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How to Choose Your First Credit Card

Getting your first credit card can be difficult and stressful. There’s a lot to look for and think about. Should you get a card from your bank, a department store, or one that you saw someone recommend online?

There are a lot of questions to ask, but luckily once you learn the few things you need to know, it’s really not too complicated.

I’m going to show you exactly what you need to look for when getting your first credit card.

The Must Haves for Your First Credit Card

Regardless of what you spend the most money on or how good your credit score is, there are a few things that you should make sure your first card has. Then after you’ve built your credit score, if you want to look around and get a second card for better cash back or points based on what you buy a lot of, that’s great.

But for your first one you need to get a card that has these three things:

No Annual Fee
Free Credit Score
Good Customer Service

Your first card should have no annual fee. This is because you want to get a card that you can keep forever and never have to get rid of. Sometimes it makes sense to get a card with an annual fee (if your cash back offsets the fee), but one day you might want to cancel the card because your spending habits have changed. This is why you should go with a no-fee card for your first one.

The second thing is making sure it provides a free credit score. There are many cards that provide you with free credit scores every single month, so you would be stupid not to take advantage of this. Remember, the purpose of your first credit card is to primarily help you build credit. So don’t get caught up in other fancy benefits, points, and cash back. Just focus on finding a good solid starter card.

Nerdwallet has a great article that lists the different credit cards that offer free monthly credit scores, check it out here.

Excellent customer service should be your other main concern for your first credit card. Hopefully, you will have this card for a long time. So be sure and read reviews about the card before you apply and look for good reviews that specifically talk about high-quality customer service.

Get a Mainstream Card – Not a Bank or Store Card

Most of the time, cards tied to your local bank don’t have as good of benefits as more mainstream cards like Discover, Chase, American Express, Citi, or Barclay. They typically are a bare bones credit card. So if you’re going to get one, you may as well get a card with some good benefits like excellent rewards programs and free credit scores.

For the same reason, you probably shouldn’t get a store card for your first credit card. Sure, store specific cards like Belk or Banna Republic might have excellent rewards and store specific discounts. But hopefully, the majority of your spending won’t be in there. It’s also very rare for these store specific cards to provide you with a free credit score.

For your first credit card, you want to get something that will give you good perks on the majority of your purchases. Like a card good for gas and groceries, or one for online shopping. Don’t waste your time with the store branded cards just yet.

Figure Out What Type of Credit Card You Will Qualify For

Depending on your situation, you may not be able to get certain cards at first. I recommend opening a free account on Credit Sesame that will tell you what your credit score is. This will give you a good idea of where to start.

Let’s look at 3 different situations you might be in for your first card:

No credit history and no job. You have no credit score at all and don’t have a job that makes a reasonable amount of money. Typically this would be for college students who aren’t working very much if any at all. They haven’t started paying on their student loans yet and don’t have any other debt.

If this is you, you will probably need to start with getting a secured credit card. This just means that you don’t have any credit history and will need a super basic starter card. Secured credit cards have you put a cash deposit down of like $500 that is only taken if you don’t pay your credit card. After a few months, you will have enough credit score to cancel that card, get your deposit back, and get your first real credit card.

Limited credit history, student, part time job. This would be for a college student who is working part-time and is able to show some income. It might not be considered a full-time income or salary, but it is substantial enough to cover a small credit card payment of $500 – $1,000.

If this is you, there are some great options out there for student cards like the Discover it student and the Citi Thank You Preferred for College Students.

Limited credit history and working full time. You’re out of college or never went to college and have a full-time or part-time job that brings you income. Maybe you just never got a credit card before because you didn’t want one, didn’t understand them, or didn’t need one.

For whatever reason, now you would like one. Although you don’t have any credit history, depending on your income you will still be able to qualify for normal cards like the Chase Slate and the Discover it.

Don’t Worry About the Interest Rate

If you’re using credit cards like you should be, you won’t be carrying a balance on this card ever. You will be paying it in full each and every month while never spending more than you can afford. If you don’t have the money in your checking account, don’t buy stuff. Period.

As long as you’re doing that, you don’t need to worry about what the interest rate is because you’ll never pay it.

Consider What You Purchase The Most Of

Although it may be difficult to qualify for a good rewards card for your first one, it’s still worth looking at.

Ask yourself what you spend the most money on. Is it things like gas and groceries? Maybe you like to travel a lot? Or maybe you do a lot of shopping at online stores like Amazon?

There are all kinds of credit cards out there, just google “credit cards good for _____________” <– insert your spending category there.

Just remember that for your first card, focus on no annual fee, free credit score, and good customer service.

You can worry about getting an excellent rewards card later.

Apply for the Credit Card

Once you’ve decided on a card it’s time to apply. Surprisingly, the application process for cards today is very easy. You can apply, be approved, and finish the whole process in less than 20 minutes.

All you need is your personal information like name, birthday, social security number, and income. You can fill out the online application and call a customer service rep if you really need to.

Sometimes if you have no credit history you may have to get on the phone and talk to a representative who will ask you some questions about your income. But overall, it’s a pretty painless process.

Read the Main Points of the Terms and Conditions

Once you are approved, you’ll want to download the terms and conditions. I know they’re incredibly long, but you don’t have to read the whole thing.

There are a few key points though that you will want to take note of. At the very least read far enough to understand the specific terms related to these points:

Annual percentage rate for purchases
Closing date for billing cycle
Due date for bill payment
Penalties for late or missed payment
Annual fee
Cash advance fee
Special terms or bonuses for account opening
Special terms for cash back or rewards

If you need more information about these points, I’ve gone into great detail about understanding them in an article called Everything You Need to Know About Credit Cards.

Activate the Credit Card and Sign Up for Auto-Pay

The last step is to activate the card when it comes in the mail and set up your online account. You will need to create a specific username and password for that credit card website and then link your bank account to the credit card.

Here’s an example of what it looks like to link a Bank Account using Discover:

Choose manage bank accounts.

Click add another bank account.

Fill in the bank information which you can get from your bank or your checkbook.

Then just click continue and you’re good to go.

Once you’ve done that, you will want to set up auto pay with your bank. Be sure to set the credit card to pay in full every single month on a certain day. By doing this, you will never miss a payment and you’ll never pay any interest.

Just always make sure that you never purchase anything you don’t already have the money for.

Hopefully, this helped you understand what you need for your first credit card. Let me know in the comments below what credit card you think is best and why!

4 Reasons You Need To Stop Comparing Your Finances

We all make comparisons every single day.

We look at our friends, our family, the people we work with, and even the TV stars we watch on Netflix.

We’re constantly comparing the haves with the have-nots. And most of the time we put ourselves in the have-not category.

But did you know that making comparisons is actually extremely harmful? And most of the time the comparisons don’t even make sense.

I’ve put together 4 reasons for why you need to stop comparing your finances with other people immediately. Comparing yourself with others is detrimental to your financial health and won’t help you one bit.

Let’s take a look at the first reason you need to stop.

1. Nice Stuff Doesn’t Mean They’re Rich

Many of us see the guy in the cubicle next to us purchase a new car or come in with the latest iPhone and think “wow, he’s got so much money.”

Maybe your sister is always taking nice vacations or purchasing a house long before you’re able to.

Or it might be as simple as your friends always going out to eat while you barely have enough money to buy groceries.

What you must remember, is that what people have and do tells you nothing about their financial situation.

Take cars for example.

During the 3rd quarter of 2014, 85% of all new car purchases were financed. That is an astounding number.

And if that isn’t bad enough, 27% of new cars were leased in 2014. This means 1 in every 4 new cars that left the dealership was rented. The odds are extremely high that your buddy in the cubicle next door doesn’t actually own his brand new car.

