Credit card tips for beginners

Financially Inclined S1 Ep3: Understanding Credit Cards Transcript

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INTRO

(MUSIC: Fun, upbeat music plays)

Yanely: What’s up everybody. I’m Yanely Espinal. Welcome to Financially Inclined from Marketplace. We’re sharing money lessons for living life your own way.

(Title card saying “Financially Inclined” appears)

Credit cards can be hard to wrap your head around, especially when you don’t have one yourself. Like, where does that money you’re spending come from? And not understanding credit cards can make them seem kind of scary. Like you’ve probably seen stories out there of people who have major credit card debt, and it really destroyed their lives. Or maybe you even know somebody personally who has struggled with credit card debt themselves. Stories like these might make you want to completely avoid that possibility and never even bother with credit cards. But then at the same time, pop culture is full of songs and movies where people just go shopping, and you see them swiping their credit cards left and right. And it kind of looks fun.

Confessions of a Shopaholic: When I was seven, most of my friends stopped believing in magic. That’s when I first started. They were beautiful. They were happy. They didn’t even need any money. They had magic cards.

Yanely : Okay? That is not true. Credit cards are not magic and you will get in trouble if you use credit cards to spend money that you don’t have. But there are a lot of advantages to having a credit card. So that’s why today I’m talking to my friend John, who goes by “John E. Finance” on TikTok. He has a degree in finance. But he feels like that formal education was missing some of the most important personal money lessons. So he learned a lot of his personal finance expertise through experience, including getting his first credit card when he was 21 years old. Now, he helps over a million followers on TikTok learn these exact same lessons. Okay, let’s get into it.

UNDERSTANDING CREDIT CARDS

John Eringman: My name is John. I go by “John E. Finance” on TikTok and Instagram. So I really just teach people about financial education. (From TikTok clips) This may be a stupid question, but when should I use a debit card and when should I use a credit card? These are the three best credit cards for beginners. Now, if you don’t have a credit card yet, you’ll want to get one. Hypothetically, what if I maxed out like 10 credit cards and never paid them back? You’re not seriously thinking I’m doing that right? Oh, no, just asking for a friend. Would I go to jail… I mean, would they go to jail.(clips end) When I was a finance major in college, I realized that it wasn’t really taught much. You know, we learned about accounting or like high level principles. But we didn’t really learn about how to manage student loans or how to build wealth and things like that. So I figured if they weren’t teaching finance majors, how to, you know, build wealth and manage their money, they’re not teaching anyone else out there. So that’s kind of where I stepped in. I was like, Okay, let’s, let’s start teaching this stuff to children and teens around the nation. I love that. I love that honesty. I remember when I was starting out, I didn’t really understand much. And I wasn’t like you were I got like classes about money or finance. I never took a business class or personal finance class or anything like that. But you kind of talked about how they didn’t really prepare you in terms of like your personal money management. Did you learn anything about credit or borrowing or credit cards in that program? No, we didn’t really learn too much about… we learned about what credit was, but we definitely didn’t know how to, you know, pay off a credit card, or we didn’t even look at credit card statements, or anything like that. So I think we really missed the mark in schools and in house households. I didn’t really understand the benefits of getting a credit card. So I just never really got one. I was like, it sounds like you know, people end up in debt or, you know, they they… credit cards sounded scary to me in college. You know, I got my first credit card when I was 21. And I made sure to, you know, be very careful when using it as well. So..

Yanely: Oh, yeah, definitely. I mean, I’ve heard a lot of students ask me, like, “why would I get a credit card is just gonna lead to debt.” And we’ll and we’ll kind of talk about some of those misconceptions that you brought up. But before, I think before we go into like those ins and outs of credit cards. Can we do like, let’s rewind a little bit and let’s back up and just start with like the basics. How does a credit card work?

John Eringman: Yeah, I mean, the very basics is that when you use a credit card, you are essentially you are borrowing money from the bank. And you have to pay that back each month, or else you will owe interest to the bank.

Yanely : When I’m talking about credit cards. I like to call them credit card loans because to your point, it it makes it really obvious that you are borrowing money from the bank. Because a lot of times we miss that connection. We just feel like hey, this is free money available on this card and we don’t always you know, understand like the full scope of “nope this is a loan and it comes with an interest rate.” And if you don’t pay it on time, you might might get late fee like all those loan terms and conditions.

