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This article is for those who have read all other ‘Stock Market 101’ articles and now want to know their investment options for their capital based upon our current market outlook.

Market Risks

There’s no doubt that the stock market has been on an incredible run, and if you’re a wise investor, you have benefited greatly from it. However, investments are all about risk versus rewards and selecting favorable outcomes. Let’s take a look at the risk:reward breakdown based on where the market might be heading.

Our view is that due to all the factors discussed in previous articles, the upside reward potential is roughly 5%. This means that IF the market continues it’s historic bull run, we don’t believe it will gain any more than 5% above it’s previous highs.  So if that’s the reward, what’s the risk?

It’s hard to say for certain, but if the market crashes like it did in 2001 or 2008, the terrifying downside risk would be around a 50% loss. Yes, you read that correctly, half of the money you’ve been diligently saving over years, or maybe even decades, could be wiped out.  If you find that number absurd and don’t believe it can happen, we encourage you to take a look at what happened in 2008. Read some of the stories of those on the brink of retirement who, in a matter of a few months, could no longer afford to retire.

You’ll often hear people say things such as “just ride the wave” or “you can’t time the market”. Those phrases serve no purpose other than to deter you from trying to make sense of what’s happening in our financial world. Timing the market is only something active traders and hedge fund managers need to worry about because that extra 1% means so much more to them.

As an average person with a 401k for retirement, you shouldn’t care if you miss the top or bottom of the market by 5%, because the risk is so much higher. In general, things fall much faster than the time it takes to build them, the stock market is no different.

I’d rather be out of the market I wished I was in, than in the market I wished I was out of.

Safe Investment Options

The first thing you should do upon finishing this article is to check your current asset allocation. There are standard guidelines/recommendations for the mix of investments you should be in, and they vary with age. Early on in your career, you should be more heavily invested in riskier assets like stocks. As you approach retirement, you want to make sure you’re reducing your risk by adjusting where your money is invested.

Check to make sure you’re in the appropriate range based on your age. Taking action one step further, you may want to consider pulling some, or all, of your money out of the market until things become more clear from a global economic standpoint.

So, you’re likely asking yourself what you can do with your money if it’s not in the market. There are a number of options you can research to find what fits you best. Some of our recommendations, and the strategies we have personally taken, are:

  • Gold – a safe harbor for cash in times of market turmoil. Throughout history, gold has an inverse relationship to the market.
  • Bonds – have a guaranteed low rate of return. You know exactly the result you’ll be getting when you invest in bonds.
  • Cash – not the greatest of options because you earn no interest on your money, but you’ll be glad you’re in cash if a recession does rear its ugly head.

If you have a financial manager, it may be a good time to bounce these concerns off her/him. At the very least, make sure you are not over-leveraged in risky assets, like stocks, based on your age and retirement goals. Stay safe and happy investing!

Will the bull run continue? Are we headed towards a recession? Does anyone actually have any idea what’s happening?

If you’ve found yourself asking one of these questions (or any other variation of them), you’re not alone. We’re currently in a very interesting time within our nation’s history and many people are struggling to decide what they should do with their hard-earned capital due to the high levels of volatility in the stock market.

We want to help ensure that you protect your nest egg as best you can, so our goal is to help you analyze the stock market from a ‘big-picture’ perspective in a way that you can understand.

The best way to do this is to follow a ‘simple’ two-step process.

  • Step 1: Make an educated guess as to whether the stock market will go up or go down in the coming months/years.
  • Step 2: Based on your answer to step 1, decide which investment option(s) you should utilize during that time period.
  • Step 3: Repeat steps 1 and 2 as the stock market appears to change directions.

That’s it! It’s a really ‘simple’ process to follow, now you just have to figure out how to achieve Step 1.

Where is the Stock Market Headed?

Making an educated guess about which way the market is going to go is a daunting task. However, if you analyze it from a ‘big picture’ perspective, you can simplify it a bit for yourself. In order to do this, there are THREE main pieces of the puzzle that need to be addressed.

  1. Where are we within the macro market cycle?
  2. Is the stock market stable from a fundamental point of view (AKA are companies becoming more profitable or are they losing business)?
  3. How is the trade war ACTUALLY effecting the stock market and the every day consumer?

We have an article addressing each of these things individually. Read through them and you’ll be able to piece together your own view of where the market is headed.