Try to remember that when someone buys a new car it tells you very little about how wealthy they are. More than likely, it just tells you how much of a monthly payment they’re willing to take on.

The same is true for new gadgets. The average American household has $7,529 worth of credit card debt. Your friend may look wealthy with all of his fancy toys, but realistically he’s probably paying interest on them.

And of course, vacations.

It’s really easy to think that people are extremely wealthy when they take nice vacations. But USA Today put out an article this past summer showing that 46% of people who take vacations come home with credit card debt.

All of those nice beach trips and fancy cruises make us think people are wealthy when in actuality, they can’t afford any of it.

Is that 1-week trip to Florida really worth paying for throughout the rest of the year?

An Experian study found that the most common sources of credit card debt are hotels and airfare, followed closely by entertainment and dining out.

We need to realize that getting loans and renting entertainment is extremely easy in this country. And just because people look rich, doesn’t mean they are.

Often times, it means the exact opposite.

All that fancy stuff really tells you, is that they likely have a high tolerance for debt.

2. You Have Different Needs and Wants

Comparing what you do with your money to what other people do with theirs, just doesn’t make any sense.

You don’t base your favorite color, the outfit you’re going to wear, or what you like to eat on the person you work with do you?

So why in the world do you care what they do with their money?

You might be a single college kid who’s still got 2 more years of school left. In the meantime, your brother just got married and he and his wife bring in $80,000 a year. Of course you can’t purchase a house and go to the beach like he can, and it would be stupid to try.

One of the many mistakes millennials are making today is that we expect to live the life our parents have in our twenties. We forget that our now middle-class parents were broke when they were 25 and didn’t have what they have now.

Why in the world do we think we can live the same lifestyle that we had growing up?

Obviously we don’t need to compare our situation with our parents. But what about comparing to our peers?

Again the problem is that even for people your age, you’re likely extremely different.

My wife and I have been married for a year and a half, and we are still quite a ways off from purchasing our first home. Yet we have some friends who are the same age and have been married for half the time and are already purchasing a home.

It would be easy to be jealous of them and complain about not being able to get our own house too. But we would be forgetting that my wife still has 1.5 years left in graduate school and we need to be putting as much money as we can towards paying for her school.

Many times even if you’re the same age, your needs are drastically different.

And not only are your needs different, but often times your wants are too.

When you start getting jealous about whatever new thing your friend just got, ask yourself why? Ask yourself if you actually want that or would rather have something else?

Most of the time if you had that money in your hand you probably wouldn’t even buy what they just got anyways.

Personal finance is personal, so stop comparing yours to theirs. You’re a different person with unique needs and wants, try and remember that.

3. Long Term Plans Work Out Better

It’s so easy to get caught up wishing we had what the people around us do. We want a house right now, a new car right now, and world travel right now.

We forget to plan for the long term.

A lot of people rush into getting homes and cars they can’t really afford. People forget that getting a home is more than the down-payment. You’ll need to have an emergency fund set aside just for major repairs that will inevitably come along. Not to mention all of the new furniture you’re going to want to get for your new place.

You need to stop focusing on what other people are getting and focus on your own goals instead.

If you want to buy a house in the next 3 years figure out how much money you need. Plan for a downpayment, some new furniture, and an emergency fund that will cover major upgrades like a new roof or bathroom remodel. Then don’t stress about what your friend is doing.

If you rush into buying something you’re not ready for yet, you could end up in deep water if something goes wrong. Just ask all of the people who bought homes at 0% down in 2007.

In 2008, many people lost their jobs and then were underwater on their homes. Not only could they not afford the payment, they also couldn’t sell the home for what they owed on it.

Take your time and be patient.

Life is a marathon, not a 100-meter dash.

Think long term and focus on your own goals. Then forget about what everyone else is doing.

4. Comparing Ruins Relationships

Comparing your wealth to your buddy’s isn’t good for anyone.

It doesn’t help you and it doesn’t help them. All it does is breed bitterness.

Joshua Becker at becoming minimalist has a great article where he discusses how comparing yourself to others is extremely hurtful, and how to overcome it.

He talks about how comparisons breed resentment. If you are constantly comparing yourself to your friends, you will begin to resent them for what they have and do.

You will never be able to develop a deep relationship with that person because there is a part of you that continues to be mad at them for what they have.

If you continue doing this, eventually you will build a wall between you and them and will ultimately push them away.

It’s just not worth it.

Comparing yourself to others doesn’t add value or joy to your life. It’s only negative. It drives you to focus on what others have that you do not.

The big problem with comparing is that you can only control one life. Yours.

You have no control over what other people do. So stop focusing so much of your energy on other people and their lives.

Instead, focus that energy on improving your own life and making it the life you dream of.

Joshua Becker ends his article with some great advice.

If you must compare, compare with yourself

Stop focusing on what others are doing and start trying to make little improvements in your own life. If you want to travel. Don’t be jealous of your friend who just got back from that 2-week European tour.

Instead, start asking yourself what you can do to start planning your own 2-week trip.

By focusing on self-improvement instead of making comparisons, you will make huge strides towards financial freedom.

Question
Is it hard for you to stop comparing yourself to others? Write in the comment section below about the things you want that your friends seem to have, and why that may be misguided.

The Ultimate Guide to Your Credit Score

You’ve probably heard that your credit score is really important and that you need to get it higher.

You know that you need to pay your bills on time, don’t close credit card accounts, and be careful about how much you spend.

Well, only part of that is true.

But the real question is do you know why?

Why is your credit score important? How important is it really? And how exactly can you improve it?

Some financial experts will tell you not to worry about it and that it really doesn’t matter. Again there is some truth to that. You shouldn’t stress out about your credit score.

But I will show you below, exactly why you should care, and how you can get a good score.

In This Post, You Will Learn

About the different types of credit scores
The difference between credit reports and credit scores
Why you should care about your credit score
What is considered a good credit score
How your credit score is calculated
Tips for building your credit score from scratch
How to recover and rebuild a bad credit score
Tips for raising your credit score quickly
Difference between hard inquiries and soft inquiries
How your score is affected by closing accounts
The best ways to monitor your credit score
Step by Step Process to Build Your Credit Score
Why you really shouldn’t worry about it

Different Types of Credit Scores

Unfortunately, there isn’t just one credit score.

Many people have heard of the FICO score, which is the one that is most widely used, but there are more scores that other lenders will use to evaluate your ability to manage borrowed money.

However, there isn’t just one FICO score either.

FICO (Fair Isaac Corporation) is a company that has developed a model that assess your credit-worthiness based on your credit history. They use a baseline model to determine how much risk you would be to a lender.

Then that baseline model can be altered slightly depending on what type of loan/credit you are applying for.

For instance, FICO may provide a different score to a mortgage lender, an auto lender, and a bank all for the same person.

And it doesn’t stop there.

The three main credit bureaus (Equifax, Experian, and TransUnion) can all have slightly different scores. This happens because sometimes your credit reports can vary from bureau to bureau. It all depends on what gets reported and when it gets reported.

Not only that, there is another score called the Vantage score than is now becoming more popular.

Basically, the Vantage score is one that the three major credit bureaus came together to create. They created this score as a way to compete with FICO and sell the vantage score to lenders.

So as you can see there are many different scores out there and it is all extremely confusing. If you’re interested in learning a little more about the different scores ready for zero blog posted a great article talking about different scores. You can read about it here.

However, don’t all of the different scores overwhelm you. Luckily, the scores use very similar metrics for evaluating your worthiness.

So if you have a high score of one type, it is highly likely that your other scores are very similar.

Let’s keep going and break down what all goes into these different scores.

Credit Report vs. Credit Score

A lot of people get these terms confused.

A credit report is a document that gives information about your credit history. It includes loans, dates, credit limits, the age of accounts, when you paid, balances, days late, and specific institution names.

