What's a bit of good advice that's really bad advice?
You know, like "always split on 18," or "having kids is the most rewarding thing you can do in life."
What's that one bit of advice you got from a trusted friend that you know deep, deep down would just ruin your thing?
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Neither of these is dead wrong but were rules of thumb that oversimplify changing and complex issues in the US:
"stay away from credit cards" - often prevents people from actually learning about how underlying mechanisms of loans, interest, credit ratings, and budgeting work. There are definitely people incapable of having access to credit and not spending it, so the saying may be true for a subset but if you always pay your bill in full on time and just use autopay so you don't forget, you're leaving 1-5% annual rebate for almost all your spend on the table. If you play credit card churning games, much more.
"The only things worth going into debt for are a home and education." - while accurate in the US for decades, the applicability or even accuracy of this statement is now dubious depending on many factors: career field and interests for education; interest rates, geography and housing prices for homes.
The entire "credit rating" system is totally insane and dystopian for people outside the US. Where I am from, we only ever register bad credit, not good credit. If you want to buy a house and need to get a mortgage they can ask for your credit rating. But that only shows how much your current obligations to other creditors are, and whether you have had trouble paying them. And you only cartain obligations are allowed to be shown on such a report.
In my country, someone with no credit card history whatsoever is in a better position to get a mortgage than someone who has a credit card and pays it off every month. The fact that the US is the reverse is just mad.
The test is to see if you can handle having access to credit you don't use. Can you operate within the current financial system without going bankrupt?
It is also the reason why recent inquiries on credit can also tank a credit score. You're riskier to lend to because you are trying to get more debt than you were used to.
There’s probably a healthy middle ground. We shouldn’t be handing major loans to people with no experience with credit either
We absolutely should. As long as they have enough stable income to support it. Rough guidelines in The Netherlands is that you can get a mortgage for about 4-5x your yearly income (subtract any other loans like credit cards, phone contracts or cars), and for no more than the house is actually valuated at (unless you're going to remodel, then you can borrow for the estimated value after it is done).
Why not? The concept is fairly easy to grasp and if I want a loan for a house, the bank can ask me to prove that I was able to put aside enough money beforehand to be able to chip away at a credit from now on.
What about people who have good-paying jobs, but lots of other debt? Or a history of defaulting on debt (maybe they can’t hold jobs very long)
Usually you’d go to the bank with the project and they ask you for securities, oftentimes the house your building or the ability to garnish your wages. Also they demand to know how much you’ve saved so far. Can’t give loans to everyone?
"stay away from credit cards"
I followed this advice in my youth. Never applied for a credit card, never took out a loan, never bought anything I couldn't afford to drop cash on. I thought it would show I'm fiscally responsible because I'm not accruing debt.
Then I got an opportunity to work a govt job providing communications for the White House; basically, following the president around and ensuring he's able to communicate at press events, etc. I applied for the job and was told I was their #1 candidate...
...But they ran a credit check on me and was surprised when they got zero results. I proudly stated that I've never been in debt before, so my credit risk is zero. But according to them, zero credit history is shady as fuck. They said they couldn't tell how well I manage money because there's no history showing regular, on-time payments on credit cards, loans, etc.
They couldn't tell if I had trouble managing money or not. That made me a potential bribe risk. Someone could offer me tons of money to slip a bomb into the president's podium, or let a suspicious character into the White House, and if I'm hurting enough for money, they suspect I might be willing to do it.
Literally, my entire history of service in the govt had no bearing on my loyalty. Only my credit score. I lost that job opportunity because I was fiscally responsible.
I went out and got a credit card that same day. I now have an extremely high credit score, which I keep up by paying all my bills and utilities on credit, then paying off almost all of it at the end of the month. I think it's stupid that I need to put myself in debt, then pay my way out of it over time, spending even more money in the long run, just to prove I'm fiscally responsible. That should prove that I suck at managing money, not the other way around. But that's the broken system we have today.
I'm confused - you pay off almost all of your credit card and you're "spending even more money in the long run". Why not just pay off all of it? Surely if you were able to afford your bills with cash, you'd be able to pay off your credit card in full every month since the bills would be the same?
Yeah. It works if you pay everything off.
If you want good credit, you don't pay it all off. You need recurring payments over time. If I pay it all off at once, then my credit score doesn't go up much at all. But if there's a constant debt on my card and I'm never late in paying at least the minimum required each month, then my credit score skyrockets quickly.
This is why the system is garbage. You need to spend more money to show you're excellent at managing money. It's a dumb system that makes no sense.
I pay almost everything off because it minimizes the interest I have to pay while keeping a line of credit running on the card. But it's important to keep that line of credit active, or else your credit score stagnates.
Isn't that just not true?
https://www.capitalone.com/learn-grow/money-management/credit-myths/
Myth No. 5: You have to carry a credit card balance to build credit
If you don’t pay your credit card balance in full, it’s carried over to the next billing cycle and considered a revolving balance. And that unpaid balance might accrue interest.
You don’t need to carry a balance to build credit. According to the CFPB, “Paying off your credit cards in full every month is the best way to improve a credit score or maintain a good one.”
Fact No. 5: You don’t have to carry a credit card balance to build credit
While carrying a balance isn’t necessary to build credit, a healthy credit utilization ratio—which measures how much available credit a person is using—is an important part of credit.
In addition to paying off credit card balances in full every month, the CFPB recommends keeping a credit utilization rate of less than 30% of your available credit. That can be a way to show you’re responsible with credit.
I pay my credit cards in full every month and accrue zero interest and have excellent credit...
I’ve got a high credit score and I’ve never not paid it off in full. It's only really ever went up over the years, with the occasional tiny 1-3 digit drop. I'd never pay interest I don't need to in exchange for a higher rating; they've got enough money.
Yeah no. Pay the entire statement balance every month, that's the whole point. If you want to do debt stuff I guess you can get a mortgage or a car loan or a school loan, but these are not requirements for good credit. You use the card, you pay the card, you now have 100% on time payments and probably low credit utilization. Get a card early so average account age high if you can, and don't get lots of hard credit checks in a row.
You can literally get free credit checks through most banks or directly from places like Experian and see what it is that affects your particular score.
Don't pay 18 or 25% interest on anything, that's nutty.
Only pay off what is due, not the full balance. So if I spent 100 on my cc last month and then 100 this month. My bill is for 100, but my balance is 200. Pay the 100, incur no interest.
Edit: by “what is due” I mean the full balance from the previous month, not the minimum payment.
You can just pay it all off unless you plan on making some I interest money from the second 100.
Every month on the same day I drive all the card balances to zero. 800+ credit score
Absolutely you can, but not paying it all off doesn’t negatively affect your score. Also 800+ here.