In order to decipher the stability of the stock market from an underlying perspective, there are multiple pieces of information that must be considered. First and foremost, are companies growing (increasing sales, increasing profit, hiring more, etc) or are they declining (laying people off, closing stores, rolling back products, etc).

Finding this information is actually pretty easy. Simply google search the company and compare current stats with where they were a year ago and a quarter ago. If each quarter shows more revenue than the quarter before, you know the company is growing and vice-versa.

If a majority of companies within the S&P 500 are growing, the overall stock market will generally rise. However, when they stop growing is when investors get concerned about recessions and bear markets. This is when they look into other aspects of market stability.

Fed Policy

The Federal Reserve is the central bank of the United States. The job of the Fed is to stabilize our economy and keep it running as best they can. Many are quick to blame the Fed when things go wrong, but if you remember your lesson on market cycles, some things are beyond their control.

One of the main levers the Fed uses to control monetary policy is interest rates. They evaluate the entire economy from the top down to evaluate where we stand, and what our trajectory looks like. When things are booming, they typically raise interest rates slowly. When things start to look bleak, they cut interest rates to help keep money moving.

The Fed recently cut interest rates by 25 basis points to 2.00-2.25%, signaling a slowing economy. It was the first rate cut since the 2008 financial crisis. Many experts are calling for additional rate cuts before the end of 2019, but nobody knows how much further the rate cuts will go at the moment.

As mentioned earlier, cutting interest rates is a strategy to keep money moving by making it cheaper to borrow money (because interest rates from the federal bank are lower). So, what happens when interest rates can’t be cut anymore? Well, that’s part of the recipe for a recession. If interest rates are at their lows, the Fed has nothing left to cut to help stimulate the economy. This is one marker to keep an eye out for, as it can indicate a recession is, in fact, right around the corner.

Inverted Yield Curve

One of the biggest predictors of a turning point in the market cycle is an inverted yield curve. In short, an inverted yield curve is when short-term interest rates are higher than long-term interest rates. For example, a 2-year Treasury bond returns 2.1% interest, while a 10-year Treasury bond returns 1.8% interest.

The reason this is important is because of investor psychology. If people can earn more money with a shorter term investment than they would with a longer term investment, they’re more likely to take their capital out of the stock market and put it into the bond market. Less money flowing through the stock market causes stock prices to decline (based on the laws of supply and demand).

The yield curve inverted in March of this year, causing more concern in the stock markets amid the myriad of other factors we have already discussed. These rates change by the minute, just as a stock price does, but the yield curve has remained inverted, broadly speaking, and has signaled to investors that the cycle may be turning downwards.

You’ve likely heard more than you care to know about the current trade war. Every time you turn on the TV, visit a news website, or look at a magazine you’ll see some headline surrounding it. With so much information being blasted at you 24/7, it’s hard to identify how exactly the trade war will effect YOU. That’s exactly what this article aims to address.

The Start of the Trade War

The trade war really began in early 2018, when tariffs were applied to solar panels, washing machines, steel, and aluminum being brought into the US from various countries. Additional waves of tariffs have since been imposed, the largest of which was a 25% tariff on $50 billion worth of goods coming in from China.

It’s these additional waves that have taken the conversation from being labeled as ‘foreign policy decisions’ to now being a true ‘trade war’. And while our President states that tariffs only HELP the United States, the trade war actually directly impacts both the global economy and U.S. companies alike.

How Tariffs Effect the U.S. Economy

Companies who have been outsourcing manufacturing to low-cost regions (in foreign countries) are now having to pay a 25% increase in order to import their ‘goods’ from China. This means that every company using this business model now has to account for a significant increase in the cost of the operations needed to make and sell their product.

What’s even worse is that there’s not a great way to avoid this impacting their bottom-line. Corporations only have a few choices when it comes to the tariffs:

  • Eat the additional cost – if the company elects to eat (pay) this tariff cost, then it will, in turn, eat away at corporate earnings. These earnings are the lifeblood of public companies. They rely on their earnings to keep investors wanting to buy more stock, which in turn keeps the stock price high. If earnings decline, fewer investors want to purchase shares which results in decreased share prices.
  • Pass along the additional cost – companies can elect to pass this cost along to the consumer of the goods they make. Now, the consumer may be another company who uses a product in their own product, but eventually this additional cost will make its way back to you in the form of more expensive electronics and various other products.