It attempts to track everything you have done related to borrowing money in any fashion.

There are three major reporting agencies as mentioned earlier. Equifax, Experian, and TransUnion pretty much monopolize the credit reporting market. Almost every lender gets its information about you from one of these three agencies.

Currently, the U.S. Law entitles you to one free credit report from each of the big 3 once every 12 months. You can request them all at one time, or you can request them throughout the year.

You want to be sure you get all three of them every single year in order to check for any errors.

Unfortunately, these companies aren’t perfect and sometimes they have the wrong information on your report. So be sure to check and get your free reports every single year.

You can go to Annual Credit Report to get your free reports.

Unlike credit reports, credit scores do not provide you with detailed information.

It is simply an objective score that is based on the information in your credit report. That’s why you want to get your free reports and check them often to make sure that your credit score is being calculated from correct information.

Why You Should Care About Your Credit Score

You will hear people talk about why you should and shouldn’t care about your credit score. Some people argue that the best credit score is 0 because that means you have no debt.

Well yes. And No.

I agree with the people who are on the street corners yelling at the top of their lungs that debt is bad and should be avoided at all costs.

I agree that the majority of people don’t handle debt well, are too emotional with money, and should probably cut up every credit card they have.

However, I also recognize that if used responsibly, your credit score can help you a lot, especially if you are young.

Here are are a few things that having a good credit score helps with:

Apartment Renting: Easily being able to rent an apartment. Yes, some people will argue that you don’t need a credit score to do this. And while that is technically true, it is a major pain because it limits the places you can look.

Waived Fees: You can get fees, down payments, and deposits waived for having a good score. I was able to get a $300 deposit waived from my utility company when moving into my first apartment because I had a good credit score.

Lower Mortgage Rates: They help you acquire lower rates on home mortgages. Again the “We hate credit score” crowd will tell you that you can get around this by showing the bank other factors and using a process called manual underwriting.

However, if you are young and don’t have a long history of employment, paying timely bills, or have 20% to put down it can be very difficult to get a manually underwritten loan. This means you will have to rent longer than you would if you had a good credit score.

This isn’t necessarily bad, but if you live in a low cost of living area and plan to be there for a long time, it often makes more sense (mathematically) to get a home.

Car Insurance: A good credit score can lower your rates on car insurance. The last time I applied for car insurance I was asked if they could check my credit score. I know that I have a good score so I was more than happy to let them.

What do you know, I was able to get my insurance rates lowered because of my good credit score.

Cash Rewards: If you use credit cards for cash rewards, having a good credit score helps you get approved for more advanced cards. For instance, I was able to qualify for few premier credit cards earlier this year and was able to get over $800 cash back in a matter of 3 months, all for free. And I wouldn’t have been able to do that without an excellent credit score.

You will hear people tell you that if you have a good credit score it means that you use debt a lot.

That couldn’t be further from the truth.

I have an excellent credit score and I have never paid a dime of interest on debt in my entire life.

Credit scores are similar to credit cards. They are a tool that can be extremely helpful and make your life easier.

But if you focus on them the wrong way and live your life based on debt, they can be extremely hurtful.

What is a Good Credit Score?

Like I said earlier, there are a few different credit scores with their own ranges.

Luckily, the two most important credit scores (FICO and VantageScore) use the same range of 300 – 850.

Lenders make their own decisions when it comes to what number is considered a good score vs a bad score. But in general, most lenders fall around the following range:

Excellent Score: 760 – 850
Very Good: 700 – 759
Good: 660 – 699
Fair: 620 – 659
Bad: 619 or less

Obviously, this will vary from lender to lender, but if you can get and keep your credit score above 700 you should be good.

If you can get it to stay above 750 you’ll typically be able to get approved for the lowest mortgage rates around.

Now let’s take a look at how we can get it there.

How Your Credit Score is Calculated

I’m going to focus on how the FICO score is calculated. If you can understand the FICO score and learn what to do to get it high, then your other scores will follow.

Your credit score is calculated from information found in your credit report. The score is made up of 5 different metrics.

Payment History (35%)
Amounts Owed (30%)
Length of Credit History (15%)
Credit Mix in Use (10%)
New Credit (10%)

Payment History – 35%

This is the most important factor of your score and makes up 35%. This category looks to see if you are paying your current creditors and lenders on time. If you aren’t doing this, you have bigger issues than a bad credit score.

As I talked about in my post on credit cards, you need to be paying your bills in full and on time every single month.

You need to strive to make no late payments. Ever.

The payment history looks at every time of lending accounts such as credit cards, installment loans, mortgages, retail store cards, and finance company accounts.

Amounts Owed – 30%

This category can be confusing. And it makes up a huge part of your credit score, so we need to make sure we get it.

Let’s break it down between “revolving credit” and “installment” loans.

For revolving credit, it looks at the total available credit compared to the total amounts owed. This is known as your credit utilization ratio.

Your credit utilization looks at all of your revolving accounts. Let’s say you have three credit cards: a Discover, a Sam’s Club Mastercard, and an LL Bean Visa <— Why do you have this??

On the Discover card, your credit limit is $3,000 and you currently have a balance of $450. On the Sam’s Club card, your credit limit is $4,500 and you currently have a balance of $1,100. And for the LL Bean, you have a limit of $1,500 but your balance is $700 because you bought way too many pairs of boots.

This means your total available credit is $3,000 + $4,500 + $1,500 = $9,000. And you currently owe $450 + $1,100 + $700 = $2,250. This means your utilization ratio is $2,250/$9,000 = 0.25 or 25%.

In order to maintain a high credit score, you want to keep this utilization ratio under 10%. As a good rule of thumb, that means try to keep each card’s balance below 10%. If you are consistently using a lot of your available credit, even if you’re paying in full, you look risky to lenders.

Always keep your utilization ratio under 10%

The other area that counts for “Amounts Owed” is your installment loans.

This means if you take out a loan for $10,000 to buy a car, FICO is looking at how much more you owe on that loan. If you’ve currently only paid $2,000 then that means you still owe more than 80% of the loan (including interest).

Paying down your loan amount will help improve your credit score.

Length of Credit History – 15%

The main factor here is how long your credit accounts have been established.

FICO looks at your oldest account, your newest account, and the average age of all your accounts.

So as long as your first credit card doesn’t have an annual fee, you should always hang onto that card. In general, the longer an account is open, the better your score will be.

Keep in mind that this does consider the average age. So if you plan on buying a house soon, you probably shouldn’t open up a new credit card a month before because it will take the average age of your accounts down.

Many people think that applying for new credit will hurt their score because of someone “checking” their credit. However, most of the time if your score takes a small dip it is likely due to the age of the accounts being newer.

Credit Mix in Use – 10%

This makes up a very small portion of your credit score, so I wouldn’t worry too much about it. But essentially it looks to see if you have multiple types of credit.

For instance, do you have a car loan, credit cards, and a mortgage? Or do you just have credit cards?

Lenders view you as less risky if you have various types of accounts. However, this doesn’t mean you should go get those types of loans just to improve your credit score!

I hate car loans, and I’m passionate about staying out of debt.

I’ve never had a car loan, and I don’t plan to, yet my credit score hovers around 770 – 780.

You can have an extremely high credit score without getting an installment loan. Like I said earlier, I never pay interest on my credit cards, and yet my score is still high.

The credit score has been marketed to be more important than it really is, and it encourages people to feel okay about getting installment loans because it will “help their credit.”

Don’t fall for that lie.

Your credit score is only good if it helps you stay out of debt and get rewards. It hurts you if you use it as an excuse to go get a loan.

Your credit score is only good if it helps you stay out of debt and get rewards

New Credit – 10%

Another small portion of your credit history looks at how often you open new credit accounts.

