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by
Ramit Sethi
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March 9 - July 22, 2020
annual percentage rate, or APR.
Ironically, credit is one of the most vital factors in getting rich,
Your credit report gives potential lenders basic information about you, your accounts, and your payment history. It tracks all credit-related activities (e.g., credit cards and loans), although recent activities are given higher weight.
Your credit score (often called your FICO score because it was created by the Fair Isaac Corporation) is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders.
Once a year, by law, you’re allowed to obtain your credit report for free at annualcreditreport.com.
Lots of people use Credit Karma (creditkarma.com) to get a free credit score, but I prefer the official credit score from MyFico (myfico.com), which is more accurate even though it has a small fee.
Credit Score vs. Credit Report
How Credit Scores Affect What You Pay
First, decide what you want to get rewarded with—cash back or travel. I recommend cash back because it’s straightforward, there are excellent cash back cards, and it’s simpler than travel rewards, which require more sophistication to truly maximize. (For more on maximizing travel rewards, look up forums on “credit card churning.”)
bankrate.com
“credit card rewards calculator.”
optoutprescreen.com
Don’t go card crazy.
There’s no magic number of cards you should have, but each additional card you get means added complexity for your personal finance system: more to keep track of and more places for things to go wrong. Two or three is a good rule of thumb. (The average American has four credit cards.)
These include installment loans (such as auto loans), personal lines of credit, home equity lines of credit, and service credit (such as utilities).
Some hotels will give you five hundred points for every night you waive housekeeping.
If you’re booking travel or eating out, use a travel card to maximize rewards. For everything else, use a cash back card. The card I use for travel and eating out is the Chase Sapphire Reserve. For everything else, I use an Alliant cash back card. And for business, I use a Capital One cash back business card. For extra benefits, I have an Amex Platinum card.
The Six Commandments of Credit Cards
Pay off your credit card regularly.
Try to get fees on your cards waived.
Negotiate a lower APR.
Keep your main cards for a long time, and keep them active—but also keep them simple.
For example, I set it up so that one of my credit cards pays a $12.95 monthly subscription through my checking account each month,
If you have a credit card, keep it active using an automatic payment at least once every three months.
5. Get more credit. (Warning! Do this only if you have no debt.)
credit utilization rate,
6. Use your credit card’s secret perks!
you should call your credit cards and lenders once a year to ask them what advantages you’re eligible for.
The Pocket Tracker for Tracking Credit Card Calls
Think ahead before closing accounts. If you’re applying for a major loan—for a car, home, or education—don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.
What happens in disputes like this is the credit card company fights the merchant for you. This works with all credit cards. Keep this in mind for future purchases that go wrong.
Manage debt to avoid damaging your credit score.
Don’t play the zero percent transfer game.
Your checking account is the backbone of your financial system. It’s where your money will first go before it’s “filtered” to different parts of your system,
Think of savings accounts as places for short-term (one month) to mid-term savings (five years). You want to use your savings account to save up for things like vacations and holiday gifts, or even longer-term items, like a wedding or the down payment on a house.
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interest rate on your savings account is not all that important.
If your bank offers you a 3 percent interest rate, that’s $150 per year, or $12.50 a month. If it’s a 0.5 percent interest rate, that’s $25 per year, or $2.08 per month. In short, who cares? $12.50 vs. $2 is not a huge difference when we’re talking about hundreds of thousands of dollars over our lives.
Just pick great bank accounts and move on.
The most important practical difference between checking accounts and savings accounts is that you withdraw money regularly from your checking account—but you rarely withdraw from your savings account.
I recommend two different accounts at two separate banks.
One basic way of looking at it is that your savings account is where you deposit money, whereas your checking account is where you withdraw money.
Most basic option (good for lazy people): A checking account and a savings account at any local bank. This is the bare minimum. Even if you already have these accounts, it’s worth talking to your bank to be sure you’re not paying fees. Basic option + small optimization (recommended for most people): This option means opening accounts at two separate institutions: a no-fee checking account at your local bank and a high-yield online savings account. With the checking account, you’ll have immediate access to your money and free cash transfers to your high-interest online savings account. You can
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My Accounts. All of my money goes through my interest-bearing Schwab online checking account. Deposits happen through direct deposit or by taking a photo of a check and depositing it through the Schwab app.
My System.
Don’t Be a Rate Chaser
So focus on the Big Wins, not on rate chasing.
The Best Accounts (Including the Ones I Use)
Checking Accounts
Schwab Bank Investor Checking with Schwab One Brokerage Account
Although you need to open a Schwab brokerage (investment) account to get all fees waived, you don’t actually need to use the investment account. It can just sit there, empty, as you use the magnificent features in the checking account.
