Parrot MD

 

PARROT.MD is the only app of its kind allowing credentialed physicians to digitally and anonymously trade call assignments, reducing burnout and creating an opportunity for a secondary income source.

 

We developed the Parrot.MD application for Android using MVI architectural pattern using Kotlin Coroutines. See it on the Play Store here.

 

 

 

 

 

 

 

Mental Fitness Plan

As a fitness aficionado as well as a bonafide computer nerd, I have come to appreciate the parallels between what it takes to see progress in the gym and what it takes to make progress when learning a new technical skill or discipline.

While the best workout plan is the one that you can stick to, these are some recommendations and guidelines on how to structure a mental workout plan in order to make progress in whatever intellectual pursuit you find yourself in.

Workout Volume & Frequency:

For the serious athlete, it is clear that repetition is the undisputed key to success.

When we practice physical skills, we create and strengthen pathways in our brain to perform.

For bodybuilders, there is a general consensus that there is a certain volume of exercise and frequency of repetition that should be targeted for significant training progress.

The same principle applies to mental disciplines. We should target a certain amount of mental exercise and frequency to maximize our learning results.

  • Volume Recommendation: Set aside 1-2 hours a day to spend focused effort learning.
  • Frequency Recommendation: Repeat your mental workout 5 days a week.
  • Guidelines:
    • For these sessions to be effective, make sure you can spend real focused time studying or you will only be cheating yourself and your mental gains.
    • Do active studying not passive. That is, don’t just watch lectures and read resources alone, take notes, practice examples, and keep a list of questions on topics that confuse you so that you can figure them out later.

Rest Time / Review:

Yes, even the mental athlete needs rest periods to allow the brain to strengthen the new connections it is making and all around reduce stress.

Taking time to be with loved ones and do fun activities is all around recommended for healthy living.

I recommend taking 1-2 days out of the week to relax and review.

During these periods, don’t study new concepts. Instead, take some time to review what you’ve learned from the previous sessions.

Pro Tip: Create short lesson plans to attempt to teach a topic that you have been learning to a friend in 15 mins or less.

This will solidify your understanding and expose areas that you are not yet comfortable in so that you can work towards a more complete understanding.

Nutrition:

Strong bodies are challenged in the gym, but built in the kitchen.

Although healthy eating definitely helps the mental athlete perform at their best, I have a different kind of nutrition in mind.

Outside of direct active study, I think that feeding your mind media related to what you are learning can do wonders for molding that sexy depth of understanding.

During the downtime of your day when you would either be listening to music, stuck in traffic, or walking around in the store shopping, have a playlist of media that you can pop on that is related to your studying.

Create a healthy diet of brain food to whip your mind into shape.

Targeted Goals:

“For one who does not know where they are going, any road will take him. But to get to the promised land, you must first cross the desert.”

Kevin Moturi

The most important part of any endeavor is to have clearly defined goals.

If you do not clearly define what you are trying to accomplish in the long term– and especially in the short term– you will flounder and not make progress.

Set goals and define what success will look like. Take those goals and create sub-goals that you can finish in the short term to help you make consistent progress.

For example, if your goal is to become a back end developer, a sub-goal might be to learn about Data Structures and a sub-goal of that might be to “Find out what the main data structures are and list them”.

Goal: Become a back end developer.

  1. Learn about Data Structures
    • Find out what the main data structures are and list them.

The inner world of the mind is boundless and formless.

You must define the starting point and the destination and what the steps look like to determine how to get to the destination.

Hopefully that analogy was not too far out to be grasped, but the point is make clear goals!

What Affects My Credit Score Anyways?

You’ve come so far. If you’ve kept up with this series, you’ve learned the basics of what credit is, what a credit score is, and the winning strategies for managing your credit.

In this final installment of “W.I.C.A?”, that is “What Is Credit Anyways?”, we are going to learn some of the ways you can actually screw up your credit.

What’s in a score?

There are a few main things make up your credit score — as shown by the quite simple pie chart below.

However, how different things influence all these factors is a topic of much debate and source of even more confusion.

#1 Pay your damn bills!

The number one most important influence to your credit rating is obvious.