While this is one of the biggest ways that the trade war effects the U.S. economy, it certainly isn’t the only one. If you’re interested in a deep-dive into it, please read this article.

Next Up: Stock Market 101 Part 3/5 – Market Stability

It seems like everywhere you look the media is smothering talk about trade wars, Fed policy, and a looming recession. While these are all valid concerns when it comes to the health of the stock market, there’s another equally important facet that needs to be addressed; the market cycle. 

Truth be told, markets work in cycles, contrary to what most believe. This basically means that whether the market moves up or moves down is not random and can actually be predicted with a decent level of certainty.

Detailing the stages of a market cycle are a bit academic for the purpose of this article. However, if you’re interested in learning just how those market cycles work, check out this video by Ray Dalio, Founder of Bridgewater Associates.

For now, we’re simply going to look at market cycles from a big picture perspective to give you a good overview of how they work.

Bull and Bear Markets

To make things as simple as possible, think of it this way: the stock market is either going up (bull market), going down (bear market), or is going sideways (stalling).

In short, a bull market is a market which sees a 20% increase in the value of an investment. Bull markets can describe any type of investment vehicle: stocks, index funds, commodities, etc.  Inversely, a bear market is a market which sees a 20% decrease in value of an investment.

The current stock market bull run is going on 10+ years, making it the longest bull run in history. The saying “what goes up, must come down” is always good to keep in the back of your mind when talking about such an incredible feat.

We have seen recent declines in the stock market, and this could just be a pullback, or it could be the start of something much more severe. It’s important, however, to note that there is a difference between a bear market and a full on recession. A bear market is typically the start of a full on recession, but there can be a bear market without going into a recession.

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

Where is the stock market right now?

So where are we right now (Q4 2019)? Technically speaking, the bull market is still in tact. However, with multiple sharp sell offs over the past 18 months, the warning signs of a bear market are evident, which is why media outlets are analyzing everything as much as they are.

What should you do with your money then? You have 3 main options:

  1. Keep your money invested in the stock market. As mentioned, the bull market could continue. This approach is risky (because of the signs that a bear market could be near), but also could yield good results if the market continues to rise.
  2. Take your money out of the stock market and invest in bonds. This approach guarantees you a return on investment but it will be capped somewhere between 1-4%.
  3. Put your money under your pillow. This is the ‘safest’ method since you can’t lose it, but also gives you no upside potential.

Each person will have their own decision to make, but our recommendation is to keep your money safe until we get confirmation of either a bear or bull market.

Next up: How the Trade War Effects the Everyday Consumer. 


Consumer Lending: A Growing Business Model

As financial technology continues to advance, the various types of products consumers have available to them have advanced as well. Investing is certainly a market that has benefited from the growth of financial technology, but consumer lending has arguably benefited just as much. If you are looking to receive a personal loan, we want to help you understand the pros and cons of each loan type before you get one.






Traditionally there was your mortgage, auto loan and business loan, but now personal loans have increased as product selection has increased.

Personal loans are smaller than your more mainstream loans and typically are uncollateralized. However, in some instances you can use collateral to help the approval process. Depending on your needs, it’s important to know the various types of personal loans, how they can be applied and what you want to watch out for.

Credit Union Personal Loan

First and arguably the most popular of the personal loan products is a personal loan from a credit union. Credit unions are a non-profit financial institution that usually offers its members better rates than a traditional bank. While traditional banks can offer personal loans, it’s less common.

The application process for a personal loan is fairly straight forward in most cases. Information you will need includes income, personal details such as your social security number and driver’s license number, as well as any co-signer you may have on the loan.

Interest rates on a personal loan are going to be higher than a mortgage or auto loan, but likely less than a credit card and payday loan. You can expect terms for a credit union personal loan to be between 2-5 years and the note is repaid through equal monthly payments. As far as personal loans go, this is likely your best option.

A personal loan through a credit union is typically used for small debt consolidation or an expense such as a home repair or auto repair.

Payday Loans

Another personal loan type that many know about are payday loans. These are much different than a personal loan through a credit union and need to be used with caution. Depending on the state you live in, you may not have this option available to you. Payday loans have been under pressure from law makers for their alleged predatory practices.

To apply for a payday loan, the process is like a credit union personal loan in that you will need your personal details and any other relevant information. Depending on who are apply with, you may be able to apply for the loan online. Funding for the loan in most cases is same day, making it an option if you have a dire emergency.

