Charge It! Start, Build & Improve Your Credit Score 8/20/24

Hello NFC Clients and Friends,   

         It’s that time of year again— back to school for educators, students, and the families connected to them! It is a great time of year to initiate, update, and improve our financial fitness. As with New Year’s resolutions, however, it isn’t arbitrary days on the calendar that drive our behavior, it is the motivation behind it.  Understanding the why, is far more important than imputing meaning on the when.  After all, most New Year's resolutions fall by the wayside.  Nevertheless, if a seasonal cue like the start of a new school calendar can shift one’s behavioral finance engine into a higher gear, I say embrace it!

Case in point, Lindy and I will moved our daughters Mackenzie (20) and Maddie (18) into their respective universities this past week; our third daughter, Ellie (15), starts her sophomore year in a few days.  I know, I know… two in college and a third on the way!?  Have faith, an NFC post on the various approaches to pulling this off without becoming the next Walter White is on the offing (that was fun to write).

       As with Mackenzie, one step we took to get Maddie’s financial journey off on the right foot is to help her acquire her first credit card. Trigger Warning: Dave Ramsey acolytes may want to take a few deep breaths here before continuing (assuming they haven’t already moved on). We are not advocating for our girls to go into debt!  We are, however, helping them establish their own credit history in the safest way possible. We chose to take Clark Howard’s advice on the Top Credit Cards for College students, and both girls now have the Discover It card, but there are other excellent options as well. Note: I do not receive any compensation from anyone for any product or service.

       The average personal credit card balance in the U.S. is rising and stands at $6,329. Collectively, Americans owe $1.14 trillion* in credit card debt alone (CNBC 8/8/24). And, as of August, 2024 the average APR credit cards now charge– 24.62%!  So, why on God’s green earth would any parent intentionally throw their children into the sea of debt where so many others are struggling to stay afloat?!  I cannot answer for other parents, but here is our thinking. First, we secured them with a life jacket; second, we made sure both girls are certified lifeguards. The fact that the latter is true in real life and not just part of a cute metaphor is a bonus, and also continues to be a source of income for Maddie and Ellie (as it was for Mackenzie)!  [*Interesting fact: 1 billion seconds = 31.7 years; 1 trillion seconds= 31,700 years.]

        Why are we doing this? To start, build, and eventually improve their credit scores. The benefits to having a higher credit score include but are not limited to 1) receiving better rates on all lines of credit including a mortgage, saving you thousands of dollars in interest over a lifetime, 2) qualify for better housing (rent or own), 3) lower insurance rates, 4) access to subsidized/”free” cell phone plans, and 5) job opportunities, especially for employers who care that you can handle your business. More benefits listed here.  To clarify, the Norman family carries no “bad” (high interest rate) debt, and we certainly do not want any of our girls to start her financial life as a “slave to the lender” (Proverbs 22:7).  In fact, the only debt payment we have is our mortgage.  And, thanks to an “excellent” credit score of 830+, we qualified for the lowest rate possible when refinancing in 2021, a 15-year fixed at 2.125%!  Compare that to the average mortgage rates today, or back then for folks whose credit scores were “good,” “fair,” or “bad.”  As the kids might say: facts, not flex. #Creditscoresmatter.

     The process: The credit card application is simple, and the card itself arrived in about a week. Insider tip: they will ask for your “Total/Gross Income,” and “Monthly Housing/Rent Payment.”  We provided an “aspirational” amount for the former, and $0 for the latter since her parents are paying for her housing. The higher the income and the lower the monthly payment, the higher the initial credit limit on the card. This is helpful as some cards only permit raising the credit limit once per year, which we do on the regular. As you can see here the “credit utilization rate” is the second most important variable in determining a credit score behind your payment history.  How and why you might want to do this explained in detail here.  Also worth noting: the credit card companies care very little about the specifics as evidenced in our mailboxes stuffed with multiple credit card offers every week. Their motive is profit— get this plastic in your kid’s hot little hands as quickly as possible so they can start racking up the interest payments, fees, etc.  This is where the life jacket comes in.

     The life jacket: The first order of business once Maddie’s card arrived was to 1) activate it, 2) create an online account for the card, and 3) set up the autopay on the account. To do so she had to provide both her bank’s ABA routing and checking account numbers. We then secured this life jacket by clicking the option to “pay balance in full,” rather than “make minimum payment,” or “other amount.”  So, every single month, without fail, she will pay off her balance on time and in full. She will pay no interest to Discover. Ever.  The autopay is her life jacket that keeps her head above water, always. For added insurance, we made sure Maddie is also a trained/excellent swimmer.

     Lifeguard certification: Just as all 3 of my girls engaged in rigorous training on safety, security and rescue measures for all things water recreation related, so too are they currently engaged and educated in the fundamentals of financial literacy and behavior finance.  They know and respect the two-edged sword of debt.  They understand that consumers spend far more when using credit cards than with cash.  And most importantly, they know if they live on less than they earn and automate saving, investing, and giving away the difference they are going to be okay.  Aside from their father’s regular rants on the importance of the time value of money, compound interest, diversification, etc., each has also read The Simple Path to Wealth, by JL Collins (gift to all first time NFC clients).  Each contributes monthly to her Roth IRA (custodial accounts started several years ago), Maddie and Mackenzie have taxable brokerage accounts, and each has a checking/savings account.  They have started building their money making machines, engaging the power of compound interest with their most valuable, non-renewable asset— time!  Each knows the Warren Buffett adage, “If you don’t find a way to make money while you sleep, you will work until you die.”  They may choose to work until they are no longer able, but they will have a choice.  Many, sadly, do not.

      Arguably the most important lesson my girls have learned so far, however, is that it is okay to ask questions about money.  This is no small thing.  Paraphrasing one of my favorite Dave Ramsey-isms: ‘Parents rarely feel comfortable talking about sex or money. We assume they have neither, turns out they have both.’  He is right!  And if we do not discuss money issues with our kids, where are they going to learn it?  Pause for a moment and think about the potential answers to that question.  If that doesn’t motivate you to start the conversation, I don’t know what will.

Yours in Financial Fitness,

David

 Norman Financial Coaching