As I’ve already repeatedly stated, the point of a credit rating is to prove that you can borrow and pay back money — with interest.

Therefore, it should come as no surprise that on-time payments is the most influential factor.

Yes, this is as straightforward as it gets… but like always in life — there are some gotcha’s to watch out for. Here are a few of the big ones.

Failing to pay for nearly anything that you owe can affect your credit score.

If you ever fail to pay your phone bill, fail to pay your rent, or even fail to pay something as silly as toll on the highway, you can damage your credit.

Basically, any bill that can end up getting sent to collections can end up screwing up your credit score, big time.

What is collections? Well, when you fail to pay for something, the person or company you owe may hire a collections agency to help them get their payment from you.

These collections agencies are endearingly referred to as Collections, and they report the debt to the Credit Bureaus that keep the information used to calculate your credit score.

Even one occurrence of a debt in collections can cause severe damage to your credit score, so I heavily advise to always stay on top of what you owe.

Court judgements made against you can affect your credit score.

If someone takes you to court seeking damages(payment) for whatever issue, and they win a judgement against you this will negatively affect your credit.

This judgement will be a ding against your score, even if you pay the damages in full for about seven years.

It is, however, definitely in your best interest to pay off any damages because if you fail to do so the outstanding damages will also count the same as an debt account in default(unpaid).

This may as well mean credit score death.

#2 Don’t max out your credit, minimize it.

The second largest factor affecting your credit score is utilization. This is how much of your available credit you are using at any point.

Conventional advice would tell you to always keep both your overall balance across all your cards added up (yes this matters), and the balance of your individual cards below 30% of your total available credit respectively.

As I said in the last episode, I recommend shooting for less than 10% for the best credit score.

This is definitely a factor that matters a lot, but in my opinion it is the most straightforward and easy to manage. You have complete control over it and there is no real unexpected way for this factor to hurt you.

Yet it is often the factor that gets most people into trouble. Personally, I feel if you cannot keep this under control, you SHOULDN’T HAVE A CREDIT CARD.

Alright, that’s settled… lets move on, shall we?

Wait — I forgot something. Credit Cards and the like are known as revolving credit. Their utilization is calculated like I explained above and affect that 30% of your credit score… but also in that 30% is your installment credit utilization.

Installment Credit refers to things such as Student Loans, Car loans, and most traditional loans in general.

The utilization of Installment credit is calculated by dividing the remaining balance on all your accounts by the original loan amounts of the accounts.

So, if you’re like me and have not paid off most of your student loan debt, your credit score will most likely suffer from high installment credit utilization.

Luckily for us, installment utilization is not weighted as heavily as your revolving credit utilization — so take care of that first.

#3 Credit age is more than just a number

Credit age is a factor that you are just not gonna have much control over. This portion of your credit score mostly just takes patience.

The longer you’ve had credit accounts open, the more positively this factor will impact your score.

Essentially, the average age of all of your accounts is used for your calculation. So, if you have 2 credit cards, one 24 months old and the other 3 months old you will have an average credit age of 13.5 months.

If you are young, or simply haven’t had credit for long it will be pretty much impossible for you to break the 800+ high score barrier — this usually takes an average credit age of 10+ years.

The older the credit the sweeter the score…

#Major KEY — About closing your credit accounts…

You may have been told at one point in your life to never close your credit cards once you open them because it will hurt your score.

This a flat out myth… well kind of.

You see, closed accounts continue to be counted toward your credit age — until about 7 years when it may fall off your credit report. At this point the credit age you accumulated from the closed account will disappear and it will negatively impact your score.

But the main problem with closing credit accounts is not lowering your average credit age, but rather closing an account can increase your utilization percentage.

This is because by closing an account you will have a lower overall credit limit across all of remaining cards.

So, if you had a $1000 card you’ve stopped using and a $2000 card with a $900 balance, by closing your $1000 card you would increase your 30% utilization to 45%, which is bad news.

But this doesn’t mean you should never close cards. It only means you should avoid closing your oldest cards and mind your balances before closing lines of credit to make sure to keep your utilization in check.