If you are young and don’t have a long history, it is best to not open a lot of new accounts within a short period of time.

The less often you open accounts the less risky you look to a lender. Simple as that.

How to Build Your Credit Score from Scratch

If you are just starting out and have no credit history the best thing to do is apply for a credit card that has no advanced reward systems or special promos.

Go with a simple Chase Freedom or Discover it card for just starting out.

The key thing is that you will need some type of income.

You will probably start with a very low credit limit, say $500. But often you can increase that easily after a few months of on-time payments and keeping a low monthly balance.

Often times for your first credit card you will need to get a secured card or become an authorized user on a card.

I don’t recommend getting a co-signer because that can end up in some very nasty situations.

A secured card is meant to be used only for a short time to prove that you are responsible. Essentially it is backed by a cash deposit that you give the bank or lender. This cash deposit is equal to the credit limit on the card.

It doesn’t work like a debit card where you spend the cash deposit. Instead, that deposit is used as collateral if you decide not to pay.

You will use this credit card like a normal card where you buy stuff, make payments, and be charged interest if you don’t pay in full.

Use this card to charge a couple of small items per month, like gas or a phone bill. Then make sure to pay in full on time every single month.

After a little while, you will have enough on your credit history to qualify for a real credit card.

At that point, you will want to close the account, get your cash deposit, and open a real credit card account to continue to build your score.

Wallethub has a great list of best credit cards organized by your credit score. Be sure to check out this list if you need a secured card.

Also, if you’re a student, be sure to check out the many student credit cards out there. These are a great way to start building credit early.

I got my first credit card at 18 years old and was able to have a credit score of 780 by my Junior year of college, and you can too!

As far as what to do in order to get a high credit score, it’s relatively straightforward.

Pay your balance in full every month on time
Never miss a payment
Keep your utilization ratio under 10%
Use your cards regularly
Don’t close old accounts unless they have an annual fee (this helps your credit history)
Try not to open a bunch of accounts close together
Check your credit reports annually
Be patient, it doesn’t happen overnight.

How to Recover and Rebuild Your Credit Score

If you’ve already messed up, don’t fear, everything can be fixed with time.

The biggest thing is that you need to make a commitment to getting back on track.

If you are honest and really work, you can totally turn your finances around and get back on your feet.

Focus on the big wins here.

Your payment history makes up the largest chunk of your score at 35%. So try to get all of your loans and credit cards up to date on payments.

Once you can get up to date that will help you take a huge step forward in getting back on track.

If you can’t afford to do that right now, call your lenders and try to work out a new payment plan. Be open and honest with them about your situation, and explain that you want to make it right.

After that, make a commitment to paying all of your bills on time moving forward.

This single step could likely increase your credit score by leaps and bounds because it makes up such a large part.

If you can, avoid closing any credit accounts unless they have an annual fee.

In order to get a new credit card, you may need to consider getting a secured card like I discussed above.

Lastly, if you are rebuilding, be patient.

It can often take 60 – 90 days before you will see any improvement in your credit score. On top of that, depending on how bad your score is, it may take many months to bring your score up.

Just don’t lose heart and try to focus less on the score, and more on fixing the problems that gave you that score in the first place.

How to Raise Your Credit Score Quickly
(Advanced Users Only)

Unfortunately, because of the nature of a credit score, it can be difficult to raise it quickly. Like most other things with finance, you need to be patient.

There’s no such thing as getting rich quick, and there’s no such thing as turning your credit score around overnight.

However, there are a few ways for advanced credit card users to boost their scores and continue to see them rise.

Once you are already doing all of the things listed above in the “building credit from scratch” section, you can start implementing a few other techniques to raise your score.

But don’t even think about doing this unless you are mature enough to control your spending.

Here are 4 tips to help you increase your score if you’re already a good credit user.

Increase Your Limit: Call your credit card company and ask for a credit limit increase. <– This is only for people who currently pay in full and only put things on the card that they plan to get anyways.

I first heard about this tip from Ramit Sethi, and he even explains how to call the credit card companies to ask for an increase.

The big idea here is that you want to increase that denominator (the bottom number) of the credit utilization ratio discussed above. If you can increase the denominator and still charge the same amount to the card monthly, it automatically helps your credit score by lowering your utilization ratio.

Get in the habit of calling your credit card companies and asking for an increase every 6 – 9 months.

Tell them exactly what you would like it to be increased to, and give them a legitimate reason as to why you want an increase. Examples include getting married, moving, have some big purchases coming up, wanting to redecorate, and other major life events.

I’ve been able to consistently increase the limits on my cards and now have almost $40,000 worth of credit limits. This allows me to charge an entire months worth of expenses on my cards and still stay well under the recommended 10%.

Get a New Card: Get a new credit card 6 – 9 months before you plan to need your credit score, like for a mortgage. Hopefully, if you’re planning to buy a home, you’ve been saving up for a downpayment. In that case, if you’re in the saving mode, it may be beneficial to go ahead and get a new credit card.

Getting a new credit card will help increase your overall utilization ratio which again makes up 30% of your overall score.

If you can get it 6 months before needing your credit score for a home purchase, this should give you plenty of time to recover from a slight dip you may experience due to the average age of your cards going down.

Remember, though, the average age only makes up 15% of your score. If you can decrease your utilization ratio and maintain on-time payments, many people actually find that their overall score increases when adding a new card.

Just be sure there’s no annual fee.

Lastly, I understand that you don’t want to over-complicate your finance life. And if getting another credit card will only add stress then it’s definitely not worth it.

Find Out About Reporting: Try to find out when your issuer reports to the credit bureaus, and pay multiple times per month. Give your credit card company a call and ask them when they report your information to the credit bureaus.

If your bill is due on the 20th and they report on the 15th, that means you likely have a higher than normal balance because it’s right before your bill is due.

Find out when they report and then pay your bill early by that date to lower the balance when they report to the credit card companies. This will keep your utilization ratio low and your credit score high.

Use Automatic Payments: Set up automatic payments to ensure you never miss. As long as you know there will always be enough money in the bank to cover the bill, it’s wise to set up automatic payments.

Like I said earlier, one-time payments make up a huge portion of your score. By making it all happen automatically, you can ensure that you never miss.

Hard Credit Inquiry vs. Soft Credit Inquiry

Many people falsely believe that checking your credit will have a negative impact on your credit score.

However, there are actually two types of inquiries the people use to take a look at your credit score.

A hard inquiry occurs when a lender pulls your credit report to review you and decide your credit worthiness. Hard inquiries are initiated by you whenever you apply for a new credit card, loan, mortgage, retail store card, etc…

This hard inquiry goes on your report to tell lenders that you are pursuing or have recently pursued, more credit.

These will stay on your report for 12 – 24 months and then after that will drop off.

People worry about these, but it’s really not that big of a deal. They do not make that much of a difference to your credit score. And if you are doing everything else right, your score will jump back up (and maybe even go higher) shortly.

If you have one or two hard inquiries it’s nothing to worry about. Lenders start getting worried when you have a lot of new accounts and inquiries within a short period of time. That tells them that you may be living beyond your means.

Unlike a hard inquiry, a soft inquiry does not leave a negative mark on your credit report. They typically occur when a lender, broker, or insurance company monitor your credit for reporting purposes.

A soft inquiry also occurs when a credit company reviews you for targeted “pre-approved” offers.

Another type of soft inquiry occurs when an employer checks credit before hiring an employee, or any other place where you would have a “background check.”

These types of inquiries can only be seen by you when you check your credit report. They are not shown to the version of the report that lenders see when you are applying for new credit.

Does Closing an Account Hurt Your Score?

Another myth that people often believe is that closing a credit card account will hurt your credit score.