One thing you need to watch for are the annual percentage rates and how much you will need to repay. The interest rates on a payday loan are extremely high and can make your financial situation worse. Also, a payday loan is meant as a short-term financial solution and should not be treated as a long-term financial solution.

Repayment of a payday loan is typically due when you are paid next. If you are unable to repay the note within a couple weeks, this is likely not the best option.

Tribal Loans

Last on our list of personal loans are tribal loans. Now this loan type is likely the lesser known out of all three but is a mix between a credit union personal loan and a payday loan. Tribal loans are different in that they are offered by lenders that are under the jurisdiction of the Indiana reservation they operate in.

The application process for a tribal loan is almost exclusively done online and typically you will receive funds on the next business day. A tribal loan is useful for emergencies and short-term financial needs. You will find on many of the website they clearly state it is an expensive form of borrowing and should not be relied on long-term.

When applying for a tribal loan, many of them are installment loans, which make them like a credit union personal loan. However, the interest rates are extremely high like that of a payday lender. The benefit is you can repay your loan early, saving you money on future interest expenses. These loans should be used sparingly and only as a last resort.

Personal Loan Market

The personal loan market continues to shift and evolve as technologies change. If these options don’t seem to fit your needs, you can always look at peer-to-peer lending. These loans are facilitated by investors who put up money to fund the loan. LendingClub is the most well-known in the market and is used by thousands. This is a healthy mix of a credit union personal loan in that your loan is an installment loan, but the interest rates will likely be a bit higher than a credit union personal loan.

Personal loans are an effective way to refinance credit card debt or to finance that home repair you’ve been putting off for years. Take the time to shop around and find the product with a competitive interest rate. Credit unions are a perfect place to start but if the situation is dire, you can turn to tribal loans and even payday loans. Thanks to financial technology, there is almost an option for everyone.

As we head into back-to-school season, the next few weeks become the busiest time of the year for tax free shopping! We’re here to make sure you have all the information you need to take advantage of some potentially massive discounts.

How do Tax-Free Days Work?

These annual holidays (sometimes referred to as “sales tax holidays“) present a great opportunity for consumers to take advantage of lower pricing on items such as clothing, school supplies, shoes, and other goods. By removing sales tax from the price of certain items at this time of year, retailers help lower the expense burden on parents for back to school shopping.

There are certain state laws a retailer must follow in order to qualify for sales tax promotions. This often means that they will offer a retail sale at the same time as their tax-free shopping period, making the savings for consumers truly spectacular!

An example of this would be a state who’s guidelines specify that only personal items costing under $100 are eligible for tax-free shopping.

A retailer may, therefore, offer shoes for $99 that ordinarily sell for $150 so that they qualify. Thus, if the normal sales tax rate is 7%, your total bill would go from $160.50 down to $99. 

Which States Offer Tax-Free Weekends in 2019?

If you don’t live in one of the 17 states that’s offering a tax-free holiday this year, you can visit one that does in order to do your shopping and you won’t have to pay sales tax on those items as long as they are eligible under the state’s tax-free shopping guidelines.

The following states offer tax-free days between now and the end of August:
  • Arkansas
  • Connecticut
  • Florida
  • Iowa
  • Maryland
  • Massachusetts
  • Mississippi
  • Missouri
  • New Mexico
  • Ohio
  • Oklahoma
  • South Carolina
  • Texas
  • Virginia
Here are the specific details of each state’s tax-free shopping days

Arkansas

Connecticut

Florida

  • Dates: August 2 to August 6
  • What items are eligible? Clothing under $60, certain school supplies under $15, and computers selling for $1,000 or less, according to the Florida Department of Revenue.

Iowa

  • Dates: August 2 to August 3
  • What items are eligible? Clothing and footwear under $100, according to the Iowa Department of Revenue.

Maryland

  • Dates: August 11 to August 17
  • What items are eligible? Clothing and footwear under $100, according to the website for the Comptroller of Maryland.

Massachusetts

  • Dates: August 17 to August 18
  • What items are eligible? “Personal use items” costing $2,500 or less, according to the website for the Commonwealth of Massachusetts.

Mississippi

  • Dates: August 30 to Sept. 1
  • What items are eligible? Mississippi is unique and dedicating it’s tax-free days to firearms, ammunition and hunting supplies, according to the Mississippi Department of Revenue.

