, but that is why this is an emergency only scenario. Because we don’t always have $3,000 on us to cover car repair costs.

Credit is a stupid bureaucratic system. I wish we could all just shout “anarchy” and run away from it. But we can’t. Instead we can choose to be smart about how we interact with credit. In what way do we borrow money and how often we pay it back.

I have had my credit card since I was 18. I am now 21 and have a credit score of 766, which FICO describes as ‘very good’. I have never missed a payment, and the only thing hurting my credit is the length of credit, aka 3 years. Part of this is also how old my longest credit account is, in this case also 3 years. So make sure you find a credit card you can maintain for a long time. And you can get the credit limit lowered if it hits an amount you don’t need every month.

And if math and money also make your brain hurt, I wish you luck in this capitalistic society. It is a real nightmare sometimes.