#4 Diversify your credit portfolio

Earlier I introduced the concepts of Revolving (Credit cards, Home Equity Credit, etc) and Installment (Mortgages, Student Loans, Car Loans, etc) credit. Having a good mix of both turns out to be helpful for your credit score.

As shown in the earlier pie chart, your mix of credit will determine about 10% of your score. So having that student loan debt, is actually helping you… but only a little bit.

I imagine this is used to calculate credit scores because it demonstrates your trustworthiness if you can prove you know how to manage both types of credit.

#5 Don’t bite off more credit than you can chew

The final factor in your credit score is number of inquiries. This is basically the number of times you’ve requested new credit.

The more inquiries you have, the worse it affects your credit score. This is true even if you are not approved for the new line of credit because by applying for it, you allowed for a hard pull of your credit history which adds to your number of inquiries.

Now simply checking your credit score using popular credit tracking tools like Credit Karma, Mint, or a service offered through your bank is not going to count against you.

This is a common misconception many people have which is pretty messed up because that means they are trying to manage their credit… effectively blind.

The whole reason why this is a factor of your credit score in the first place is because it has been determined that people who are constantly applying for new lines of credit reflect higher loan risks than people who only apply for a few once in a while.

Checking your score does not mean that you are requesting new credit so therefore it won’t count as a credit inquiry.

So, for Pete’s sake, check your score and keep track of it! That way, you can be aware of any issues that come up and quickly handle them.

When you apply for new credit, the lender you are requesting from does what is called a hard pull of your credit report.

This is what causes your inquiries count to increase. It is not only for credit cards, opening a new cellphone plan can result in a hard pull as the mobile carrier wants to know if they can trust you to make the monthly payments before offering you that free iPhone 8 on a 2 year contract.

The same is true for big purchases that you may have to finance (pay off on a month to month basis) like that big expensive flat screen TV you’ve been looking at. Hard pulls don’t affect your credit score but they can knock you down a hand full of points if you let them get out of control.

They can take up to two years to be removed from your credit report.

On the other hand, what credit score tracking services do is called (you guessed it) a soft pull of your credit report.

This is never counted against you and can be pretty much done whenever — even sometimes without your permission.

Finally…

There you have it, those are all… okay, most of the ways you can screw up your credit.

As you can see, the basic components that make up your score are pretty straight forward — pay your bills, and keep your spending in check.

The other details can be tricky to grasp at first, but if you remember those first two principles you should be fine.

Oh yeah… the TL;DR (Too long; Didn’t Read) for you lazies

  • The easiest way to screw up your credit is by not paying your bills!
  • This includes even other bills you did think were connected to your credit score, like your cellphone bill
  • The second most influential credit score factor is how much of it you use. Keep your utilization below 30% no matter what!
  • Keeping your credit accounts open longer has a positive effect on your score.
  • Closing your credit accounts can hurt you, but not immediately… unless they represented a significant portion of your total available credit
  • Having a mixture of both Revolving credit (Credit Cards) and Installment credit (Loans) can give you a good credit score boost
  • Applying for new credit all the time can knock you down a couple points, but not too much.
  • Checking your credit just to monitor it does NOT hurt your score, allowing lenders to check your credit to see if your eligible for new credit WILL hurt your score.

Parting Words

If you kept up with the series until this point, I would like to say thanks!

I hope this information will help you the way it helped me.

Building your credit is all about patience. If you follow these steps you can probably get a pretty decent 700+ score in 2 years of good behavior.

If you haven’t read the other 3 parts, it is not too late! Here is part 1, part 2, and part 3.

How to Manage Your Credit

Back in Part 1, I compared using credit to playing with fire.

You shouldn’t play with fire.

You should understand fire, respect fire, know how to safely use fire, and how to put it out.

Likewise, I recommend you take a similar approach to credit.

In the Beginning…

In this section, I am going to assume you are just beginning your credit journey.

As I mentioned in Part 2, everyone comes in to this world naked — that is, no credit score or history.

If you are under 18, you cannot legally enter a contract… though that doesn’t entirely mean you can’t start using credit.

I’ll touch on this further in a separate blog.