Missouri

  • Dates: August 2 to August 4
  • What items are eligible? Clothing under $100, computers under $1,500 and school supplies under $50, according to the Missouri Department of Revenue.

New Mexico

  • Dates: August 2 to August 4
  • What items are eligible? Clothing under $100, computers under $1,000, computer peripherals under $500 and school supplies under $30, according to New Mexico’s Taxation and Revenue Department.

Ohio

  • Dates: August 2 to August 4
  • What items are eligible? Clothing under $75 and school supplies under $20, according to the Ohio Department of Taxation.

Oklahoma

  • Dates: August 2 to August 4
  • What items are eligible? Clothing under $100, according to the Oklahoma Tax Commission.

South Carolina

Texas

  • Dates: August 9 to August 11
  • What items are eligible? Clothing, backpacks and school supplies under $100, according to the Texas Comptroller.

Virginia

  • Dates: August 2 to August 4
  • What items are eligible? Clothing under $100, school supplies under $20, Energy Star products under $2,500, hurricane preparedness items under $60, and generators under $1,000, according to the Virginia Department of Taxation.

Looking for other ways to save money? You don’t want to miss our secret mortgage hack that can possibly save you thousands!


Understanding Personal Debt

Consumer or personal debt in the United States continues to be a pain point for many citizens. With an economy driven by debt, companies and financial institutions make it incredibly easy to obtain financing. While that’s great for those whom are well versed in budgeting and savings, most of us find ourselves getting trapped with massive debt accumulation

There are several types of personal debt and each carry different terms that include interest rates, payback length, loan terms and so on. It all can seem overwhelming, which leads to a serious lack of understanding and uneducated use of debt.

In this article, we’ll highlight a few of the common types of personal debt and how they can impact your financial health. We also have multiple resources to help you get out of any debt you currently find yourself struggling with. 

Credit Card Debt

First and arguably the easiest way to get into debt is by owning a credit card. Whether it’s a store credit card or a generic card, they all work in a similar fashion and offer one main benefit, an open line of credit. All you have to do is swipe the card and instantly purchase nearly anything you want regardless of if you can afford it.

One of the main benefits to having a credit card is it can help keep your cash flows open. More specifically, if you are looking to make a large purchase, you can finance it over the course of a few months rather than having to pay the full amount at once. Some card companies offer special 12-month financing over certain dollar amounts or have zero percent interest as an introductory offer.

However, one of the drawbacks ends up being that life gets in the way and you carry a balance. While a month or two with unpaid credit card debt isn’t the end of the world, many carry a balance for years, only paying the minimum payment. If you carry a balance, interest rates on cards can be north of 25% depending on your terms. To avoid paying high interest rates, you need to pay your balance off in full each month. This will save you stress and keep debt at bay.

If you currently find yourself with credit card debt, we can help you get out of it!

Auto Loan Debt

The next type of popular consumer debt is the auto loan. Auto loans are easy to obtain in most cases, but there are a few more hurdles you have to jump through to get an auto loan than to get a credit card. Financing a car is the typical road many travel, since vehicles are a necessity for most.

Financing a vehicle has become much cheaper as interest rates have decreased. Conservatively you can get a loan around the 5% area with respectable credit. Since borrowing is less expensive, if you want to get that new vehicle you may finance it over a few years, keeping your cash flow open.

Similar to credit cards, many people neglect to pay down their loan quickly, thus paying the full amount of interest. Also, when you go to shop for a vehicle, look to obtain financing at your local bank or credit union as they typically have more competitive rates than the dealership. If you find that your rate is a bit high, after you’ve paid on the loan for a few months you can look to refinance to a lower rate.

Mortgage Debt

Last up is the home mortgage, enabling people to realize their dream of home ownership. Many loans are typically a 15- or 30-year term, with either a fixed or variable interest rate. These loans are secured by your house and typically run 90% of your homes value or lower. To avoid private mortgage insurance you’ll want to make a down payment of 20%.

For many, obtaining the status of home ownership would be impossible without the home mortgage. This allows you to stretch the cost over many years, giving you the ability to afford a home. Typically you can prepay the note, meaning you can put more towards principal each month if you wish to pay down the note.

Unlike the other two debts, a mortgage is something you get once and will only look to refinance if rates go lower. Other than that, a traditional mortgage is a fairly straightforward product.