That’s partly true, but not necessarily.

Closing an account doesn’t hurt your score just because you closed the account.

If your score goes down because you closed an account it is likely for one of two reasons. Either the account was older and now your average age of credit is newer, or your credit utilization ratio increased because your available credit decreased.

You can avoid this by not closing credit cards that you have had for a long time. As long as there isn’t an annual fee, there is no reason to close the account. Just make sure to charge it and pay it off at least once every 6 months or so in order to keep the account active.

For the utilization ratio let’s look at an example.

Let’s say that you have $10,000 worth of credit limits across three cards.

If you currently spend $1,000 per month, that means you are using 10% of your limit. If you close a card with a $4,000 limit and still spend $1,000 per month your utilization jumps from 10% to 17% because your available credit went from $10,000 to $6,000.

So if you plan to close a credit card, be sure to decrease your spending on credit cards so that your utilization ratio stays the same.

Best Ways to Monitor Your Credit Score

The very first credit card I got was the Discover It card.

I’m a huge Discover fan. Their website is extremely easy to use, they don’t have any annual fees, the rewards are competitive, and their customer service is fantastic. I’ve had a great experience with them and always recommend them.

One of the biggest perks of the Discover card is that they provide you with a free credit score every single month on your billing statement.

Of course, like I said earlier, there are many scores out there, so which one does Discover use?

Discover provides you with a free FICO score based on your TransUnion credit report.

This is a huge perk and keeps me from having to pay FICO $15 to check my credit score.

I love this so much, that I actually got a separate discover card for my wife when we got married just so we could get her credit score every month too.

The other place I love to use for free credit score reporting is Credit Sesame.

Credit Sesame is one of the only places I know of that actually provides you with a legitimately free credit score every single month. They don’t even ask for a credit card number, so there’s no way for them to even charge you money.

I should point out that Credit Sesame does not provide you with a free FICO score like Discover.

They use the Experian National Equivalency Score which is very similar to FICO and is (you guessed it) provided by Experian.

While not exactly the FICO, it is very similar and helps give you a great idea of where you stand.

I use both the Discover card and Credit Sesame together to keep a good eye on my credit.

They’re easy, free, and accurate. What’s not to love.

Step by Step Process to Build Your Credit Score

Apply for your first Credit Card (Secured if needed).
Pay your balance in full every month on time
Never miss a payment
Keep your utilization ratio under 10%
Use the card regularly
Set up a monitoring service like Credit Sesame
Find out when your card reports to the credit bureaus and pay card down before that day
Set up automatic payments based on the reporting date
After 6 months call your credit card company and ask for a credit limit increase
Open a second credit card
Try not to open a bunch of accounts close together
Check your credit reports annually
Continue to keep utilization under 10% across all accounts
Don’t close old accounts unless they have an annual fee
Repeat step 9 for all cards every 6 months
Be patient, it doesn’t happen overnight

*Again the above step by step process is assuming you always pay your cards in full and you never buy anything you wouldn’t (and couldn’t) but with cash. If it’s not in your budget, don’t charge it.

Despite Everything, Don’t Worry About It

I know this post is very long, but I hope you’ve made it here.

You should now have a better understanding of all things credit scores.

I do want to point out, that the score really doesn’t matter as much as you think. And it definitely doesn’t matter as much as lenders want you to think.

The credit score is important to help you get a low rate on a mortgage and help you get some extra bonus credit cards. Other than that, you really shouldn’t worry about it.

Of course, it’s important for all of the reasons I listed above, but it doesn’t indicate how financially savvy you are. And it definitely doesn’t indicate how close you are to financial freedom.

So take that for what it’s worth.

Pay your bills on time, don’t spend a lot, and then don’t stress about it.

If you learned something from this post, I’d love it if you could share this with a friend. If you found this helpful, it’s likely that your friend will too!

Everything You Need to Know About Using Credit Cards

Credit cards are seen as evil by many in the personal finance arena. And I agree they can be absolutely devastating to someone who doesn’t know how to use them.

However, credit cards are just a tool.

They’re like a sledgehammer. When used correctly they get a lot of work done very efficiently.

But in the hands of someone who isn’t careful, it’ll bust your shins wide open and leave you hurting for a long time.

I don’t want my shins busted, and I don’t want yours busted either.

I want to help you understand how credit cards work and how you can use them to your advantage. They provide a lot of benefits if used correctly. Just this year my wife and I have been able to use the extra cash we’ve picked up from credit cards to buy an HD TV, new vacuum, and vanity table!

If you’re committed to being financially disciplined, you can use credit cards to your advantage. I’ll show you everything you need to help you understand how credit cards work and how to use them.

In This Post, You Will Learn

What “credit” is and how it works
The credit card terms that matter
How to understand the billing cycle
How to understand the website
How credit card companies make money
Advantages
Disadvantages
How to qualify for a credit card
How to use a credit card responsibly
The 10 commandments for credit cards

What is “credit”

A credit card is simply a type of financial account that allows you to take a small, short-term loan from a bank. It is referred to as a credit card because when you use it, you are actually using the bank’s money to make a purchase. So the bank applies a “credit” to your account in order to cover the purchase and then you promise to pay them back later based on the terms of the agreement.

Like all loans, there is a certain amount of interest that you agree to pay the bank for the privilege of using their card. However, the one unique thing about credit cards is that if used wisely they can be an interest-free loan.

In order to never pay any interest on your credit card, you need to pay your bill in full every single month. We’ll take a look at exactly how to do that below.

The Credit Card Terms That Matter

You know the terms and agreement that you are supposed to read before creating a facebook account or iTunes login? You know how you never read them and just click accept?

Please, for the sake of your future, don’t do that with credit cards.

Almost all cards work the same way and have very similar terms and agreements. But you need to pay attention to a few key points in these terms before you sign up and after you are approved.

There is a lot of information in the full terms and agreement for the card. And honestly, most credit card companies full terms and agreements will be very similar. I recommend reading through at least once the full terms for a credit card so that you get an idea of what they say.

That being said, there are a few items that you need to pay particular attention to. Use this list every time you get a new credit card to be sure you understand what you’re signing up for.

If you don’t know all this information about the cards you currently have, now would be a good time to find out.

Annual percentage rate for purchases
Closing date for billing cycle
Due date for bill payment
Penalties for late or missed payment
Annual fee
Cash advance fee
Special terms or bonuses for account opening
Special terms for cash back or rewards

Let’s explain what you need to look for in each of these:

Annual Percentage Rate For Purchases: This is the amount you will pay on your purchases based on a yearly basis. See the section below on how credit card companies make money to understand how this affects you. But if you follow the 10 commandments, you won’t have to even worry about what this number is because you won’t be paying it.

Closing Date for Billing Cycle: The two dates you need to pay attention to are the closing date and the due date. The closing date marks when the cycle for grouping purchases together is over. For instance, if your closing date is on the 4th of every month, that means that all purchases made between August 5th and September 4th will be on one bill.

The Due Date: This is the date when you need to pay your bill. For instance, if your due date is on the 1st of every month, that means for the billing cycle between August 5th and September 4th you would need to pay that bill by October 1st.

Penalties for Late or Missed Payment: This is a fee that will be charged if you are late on a payment or miss a payment. For instance, my Citi Thank You Premier card has a late payment fee of $35. I definitely don’t want to pay that and I also don’t want the ding that late payment would do to my credit score.

Annual Fee: Always be sure to check if your card has a yearly fee. I recommend against cards with a yearly fee, unless you are gaining more cashback from that card (after the fee) than you could receive on another card for the same purchases. But that is very rare. Most of the time, just don’t get a card that has a yearly fee. It’s almost never worth it.