Anyways, at this larval phase, you won’t have many good credit options due to your lack of credit history and low credit rating.

You are weak and easy prey to predatory lenders looking to get you into extremely high interest contracts known as sub-prime credit.

Give them the chance and they will rip you apart.

Stay patient, lay low and you will survive to emerge as a graceful butterfly — with excellent credit of course.

In the larval stage of your credit metamorphosis

There’s a number of ways to do this.

If you are a college student, you may find credit building options from your local bank. I started out with the Wells Fargo Cash Back College Card.

I believe these banks, seeing that your are in college and oh so full of future earning potential, want to win your loyalty early and therefore offer you credit options at a Prime interest rate (as opposed to Sub-Prime I mentioned earlier).

Another option, especially if you are not in or out of college is to get a secured card.

When there is no record of your trustworthiness to go on, banks typically need some kind of insurance from you just in case you turn out to be a deadbeat.

For this, they created the Secured Credit Card. In this kind of credit agreement, you put money down to “secure” your credit.

For example, if you get a credit card with a $200 limit, you typically will give the bank $200 in exchange to secure the loan.

This does not mean you’ve paid $200 for a credit card, but only means that if you turn out to be untrustworthy and don’t make your payments (which I’m sure you won’t be, since you are reading this)

the bank can then cover themselves by taking that $200 you deposited.

After establishing a secured credit line and using it responsibly

(as I will explain in the next section) for about 6 months, you will be able to convert your account into a unsecured credit.

As a congratulatory gift for graduating to grown-up credit, the bank will return your deposit. This allows you to start establishing your credit without having to pay sub-prime interest rates since you secure your loan.

Secured cards can be an excellent way to begin to repair your credit too if you are reading this too late.

The options above assume you are working and have a steady income.

I would highly recommend you have a steady income before really getting involved in the credit world.

However, I’m not saying you can’t get the ball rolling at least.

If you have parents who are well trained in the art of credit, ask them to be added as an authorized user on their credit cards.

This way you will start building credit history as long as your parents exhibit responsible credit use.

Ensure the credit issuer actually reports authorized user activity to the credit bureaus though — major key.

There are other options for starting out you may want to know about…

but I’ll just cover my favorite here.

The K.I.S.S strategy

Okay, now let’s get to the real talk. Now that you’ve got credit it’s time to learn how to use it. I am going to give you a strategy I decided to just now call the K.I.S.S strategy — yes, you guessed it… the Keep It Simple STUPID! strategy.

Seriously, managing your credit is NOT hard… so don’t make it hard.

All you have to do is abide by a few simple guidelines.

Don’t overcomplicate credit… smh

First, get your mind right, and remember credit cards are for building trust.

They don’t represent extra money. Don’t ever think of them as money to use in an emergency (yeah, I said it).

Use your credit card for everything — that is, everything you would normally purchase if you didn’t have the credit card.

If you know you would not afford an item if you only had your debit card or cash, then don’t buy it with your credit card.

It’s really that simple. Keep your normal reasonable budget, except instead of using your debit card or cash, use your credit card to cover the purchase instead.

Consider the money you spent on your credit card the same as you paying cash — after all, you do have to pay it all back in the end. So don’t go spending that money in your account like its still yours.

At the end of the month, cover what you spent on your credit card with that cash.

By doing this, you have demonstrated you can borrow and payback money responsibly.

You are showing yourself to be trustworthy, the banking overlords are pleased.

WAIT, okay its not that simple.

One of the biggest statistics that influences your credit score is your utilization. That is how much of your credit limit you are using.

If you have a $500 credit card, please, please don’t use the whole $500.

Well, if you pay it off in full before your credit statement posts you should be fine… no, forget you read that.

What we want to do here is establish winning credit management habits and the biggest one of all is to keep your utilization low!

Those with credit scores at the higher end of the spectrum keep their utilization below 10%. Of course this is hard to do when you are starting out, as that would mean you could only spend $50 on your $500 limit card.

You can give yourself some leeway to start and aim for utilization below 30%.

So with your $500 limit card set your spending limit at $150.

Never ever leave a balance on your card above 30% of your total limit.