John Eringman: Hmm, I love that you use credit card loans. I mean, that’s that’s so true because you’re borrowing money and you do have to pay it back. It’s not just free money.

Yanely: Can you tell us like, what are you seeing that people are really concerned about like that are asking you these maybe top questions when it comes to credit cards?

John Eringman: There’s two big ones that come to mind. The first big one is that people don’t even know how to get their first credit card. They don’t know if they should, you know, apply for one online. They don’t know if they should go into the bank and get one. It’s very scary. Like I resonate with that so much. I was scared to get my first credit card. And what I say to most people, before you get your first credit card, I encourage most people to have some sort of income, whether it’s a side job, a side hustle, a full time job, whatever it may be, you want to have income, so you can qualify to get your first credit card because most banks won’t lend you money if they know you don’t have any sort of income to pay it back. Right? And so then the second biggest question that I get is like, “Okay, I know how to get one, which one should I even get?” Everyone’s situation is going to be different. So you know, if you’re making a couple $100 per month, you might get a different credit card than someone who’s making $1,000 a month. But I would say there are secured credit cards that are really helpful for people to build their to build their credit score. A secured credit card is where you put down, let’s say $100 as collateral, and then the credit card companies hold that and then you can buy things with that secured credit card. And you basically have a monthly statement every single month that you pay off. When you use the secured credit card, and then you pay it back on time and in full, they see you as a safe borrower, and that’s going to increase your credit. It’s super important to make sure you’re paying back your secured credit card every single month on time, because that’s going to build your credit score. And if you don’t, then it’s actually going to hurt your credit score. So it is a it is a little bit of a risk there.

Yanely: Yeah, and I think it’s easy to understand the concept of a secured credit card, because you are, you’re using it in a way where it’s kind of similar to a debit card, but it’s still a credit card. It still helps you generate a credit report. But people know that connection to the money, it’s actually their money. I’ve noticed that when I’m in schools, a lot of the students really seem to just equate debt to credit cards. And you know, you mentioned that you kind of did that yourself, too, when you were in college. So can you tell us what do you make of that? Like, now, when students are doing that do you feel like that makes sense for them to think that way?

John Eringman: Yeah, and it’s definitely a common misconception. And I think it’s important for people to really understand the differences between you know, credit card debt, and then just using your credit card responsibly. Again, I’ve used credit cards for, you know, over six years now, and I’ve never paid a single cent in interest, because I pay off my credit cards each month. And that history of being responsible with that debt will then increase that credit history. And it’ll it’ll show that you’re a good borrower. Like, okay, this person said he was going to borrow $500, he paid back the full amounts and so he is good, he or she is good for their word, right?

Yanely: Yeah, you’re so lucky, I cannot tell you. I mean, I wish I had a similar story to you. Because my in my case, it was a total opposite. I was 18, I got my first credit card. I used it to buy a laptop, and pretty much maxed out the credit card just with that one purchase. And then I needed textbooks. And so then I was like, “Oh, I can’t, you know, I don’t have enough money in my checking account to pay for these textbooks with my debit card.” So I went and got a second credit card. And I maxed that credit card out buying textbooks and school supplies. And then when I noticed, you know how easy it was to just swipe the credit card and keep getting stuff. You know, I didn’t understand all those things that you’re talking about: the interest and making sure you pay on time by the due date. So I just kept spending more on my credit cards. And by the time I got to my senior year of college, I had almost $20,000 of credit card debt. And literally, you know, credit card debt has interest that’s really high. So I I truly did not understand it. And I feel like for a lot of the students that are listening to this podcast and trying to learn, you know, so that they can get their first credit card. That’s the kind of story that I think makes people nervous.

John Eringman: Yeah, and that’s a good point. And I love your story just because it’s it’s not uncommon for that to happen. There’s a key thing in personal finance and investing. It is don’t invest in it if you don’t understand it. And I would say the same thing for credit cards. You shouldn’t get a credit card if you don’t understand how it works. So you really want to have the core principles of you know, borrowing money and paying it off each month and how that builds your credit score before you actually get your first credit card.