Conclusion

Unfortunately, debt is one of the trademarks of modern American society. The topics addressed in this article are some of the most common personal debts you’re likely to encounter during your lifetime. Using debt as a leveraging tool can have a positive impact on your financial well-being. However, for many the debt gets out of hand and becomes a financial burden. When using debt, use it cautiously and ensure you can repay the loan quickly, saving you money on interest expense.

Having Enough Money to go on Vacation

Vacations are a wonderful time where you can relax and forget about the world. Whether it’s sitting on a beach or hitting the slopes, the primary goal of a vacation is to take some time to enjoy life. Unfortunately, people take vacations on shoestring budgets and when the slightest financial obstacle arises, the whole vacation gets derailed.

This is where properly saving for vacation comes into play! Now, it’s simple to say that you’re going to save for vacation, but without a plan you could be going in blind. Without a plan, you leave yourself open to shortfalls and never reaching the goal of having enough for a vacation. While everyone operates differently, it’s up to you to identify an effective methodology and begin saving. Luckily, this article will help spur your mind and get you on the path to successful saving.

Method 1: Sinking Fund

First up is a generic sinking fund. A sinking fund is simply a separate place where you store money as it becomes available. There’s no certain dollar amount, rather it gives you a place to store your money and not spend it.

Sinking funds can be as simple as putting cash under your mattress and as complex as creating a whole separate savings account. Regardless of the method, the point is that this fund is always there, allowing you to contribute steadily over time. Even if you have no immediate plans to go on a vacation, you can continue contributing so that when you do want to take a trip, you’ll already have money set aside for such occasions.

Effective ways to save in a sinking fund include cash envelops. You can keep this around the house and when you have $5 or $10 in your pocket, simply slip it in the envelope instead of buying soda pop or fast food.

Method 2: Automatic Savings Deposits

Another method you can implement if you are one that tends to spend are automatic deposits into a savings or checking account. For example, if you know you get paid every other Friday, you can have $50 from each paycheck automatically deposited into your vacation account. This not only moves the money but moves it before you even have a chance to spend it.

You can take it a step further and open an online savings account. These typically generate a higher rate of return from interest, and funds typically take 1-3 days to arrive in your checking account. That means you won’t accidentally spend that money.

Also, there are apps on your phone (such as Acorns)that will round up your purchases and invest your spare change. If you search the list of finance apps, you may find something that fits your financial style perfectly.

Method 3: Have a Garage Sale

If you are looking to aggressively build and simply kickstart your vacation fund, you can look into having a garage sale. I bet you’d be surprised at how much stuff you have around your house that isn’t doing anything. You’ll likely have a garage sale and make a few hundred dollars, depending on the items you have for sale.

This can be a quick way to boost your vacation fund or to begin it. From there, you can look at flipping items from other garage sales or stopping by your local Goodwill store. You may find it enjoyable buying and selling items, leading to a continuous flow of money into your vacation fund.

Conclusion

These are just 3 of many ways in which you can begin saving for a vacation. The goal is to have enough money to cover the costs and then some. Emergencies arise and you don’t have to ruin a perfectly good vacation.

Overall, we believe that you should try to keep saving for a vacation a game. If you have kids, encourage them to compete and try to save the most money. Starting the process for saving towards a vacation should not begin a few months out, rather a continues flow of money into an account that’s set aside for this sole purpose.

If you make the task of saving for a vacation fun, you’re much more likely to succeed in the endeavor.

So, You Want to Get a Credit Card?

Signing up for your first credit card can feel like a scary endeavor. A quick search into the downfalls of having a credit card can take you down a very dark rabbit hole of financial horror stories, which will undoubtedly have you running the other way screaming. If you somehow can look past these stories and have decided you need to get a credit card (which you do), the next hurdle is wading through the THOUSANDS of options you have when it comes to credit cards. Fees, points, perks, affiliated with a brand you like; the options can leave you drowning in comparisons making you stagnant and indecisive. All of these items above are certainly worthy of consideration, but the most important thing you can do is pick one and go so you can get started on your credit-building journey. If you can’t decide on which card to get, find one with no fees and a point or cash back system and move on, you can correct course down the road with no damage done.