So yeah, Keep it pretty simple STUPID!

Pay your balance off in full EVERY MONTH — or don’t…

Leaving a balance on your card, especially one that exceeds how much actual cash you possess, is EXACTLY what I was talking about when I said using credit is like playing with fire.

Again this is due to interest working against you.

In addition, if you leave a balance at the end of the month, you may get into a situation where you keep spending and leaving more and more on the card every month until you run a debt that you cannot manage.

Trust me, I’ve been there — when I didn’t know better of course.

However, I think leaving a small balance on your card is not necessarily a bad thing, especially when you start getting higher limit cards.

When your credit card lender reports on your trustworthiness there are two data points that are especially important.

  • Whether or not you made your minimum payment
  • You card utilization percentage

Both are important but missing a payment is definitely much more damaging and harder to recover from.

In this context of how to manage your credit card balances though, the utilization percentage is what is in play here.

I mentioned earlier that the highest credit scores are owned by credit users with less than 10% utilization.

However, as an interesting plot twist those with utilization at 0% have tend to have low credit scores.

In a study done by Credit Karma, those with 0% utilization were shown to have lower credit scores

This seems to say that you should leave at least a small balance on your account — less than 30% of your credit limit is recommended, less than 10% is preferred.

The downside to this is that you will pay interest on the balance that you leave on your card.

The good news is that if you keep your utilization very low, the interest charge should be quite negligible. The better news is that there is a strategy if you want to avoid paying interest at all…

If you want to avoid paying interest but still get the benefit of having a utilization above 1%, what you need to do is pay the balance in full after your statement posts. So before you minimum balance is due, pay off your account in full.

This way, your bank reports a balance on your statement which gets reported as utilization but your balance is paid off before your credit lender has a chance to charge you interest (Interest accrues on the balance left after the minimum payment due date).

To use this strategy effectively, be sure you still adhere to the iron rule of never spending more than 30% of your credit limit on your credit card.

If you post a statement with a high balance, it is going to hurt you even if you pay off your account before your minimum payment due date.

After learning the basics of the game… now get on offense.

Okay, now you’ve got the basics of the game.

Obtaining a good credit score is really not rocket science as I’ve shown.

Now it’s time to get fancy.

Earlier, I advocated for using your credit for all your normal, in-budget, purchases.

The reason my advice is different from your dad’s, who I’m sure has told you to use your credit card sparingly, is due to… the rewards!

Yes, you’ve probably heard of it before, some credit companies will give you different kinds of perks for using credit for your purchases.

The more often you use your card the more they give you.

Now if you’re a credit youngin’ you most likely won’t qualify for these kinds of credit cards quite yet.

But I want you to get used to and comfortable with using your credit card for everyday purchases and of course — responsibly paying it off.

When you finally can qualify for some of the best rewards cards, you will already know the drill.

There is a whole buffet of different types of rewards you can get depending on the credit card. Cash back on purchases, hotel discounts, flight discounts, and luxury gifts are a few of the popular ones just to name a few.

If you are a travel addict like me, having a stellar travel rewards card is a simply a must do.

This is pretty much the pinnacle of the credit card game. Once you start getting rewards for being financially responsible you are now playing with the pros.

But don’t get too cocky, stick the the basics because there is still lots of trouble you can get into — this is interest we are talking about here… it’s literally fire… respect it.

This is especially true when evaluating rewards cards offers, there are a lot of them out there and they are NOT all created equal.

I like to crowd source my rewards cards knowledge, so I usually visit the r/churn subreddit to see what the rewards card aficionados are raving about lately.

They have an excellent resource where rewards offers are evaluated by a body of your peers!

Ironically, in the LAST AND FINAL installment of W.I.C.A… we will learn all about the ways you can get burned.

The TL;DR (Too Long; Didn’t Read)

  • When you start building your credit, you won’t have many attractive credit options
  • Credit youngins can begin building credit using special Student Credit Cards, Secured Cards, or sub-prime retail cards (avoid this option).
  • Keep your credit management strategy stupid simple! Use your credit card for normal every day purchases and pay your balance off every month.
  • Never use more than 30% of your credit limit on your credit card.
  • For the optimal score, make your credit lender reports a small balance on your credit statement, to avoid paying interest on the balance pay off your account in full before your minimum payment is due.
  • Once you get your credit score high enough to qualify for good rewards cards, you can get on the credit offensive and start getting benefits for your trustworthy credit behavior.