Cash Advance Fee: Some cards will let you get a cash advance when making a purchase without a fee while others will often charge you a percentage of the cash received. Be sure to never get a cash advance on cards that charge a fee for this.

Special Terms or Bonuses for Account Opening: Often times cards will have sign-up bonuses if you meet certain spending requirements. Be sure to always pay attention to these and if you are trying to get the sign-up bonus, pay specific attention to the deadline dates. Many people sign up for the credit card because of the bonus, but then never get it because they forgot when the due date was.

Special Terms for Cash Back Rewards: There are many cards like the Discover it and the Chase Freedom that have rotating cash back categories. You must pay attention because they often require you to sign up every quarter online in order to actually get the cash back bonus.

Understanding the Billing Cycle

When I got my first credit card I knew that I was supposed to pay in full in order to avoid interest, but I had a really hard time understanding how to do that. I got really confused on how the billing cycle worked. So I want to take some extra time explaining this because the credit card companies don’t explain it in words we can understand.

Credit cards work on a monthly basis. But that doesn’t mean you have to pay for what you purchase by the end of that month.

Let’s look at an example.

Pretend I have a card that has a statement end date on the 4th of every month and a due date on the 1st of the month. Then let’s say I go out to eat and spend $17.00 on August 6th. That $17.00 charge will be on my statement for August 5th – September 4th.

On September 4th, I will receive an email from my credit card company that says my statement is ready. That bill statement will show all of my purchases from August 5th – September 4th. Then that bill will be due on October 1st. This means that I don’t have to actually pay the credit card company for my $17.00 dinner until almost 2 months after I went out to eat.

This may be common sense for many, but I remember being extremely confused because no one ever explained it to me. Since my payment due date was on the 1st, I thought that I would need to pay for my $17.00 dinner from August 6th by September 1st in order to avoid interest.

But that isn’t the case.

If I paid the credit card company for all of the purchases between August 5th and September 4th by October 1st, they would not charge me any interest. I would effectively be getting a 1 & 1/2-month interest-free loan.

If you hear someone talking about paying their credit card bill “in full”, that’s what they are talking about.

This is how you want to use a credit card. You always want to make sure you’re paying the bill in full.

Understanding the Website

Another issue that I had when I got my first credit card was understanding the website. While all credit cards will have different websites, they will all have the same basic information.

The things you need to pay attention to are the recent transactions, pending transactions, view statement, make a payment, and any cash back or rewards.

If you look at the home screen you can see a few of these items that can be easily found.

As you can see the current balance on the card is $11.97, the previous statement ended October 4th, 2015 and was due on November 1st, 2015. The minimum payment due currently says $0.00 because I have already paid the full statement balance by the due date of November 1st.

You can also see a drop down for pending transactions and recent transactions.

The recent transactions is a list of all of the most recent purchases made against that card. This is especially helpful if you are trying to remember what you bought or are checking to see if there are any fraudulent charges. For my Discover it card, this area looks like this.

This is a great reference to be able to go back and see where you are spending your money.

The pending transactions is similar to the recent transactions except these transactions have not been fully processed. Typically these transactions have occurred in the last 2 – 3 days and are still in the process. Sometimes weird amounts will show up under pending like when you get gas. But don’t be alarmed unless a store shows up that you know you didn’t shop at.

Typically that odd amount (known as a hold) will go away in a couple of days when the real amount is processed.

As you can see above there is a pending transaction for a Shell gas station of $1.00. That is just the hold amount that the gas station places on the credit card.

In a couple of days, that transaction will move down to recent and will be around $20.00, or whatever it was that I paid for gas that day.

No matter what credit card you have, there will always be a view statement option. This will allow you to choose a specific statement based on the dates you’re interested in. You want to be sure you look at the statement and pay attention to all of the transactions on it.

Like I said earlier, as long as you pay the total amount of the statement balance by the due date, you will not be charged interest.

All credit cards will be a little different as to how far back in your history you can look. As you can see, my Discover card statements go all the way back to 2011.

Another confusing thing is what to choose when you are trying to make a payment.

There are always different options and trying to figure out which one you need to do can be confusing.

Usually, you have four different options for making a payment. You can pay the current balance, pay the statement balance, pay the minimum payment, or choose some other amount.

If you want to pay tons of interest and lose a ton of money, then pay just the minimum payment every month. (Please don’t’ do that)

Typically if you plan to just pay against your card one time per month you want to choose “pay the statement balance.” This will ensure that you never ever pay any interest.

The other options like pay the current balance and choose other amount are to be used when you are already paying the full statement bill, you just want to lower your current balance. Sometimes you might want to lower the current balance because you know you’re about to make a big purchase. Or you might want to lower your current balance because that low balance helps improve your credit score.

Either way, you always want to be sure you’re paying at least the statement balance in full every month.

As I said earlier, the minimum payment due is $0.00 because I have already paid for this month. But typically that minimum is $25 on my Discover it card.

The last thing that you want to pay attention to is your cash back or rewards.

Depending on the credit card these rewards can be earned and spent in a lot of different ways. Specifically with the Discover it card I can either take the cash back as a statement credit, shop directly on Amazon, donate it, shop on the limited items in the Discover store, or use it to get a gift card.

Each credit card has its own system of rewards and each card has multiple ways to redeem rewards and some rewards are higher than others.

For instance, below you will see that I currently have $67.16 of cash back on my Discover it card. If I take this as a statement credit or use it to shop on Amazon I will have exactly what it says, $67.16.

However, if I use the cash back to get a gift card, like LL Bean, I can actually get more cash back than just the $67.16.

Each gift card is different on Discover, but for an LL Bean gift card (which is where my wife loves to get boots from) has 3 different options. You can use $20 of cash back to get a $25 gift card, $40 to get a $50 gift card, or $80 to get a $100 gift card.

As you can see this is a much better option than just taking it as a statement credit.

So if you plan on shopping somewhere anyways, regardless of cash back or not, you should probably check on your options with your credit card rewards.

You might get more bang for your buck than just using it on Amazon or as a statement credit.

How Credit Card Companies Make Money

Credit card companies make their money in a few different ways.

Fees
Interest
Cut of purchases from the merchant

Credit card companies make a lot of money by charging annual fees, overdraft fees, late payment fees, and cash advance fees.

You should never have to pay any of these fees. (In a very few cases the annual fee can make sense, but not in most).

Basically, you should cut up your credit card right now if you are regularly paying any of the fees listed above. There is no reason you should be paying these. It simply means you are managing your money poorly (no pun intended) and need to stop.

Credit cards make lots and lots of money by charging you interest. Again, the only way you should ever use a credit card is if you are paying your balance in full every month. The majority of credit cards on the market have interest rates that average about 15%. That is a ridiculous rate!

If you are carrying a balance on your credit card ever, you cannot handle a credit card. You will never reach financial freedom while carrying credit card debt.

The other major way these companies make money is by charging the store where you buy items a fee that is a percentage of the items sold. Typically you can bet that the credit card company is receiving 1% -4% of the purchase price when you buy.

Advantages of Credit Cards

If credit cards can cost you so much money why do people use them?

Well, there are a lot of benefits to credit cards that go way beyond the 1-month loan. I’ll outline just a few:

Credit card companies provide a buffer between the purchase and your actual money. Credit card companies are extremely good at handling fraud and often times you are not responsible for any unauthorized use of your card. Unlike using a debit card, when your credit card is used fraudulently it is a fairly painless process to get everything reversed and issued a new card.
Many cards offer extended warranties on products. You will need to check the fine print on your specific card. But it is fairly common for credit cards to extend the manufacturers warranty on many items.
Cash back and rewards. Obviously, this is a major perk of credit cards. If used responsibly credit cards can be very lucrative for the often hefty sign-up bonuses and cash back rewards programs. Heck, just earlier this year I even bought an HD TV with cashback from a few cards.
Credit cards build your credit score. I won’t cover all of the nuances of credit scores here. But basically having various types of credit and loans that you pay regularly and on-time helps boost your credit score. This becomes very helpful when you are trying to get a mortgage on a house or even just putting down a deposit for utilities at your apartment.