Why You Need a credit Card

Earlier I mentioned that you definitively need a credit card, and here’s a high level overview of why. If you’ve been in the market, or plan to someday be in the market, for any of the major life purchases (car, house, business loan, student loan, etc.) you have/will come head on with the topic of your credit score. Credit scores are based on a 300-850 point range (see image below). A good credit score can save you thousands of dollars over the course of a lifetime when it comes to major life purchases. Why? Simply put, your credit score is the statistic banks or other money lenders look at to determine how much of a financial risk it is to loan you the money to make your big purchase. A bad credit score can mean severely unfavorable interest rates, which over the course of a 5-7 year car loan or 30 year mortgage for your house, can quite literally add up to thousands or even tens of thousands more in interest payments! Credit cards are one of the main factors that make up your credit score, and when used properly can help you build and improve your credit score. Things like available credit to debt ratio, on-time payment history, and years of credit history are the most critical aspects of how owning a credit card can impact your credit score. The duration of your credit history is the one aspect you have the least control over, which again is why it is important to just pick a conservative one as described above and start building credit. Next, we’ll cover the rules of owning a credit card so you are using it as a positive financial tool rather than ending up in a financial horror movie.

Understanding Credit Score

Rules for Owning a Credit Card

Credit cards are essentially free short-term loans, when used properly.  When used incorrectly, they can cost you between 16-25% more for every purchase you make on the credit card. When you sign up for a credit card, the issuer will also be looking at your credit score and credit history, and will likely start you out with a very conservative credit limit (maybe as low as $500). Most times this is unavoidable, so we need to follow the rules that will be laid out next to increase that limit, which in turn will boost your overall credit score.

Rule #1: First and foremost, and I cannot stress this enough, never EVER miss a credit card payment. Average interest rates on credit cards typically fall in the range of 16-25%, so missing a payment will cost you significantly. These high interest rates are how people end up in the horror stories you read about because once you miss a payment and get hit with the interest at months’ end, it makes it that much harder to make next month’s payment in full, resulting in another round of interest hitting you! On top of that, on-time payment history, as mentioned earlier, is a major factor to your credit score. As unfair as it sounds, one missed payment can drop your credit score 50-100 points! To put that in perspective, we’re talking about a credit score system that ranges from 300-850, so a 100 point drop is significant to say the least. So again, pay off your card in full every single month, no exceptions.

Rule #2: Pay off your credit card in full every month! That’s right, it’s so important that it’s rule #1 and #2. One way to guarantee this happens is to automate your credit card payments. If you set up auto payments and make sure you are not spending more in a given month than you will be able to pay at the end of each month you will be on your way to credit euphoria.

Rule #3: Increase your credit limit regularly. Assuming you have followed rule #1 and #2 to a tee, this should be an easy task. Every 6-12 months call up your bank and request an increase in your credit limit, even if you don’t need the extra money. Tell them you have a not missed a payment in the last __ months and you would like your limit increased. Some banks will do this without you even requesting to have it increased, but if not make certain you are proactive and call them. The reason behind this move is the available credit:debt ratio mentioned earlier relating to your credit score. If you’re stuck at that $500 credit limit and spend $500 per month on it regularly that gives you a 100% credit:debt ratio which is not good in the eyes of the credit bureaus. You want to have as low of a credit:debt ratio as possible while actively using your card. DO NOT use this increased limit as a reason to spend beyond your means, as that would defeat the purpose entirely. In the scenario above, if you had your credit limit increased to $1,000 and continued to spend $500 max per month, your credit:debt ratio would be 50%, which will go a long way in boosting that credit score of yours.

Use the Perks

We’ll cover the detailed perks of credit cards individually in a later article, but for the basis of this intro to credit cards we will keep it simple. Almost every card these days comes with perks or point systems, which are complicated ways of saying FREE MONEY! Some credit cards come with up to 6% cash back on your purchases, and again this is nothing but free money. When you consider the average returns on the S&P 500 over the course of the last 30 years being 8%, earning 6% back just for buying things you would purchase regardless is significant. Make sure you are taking full advantage of the perks and points system your credit card offers. If you aren’t sure the full extent of the perks (there are some incredible perks in the fine print), call your bank and ask them to outline all of the perks of the card. You may be surprised to learn things like you never need to purchase rental insurance when renting a car because many credit cards come with free rental car coverage. That’s just one example of the variety of perks offered by various cards, so take 15 minutes to understand what perks you have and then use them!