Read the next episode here: What Affects my Credit…Anyways?

What’s a Credit Score Anyways?

A Credit Score is a measure of… Trustworthiness

So what is a credit score anyways?

Well, remember when I talked about trustworthiness in part 1?

A credit score is essentially a measure of your financial trustworthiness.

You see, using credit gives you a rating that is all important in our western modern society.

This rating is called a credit score and it is not just used for bankers to determine whether you can make them rich.

This credit score has evolved to basically reflect your character as a responsible citizen. Some employers even pull your credit score to determine whether or not you’d make a good candidate for the job. They want to know if they can trust you.

However, by far the most important function of a credit score is to determine how much someone should charge you in interest when you take a loan.

Initially, your score will be low because they wont have much data to go off of, but as you use your credit and build credit history, your score will change to reflect your financially responsible — or irresponsible — behavior.

But why would I need a Loan?

Sure, you could probably do without ever having to get a credit card…

But, unless you plan on being a multimillionaire pretty soon, there is probably going to be a point where you might need to make a large purchase for something important.

A few examples:

  • Getting a car
  • Buying a house
  • Paying for your college tuition
  • Starting a business
  • Etc…

Most of the time you don’t have thousands of dollars on hand

to make such a purchase. This is where a loan will come in.

You borrow the thousands of dollars and agree to pay it back a

little at a time over several years— with of course, interest.

How much interest they will charge you for this loan is going to depend on your credit score…

And you can’t have a credit score unless you have a credit card!

(Or a different form of credit)

Someone one with an excellent credit rating is going to get “cheaper” loans than someone a bad credit rating.

Even if you feel like any of the above reasons is not any immediate concern of yours now, if you want to get a grown-up job, an apartment, your own cellphone plan in the future, all of these things may check your credit score to determine if they can trust you!

Okay, what’s the the Credit Score scale?

Everyone starts at the same credit score, and that is… no credit score.

No credit score is essentially the same as a poor credit score.

Credit Report Bureaus, organizations that track your credit history and provide lenders with a score, do not yet have enough information on you to know how trustworthy you are.

If you apply for a loan or credit at this stage, the lender pulling your credit score will see a “too new to rate” message instead of an actual score.

At this early stage your credit/loan options will be really limited (I’ll explain this further) but after you hold a credit account for at least 6 months you will finally get your first score.

The average credit score in the United States is about 695.

If you display good credit management during those first six months, you will start somewhere close to the middle of 300 (the lowest score)

and 850 (the highest score).

Since you still have limited credit history, the credit algorithm is likely to output a lower confidence number

around 500 to 600.

What’s a “good” score anyways?

If you are like me, you are probably wondering what you can really get with any given credit score.

The graphic above shows your chances of getting approved for different quality credit cards at different scores.

Not all credit cards are created equal.

There are special rewards credit cards reserved for holders that have been proven trustworthy. They have additional perks such as cash back, travel benefits, hotel discounts, and even road side assistance.

For those with bad credit records or no credit history, the only choice is often a secured card — a card that will require you to deposit the cash value of the credit account.

For example, if you deposit $300 you will receive a secured card with a limit of $300. The $300 you deposit still belongs to you, but if you prove to be untrustworthy, the credit company can use that money to cover your debt.

APR = annual percentage rate

This graphic shows the rates you can get an car for a certain credit score.

The higher your credit score, the more you can borrow and the lower interest you will have to pay on it.

So now we understand a bit about how a credit score works, the next essential thing is understanding how to manage it, get it high, and keep it high.

The TL;DR (Too Long; Didn’t Read)

  • A credit score shows how financially responsible you are
  • A credit score is used for many things but most importantly, determining how much interest you will pay on a loan
  • You may need a loan in the future to; buy a house, buy a car, pay for school, etc so it pays…or rather saves to have a good credit score
  • Everyone starts with NO CREDIT
  • Credit scores range from 300 (the lowest) to 850 (the highest). Above 700 is good, between 700–620 is average, below 620 is BAD
  • Good credit scores get you approved for special credit cards, and lower interest rates.