Disadvantages of Credit Cards

Unfortunately for most people, the disadvantages of credit cards outweigh the advantages.

Credit cards are extremely dangerous when left in the wrong hands.

It has been proven by multiple studies that the majority of people actually spend more when they use a credit card as opposed to cash. If you’re that type of person, any rewards you get from your spending will be offset because you’re spending more than you normally would. If this is you, you don’t need a credit card. However, I believe that if used in the correct way, you won’t spend any more with a credit card than you would with cash.
The terms are often confusing and it feels like the credit card companies are out to get you at every turn. There are all sorts of fees and if you’re not careful you’ll end up paying way more because you didn’t read the fine print. Most of the time, credit card companies are not your friend.
If you carry credit card debt you will kill your finances. The average American household has $16,140 in credit card debt as of October 2015. You will never become wealthy and financially free by spending more than you make. And that is exactly what the majority of people do with credit cards.

How to Qualify for a Credit Card

If you’re over the age of 18 and have an income, you can likely get approved for some type of credit card.

If you are looking for your first card, I would highly recommend a nice rotating cash back card that doesn’t have an annual fee such as the Discover it or the Chase Freedom.

The Discover it is my personal favorite because they have had a history of excellent customer service, they have good rotating cash back categories, and they provide me with a free FICO score every month!

In order to apply just go to https://www.discover.com/ and apply for the Discover it card.

If you have a low credit score or no credit score it will be a little harder to be approved and you will likely have a very small credit limit. But that’s okay. Just start making small purchases and paying the bill in full every month.

Eventually, you will raise that credit score and can start taking advantage of advanced credit card uses.

How to Use a Credit Card Responsibly

Credit cards can be extremely powerful. And we all know

With great power, comes great responsibility
– Ben Parker

I couldn’t resist it.

But seriously. Credit cards can be extremely dangerous. They’ve ruined lives because people can’t control themselves.

If you can’t pay off your credit card in full every single month, year after year, you don’t need one.

Many financial experts will tell you to avoid credit cards altogether and to never ever get one.

They assume that you will be irresponsible and won’t be able to control your spending.

Don’t prove them right.

I believe that for most people they’re right. Most people can’t handle credit cards. And because of that, I would advise the majority of people to cut them all up and never use them.

But if you can commit to only using the credit card for purchases you were going to make anyways and always paying the bill in full, I think credit cards can be a great way to pick up some extra cash.

You need honestly ask yourself if you can handle the responsibility that comes with using a credit card. If you can’t, please do yourself a favor and shred those cards right now. That will be the first step on your way to financial freedom.

10 Commandments for Using a Credit Card

To wrap up, I want to leave you with the 10 Tightwad Credit Card Commandments.

If you decide you can handle a credit card make sure you adhere to these commandments. If you can’t, you’re not responsible enough to use a credit card.

Plain and simple. Use these as a guide to decide if credit cards are right for you.

For me to use a credit card, I promise I will always:

Only make purchases that I would have made otherwise and that fit within my budget
Always pay my bill on time
Always pay my bill in full
Never carry a balance that accrues interest
Never carry more than 15% of my credit limit on the card
Never pay an annual fee for a card (unless calculations prove that it is the best deal for the rewards)
Never use the card for “one-time emergencies”
Read and understand the terms and agreements for the card
Never make excuses for breaking these commandments
Cut the card up and throw it away at the first sign of breaking any of the above commandments

Ultimately credit cards are a tool to be used. They can be used for evil or for good depending on who’s in charge.

The bottom line is to know yourself. If you can’t handle credit, that’s okay. Just be willing to admit it, don’t use it, and move on. You’ll be better for it.

Please let me know in the comments below your own thoughts on credit cards. I’d love to hear about your experiences and how they’ve helped or hurt your own life!

Don’t forget, be sure to sign up for my newsletter to get extra tips on becoming financially free!

3 Habits That Are Costing You Hundreds of Thousands

We all have habits that we do daily or even weekly that cost us money. Most of the time they are really little, like a cup of coffee or eating out for lunch. But just how much do these innocent purchases cost us over time?

Let’s take a look into 3 everyday habits that sometimes can turn into much bigger monsters than we could ever imagine.

Little Habits Turn Into Big Costs

This is super important. What seems like only a small amount of money at the time, turns into a huge chunk of cash once that small purchase becomes a habit. The problem is that when we only do it once a day or even every other day we don’t think about it adding up.

If you don’t track your spending it really goes by unnoticed because these small habits are typically only a few dollars at a time.

A lot of people think that when it comes to spending, you really need to focus on the big things and not worry about the little things. I agree with that to a certain extent. If you mess up the big purchases like college tuition, cars, and houses then what you do with the small things isn’t going to matter much.

However, I would argue that we still need to pay attention to the small stuff because that’s where you can really waste a ton of money without even noticing.

Let’s dive in.

Daily Coffee

This one is tough and I’ll be the first one to admit I love my morning Coffee. But if you’re running by Starbucks or that little hippy coffee shop a block from work every single morning, you might as well hook a vacuum up to your wallet.

I mean seriously. You have no idea how much money that daily coffee is actually costing you.

Now I’m gonna get into sum numbers (haha, get it?) Okay, but seriously, I’m gonna go through some math, so just try to bear with me without your eyes glazing over.

My buddy Luke works at the local Starbucks and based on his expert memory skills, claims that about half of the people who come to his Starbucks every day are 5-days-a-week regular Starbucks goers. Now, I’m not sure if that represents most of the population, but I think it’s safe to assume that there are a ton of people who just gotta have their cup of Joe every morning on the way to the office.

I have a handful of friends that fall into this category and I’d be willing to bet that you do too.

So how much money does that person spend? Well, $3.25 for the average Starbucks drink may not sound like a lot, but it adds up quick for those everyday visitors. If you spend $3.25 on Coffee 5 days a week that works out to $65 a month. Okay, so maybe that’s not too bad until you look at the yearly cost of $780. Now we’re talking enough money for 3-5 day beach trip that you spent slurping back your favorite frappuccino.

But what happens if we do this for a few years? After 10 years of having your daily java, you’ve spent $7,800! Let me say that again. SEVEN THOUSAND EIGHT HUNDRED DOLLARS on Coffee. You could’ve bought a car, but instead wasted it on a morning drink.

Extend this out for your entire working career and 40 years later you’ve spent $31,200 on Coffee.

Coffee. Let that sink in.

For all those visual learners out there I put together a nice little spreadsheet that really shows the cost of coffee over all those years.

For a $3.25 Coffee 5 days a week, check out this chart to see how much money is spent over the years.

Okay, okay, I know some of you still aren’t convinced to quit your daily Starbucks run. But let’s talk about what happens if instead of morning coffee you invested that money.

Here’s where the numbers start to get really interesting.

Let’s take the money you would’ve spent on coffee and invest that into a nice Total Stock Market Index fund that produces on average 6% per year. Let’s say you invest that money monthly, and see what happens.

After 10 years of investing, that money is worth $10,652.16. We’re already up almost $3,000 compared to the amount spent after 10 years. If you do this for 20 years that coffee money turns into $30,000.

So, if instead of spending $3.25 a day on Coffee you invested that money you could have an extra $30,000 after 20 years!

Now, what happens if we extend this out for your entire working career?

The Numbers. Get. Crazy.

After 40 years, that daily Coffee would’ve made $129,446.90!!