Yanely: Yeah, that’s a good point. You know, you mentioned that like as you’re building that credit history and adding you know, on time payments and things like that, you are improving your credit score, right? You mentioned that that helps your credit score. What is such an advantage of having one? Why is it such a big deal to get one? Why can’t I just like, avoid it altogether? Be 30, 40, 50 years old without a credit card or credit score? Why does your credit history and in particular your credit score, even matter? Why is that important?

John Eringman: To break it down to just a basic level. Your credit score is just a report card of how well you pay off your debt. So let’s say you borrow $5,000 for a car, and then you make monthly payments to pay that off each month, you are true to your word, and your credit score will go up because of that. So then let’s say on the other side, you get a credit card, you know, you spend $5,000 on your credit card, but you don’t pay it back. You make.. you have late payments or missing payments. That inherently looks like you’re a bad borrower. You’re not true to your word. That matters because eventually when you want to buy a car, or maybe you want to buy a house, you know, years later, if you have a low credit score, if you’re not true to your word and you don’t pay back your debts in time, that’s going to cause your interest rates to go up. At the core of it, it’s high credit score equals low interest rates, and you pay less for things like cars, houses, you know, anything borrowed. And then a low credit score means high interest rates, which you’ll pay way more on cars and houses

Yanely: And lower interest rates with a car loan or with a home mortgage loan is a big deal because over time, that adds up to a lot of money. Actually, every apartment I’ve ever applied for the landlord will ask me for my credit report and will ask me for permission to run my credit because they want to see like you said, like, what is my reputation? I know a lot of people who have gotten denied for apartments. You know, 18, 21, 23 years old, want to get their first apartment, they’re, you know, put their big girl pants on, “I’m gonna move out of my parents house,” and then they can’t because they literally cannot get approved for an apartment. They have bad credit. All right, so let’s say there’s a 16,17 year old out there listening to this podcast, like, “Alright. I got my income, you know, maybe I got my summer job, and I got some income coming in.” What do they need to do to prepare before going online and filling out this application?

John Eringman: I definitely think it’s just, you know, self education and talking to your friends and family. Because I guarantee if you have the conversation with 10 people and be like, “Hey, I’m thinking about getting my first credit card. Do you have any experience in that?” Or “have you gone through the process themselves?” I guarantee you can find someone who has gone through the process or just went through the process of getting their first credit card. I encourage you, yeah, if you have your summer income and you want to get your first credit card, start talking to people, talking to friends and families be like, “Hey, have you applied for a credit card yet?” If your friends and family are not talking about money, you’re not going to, you’re not going to feel comfortable asking questions and you’re going to be scared by by making those money moves. You know, it might be an uncomfortable conversation, but it’s a conversation you need to have. And so if you feel worried, or if you don’t fully understand how to use a credit card or how to pay it off, I encourage people to just just chat with your friends. I mean, make it make it a more common conversation out there.

OUTRO

Yanely: Okay, you heard John. Credit cards aren’t really for going on crazy shopping sprees, unless you want to accumulate a lot of debt. Instead, they’re one way that you can show people your financial reputation is solid. People like landlords who might rent you an apartment, or even bankers who might approve you for a loan so you can buy a home or a car. So here’s my challenge to you. You might not be ready to get a credit card just yet. But this week weigh the pros and cons of having credit versus not having credit. Think about your goals for the future and ask if a good credit score might affect those goals. Like do you want to buy a car someday or maybe have your own place? A good credit score means that you’ll have more options and you’ll get better deals. One of the easiest ways to begin building strong credit is with a credit card. And listen up because this is probably the most important part. To avoid paying any interest fees, you’ll need to pay off the balance in full for every monthly bill. Now the more you learn about credit cards before getting one, the more you’ll be able to use your credit card as a tool to make your financial life easier later on. And that’s a flex. You got this! Happy credit building

CREDITS

Host – Yanely Espinal

Senior Producer – Hayley Hershman

Video Editor – Steven Byeon, Mallory Brangan

Sound Engineer – Juan Carlos Torrado

Producer – Hannah Harris Green

Director of Podcasts – Bridget Bodnar

Executive Director – Francesca Levy

General Manager – Neal Scarbrough

Special thanks – Sy Syms Foundation, Donna Tam

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