In the next episode, we will talk about managing credit, and how good credit scores are created and maintained.

What is Credit Anyways? Part 1

Recently, my 15 year old sister asked me a simple yet complex question,

 

“How does credit work? I have a debit card, I don’t need both, do I?”

 

She had been getting mail from banks trying to entice her into their latest credit offering.

 

To most, the idea of a 15 year old getting a credit card sounds like a very bad idea, but I thought this would actually be a great opportunity to teach my sister some financial lessons.

 

Lessons I had to learn the hard way…

 

When you get into credit debt…

Credit gets a bad wrap

After graduating from college, I finally went and truly educated myself about the world of credit. After learning the fundamentals, I was able to add nearly 100 points to my credit score in about a year.

 

The more I learned about credit, the more I realized most people had no idea how it really worked. Even my parents had serious misconceptions about how credit worked.

 

Many people see credit as this thing to be feared and only used when absolutely needed. I would agree that credit is a bit like playing with fire. But like fire, understanding how to properly use credit can literally bring you out of the dark ages.

 

Understanding credit is so easy a caveman can do it

“…understanding how to properly use credit can literally bring you out of the dark ages”

Credit is basically a loan

Banks and other business entities will to loan you money to do whatever you please with it, and in return you agree to pay them back… with interest.

"Credit is basically a loan that you pay back… with interest"

So, when you get that shiny new plastic card essentially you are getting a loan from the bank that sent you the card.

 

Okay, well not exactly.

 

To be more accurate, the bank has agreed to loan you up to a certain maximum amount known as your credit limit.

 

This is what makes a credit card different than a debit card.

 

While a debit card represents the money you have in the bank, a credit card represents the money the bank will loan you.

 

You can buy whatever you want with that card (as long as they take credit) until you have spent up to your credit limit (the total amount of money a bank is willing to loan you). Of course, you never, ever want to do this.

 

I’ll explain why later.

 

Credit cards are for building trust

The biggest mistake you can make when you get a credit card is to think that it is essentially free money, or extra money for you to use when you get low.

Instead, you should view your credit card as a tool for building trust with banks and lenders.

 

"View your credit card as a tool for building trust with banks and lenders.”

For you to understand how a credit card does this or why building trust with banks/lenders is important, first we’ll have to revisit the topic I mentioned earlier: interest.

 

The power of Interest

Ahh interest — this is probably the most important concept to understand when dealing with credit.

 

Interest is what creates wealth.

 

Interest is putting your money to work for you.

 

Interest is one of the most powerful forces in the known universe!

 

For example, say you have $1000 and you loan it to your friend. Your friend has agreed to pay you back tomorrow — with 10% interest.

 

Tomorrow comes and your friend, being trustworthy, makes good on her promise and pays you back $1000 plus $100 in interest that you both agreed upon.

 

10% of $1000 is $1000 x .10 which equals $100 !

Yes you’ve just made $100 with literally no work at all. All you had to do was trust your friend would pay you back.

 

Who can you trust?

Now you’ve entered into the knowledge of how what true wealth is.

 

Essentially, those with money, loan it to people who they can trust, and in turn those people pay them back the money with interest.

 

Imagine if you had a million bucks and you could rely on that trustworthy friend to pay you back with 10% interest every time…

 

You’d make $100,000 every time they paid you back.

 

You could live on the interest you make alone without ever spending your original million.

 

What does this have to do with credit?

 

Well… everything really.

 

Banks want to loan people money so that they can collect interest payments…

 

So when you get a credit card, this is essentially the bank loaning you money. When you start out they’ll give you a few hundred dollars. But as you show you can pay your debts, proving your trustworthiness, they’ll be willing to lend you more.

 

Which I know probably has you wondering… what’s in it for me?

 

Why do I want to help make bankers rich?

 

For an answer to this question — check out the next episode:

 

What is a Credit Score Anyways?