That my friends is insane. Check out the chart below that shows the investment return over the years for that daily coffee.

Do you see that? We’re talking about enough money to purchase a house! You could buy a house, with the money spent on coffee for a full working career.

Hash-tag Mind Blown.

So What Should You Do?

Well, let’s be honest. I don’t expect you to give up coffee altogether and start investing $3.25 every day. (Although that’d be pretty awesome).

Instead why don’t you consider making your coffee at home every morning before you head out?

Let me break it down.

My wife and I both drink a standard 16oz Tervis Tumbler (gotta have that Tervis!) coffee 5 days a week.

We do most of our grocery shopping at the local Sam’s Club where everything is bigger and better. The coffee grounds cost us $10.98 for a 48oz jumbo sized Folgers Classic Roast. We get our favorite 64oz (vanilla caramel) creamer for $5.32. And then we get our massive 700 count Brew Rite Coffee filters for $2.98.

We can get 190 Tervis Sized cups of coffee out of the Folgers. We both use 2oz of creamer for each Tervis, getting 32 cups for the 64oz creamer. And we get 700 cups out of the coffee filters (we have to double up the coffee filters because we have a crappy leaky coffee pot :), so 2 cups every morning for 2 coffee filters.

If you plug those numbers into the fancy dancy spreadsheet you can see that my daily cup of joe only costs me $0.23 per cup.

Can’t beat that with a stick.

This means that I spend an average $4.60 per month or $55.20 per year for my cup of coffee every morning.

That works out to $12,677 if I invested that $0.23 instead for 40 years. I’ll happily pay that compared to the $129,446 from the Starbucks spending.

I’m not telling you to give up your coffee drinking, cause I’m sure not giving up mine. But if you’re a coffee house every morning kinda person, I encourage you to re-think that habit.

Maybe you should cut down to once a week splurging on that special Starbucks coffee. And the rest of the time just make a nice cup of Joe at home. That will free up a crazy amount of money that you could save or spend somewhere else that’s way more important than a fancy cup of coffee.

Smoking

Before you think I’m about to slam smokers, I want you to know that I don’t think there’s anything wrong with smoking cigarettes. I don’t think it’s very wise, but certainly not morally wrong.

With this article, I plan to focus on the cost of smoking instead of the negative health aspects.

I’m not even going to discuss the fact that 480,000 deaths every year in the U.S. are caused by smoking (about 1 in 5 deaths annually). Or that on average, smokers die 10 years earlier than nonsmokers. No, I promise I’m just going to discuss the money aspect of smoking. If you would like to read more about the health related issues the CDC has some great information that can be found here.

Let’s get to sum numbers (look I did it again; okay I know, not as funny the second time).

According to the Centers for Disease Control and Prevention (CDC), the average cost for a pack of cigarettes in 2013 was $5.76 plus an average $2.25 in tax. That’s a total $8.01 for an average pack of cigarettes. That was two years ago and no doubt the price has increased but let’s just work with those numbers and see what happens.

In 2012, the average smoker went through 1 pack (or 20 cigarettes) per day. If you smoked 1 pack per day at $8.01 a pack, that works out to be $224.28 per month. This quickly turns into $2,691 per year.

And you thought the coffee drinkers were bad.

According to the CDC, every day 3,200 people under the age of 18 smoke their first cigarette. On top of that, every day 2,100 youth and young people who have been occasional smokers turn into daily smokers.

As you can see it’s very common for people to start smoking at a young age and then continue the habit throughout the majority of their life. So that $2,691 spent per year on cigarettes turns into $53,827 after 20 years and $107,654 after 40 years.

Again, this analysis wouldn’t be complete if we didn’t look at what would happen we invested that money instead.

For an 18-year-old who smokes for 40 years until age 58, the money they spent on cigarettes would’ve been worth $446,651 if invested at 6%.

Did you see that? We’re talking about nearly HALF A MILLION DOLLARS spent on cigarettes.

Let me remind you what I just said above. If you smoke for 40 years, it has cost you nearly half a million dollars and yet 3,200 young people smoke their first cigarette every day.

This country clearly has its priorities messed up, and this smoking epidemic needs to come to an end.

Again, for all the visual folks out there, see the chart below for the actual cost of smoking.

If the insane health risks associated with smoking aren’t enough to convince you to quit, take a look at the amount of money you’re burning every time you light up that cigarette.

You could retire rich if you only quit smoking.

So What Should You Do?

Quit.

I know it’s extremely difficult. I know it’s insanely addictive. I know you’ve tried a hundred times. But for the sake of your life, your family, your wallet, and your future stop smoking.

There are tons of programs out there that can help you quit. But ultimately it’s going to have to be a conscious decision that you make. Figure out whatever program works best for you, but you’re going to have to make up your mind.

There’s no program in the world that can help you quit unless you are actually serious about it.

So make up your mind. Take a stand for your future and put an end to this habit that is literally killing you.

Eating Out For Lunch

This one is extremely tough, especially if everyone else at work or school loves to go out to eat.

The problem is, just like smoking or coffee, the little bit spent on lunch doesn’t seem to be very much at the time. I’m not sure about your friends and coworkers, but some guys in my office go out to eat 4 and 5 days a week. I mean, the occasional lunch out of the office isn’t a big deal, but this daily cost can really add up!

Let’s assume that you go out to eat for lunch 3 days a week. I’m not sure about how it is where you live, but in Chattanooga it’s extremely difficult to each lunch for less than $7. So 3 times a week at $7 each time works out to $21 per week.

Now compare that to your work. How much money do you make an hour? Yet you’re spending $21 to each lunch 3 days a week. How much longer do you have to spend at work just to make up for the cost of lunch?

Let’s keep going.

At this rate, you’ll spend $84 a month and $1,008 per year. And that’s not even getting lunch every day, it’s just 3 meals a week!

Once again, if we look at what that money would do if you invested it at 6% you can see from the chart below that after 40 years it turns into $167,285.

I think I’ve made my point. Do you really want to spend that much money on eating just 3 meals a week with your coworkers?

Maybe you do. And if so, that’s okay. Just make sure you’ve considered how much it costs and work it into your budget.

But for the vast majority of us who go out to eat for lunch out of habit, I think it would do us a lot of good to consider how much it really costs.

So What Should You Do?

Brown bag it. That’s right take your lunch from home.

My wife and I take our own lunch every single day. This saves us a ton of money and I can later use that to go out to eat with her.

A typical lunch for me consists of a ham and cheese sandwich, a banana, and a small bag of my favorite wild roots forest berry trail mix. Since we get great deals on groceries at our local Sam’s, this works out to be about $2.06 for that meal.

Again, this is way cheaper than eating out.

I would much rather spend that money going out with my wife or friends on the weekend, than burning it on lunch at the office.

What Habits Are Stealing Your Money?

I’m not saying that you should quit doing all of the things you like. The main point I’m trying to get across is that you should really stop and consider how much your habits actually cost.

Often times these habits are sucking more from our wallets than we think.

If you’re interested I have made my spreadsheet available for free download.

Simply put in your name and email into the form below and you’ll get access to the excel spreadsheet I created to come up with all of the numbers!

It has instructions that come with it so you know exactly how to use it. You can put in your own numbers to see how much your daily habits cost you.

Just go ahead and download it. Then respond in the comments below, or shoot me an email and let me know what you found out about your habits!

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How Credit Card Companies Make Money

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Disadvantages of Credit Cards

How to Qualify for a Credit Card

How to Use a Credit Card Responsibly

10 Commandments for Using a Credit Card

Little Habits Turn Into Big Costs

Daily Coffee

So What Should You Do?

Smoking

So What Should You Do?

Eating Out For Lunch

So What Should You Do?

What Habits Are Stealing Your Money?

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