Category: Credit

  • When to Think Cash Instead of Credit

    When to Think Cash Instead of Credit

    Do you use credit cards for every purchase?

    If you would have asked me this a couple years ago, the answer would have been “100% yes.”

    I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.

    The best vacations I’ve ever had were paid for using points instead of cash. 

    My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.

    We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.

    When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.

    My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.

    I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.

    She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.

    I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.

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    Using points also helped me stay on budget and build my net worth. 

    Besides the incredible memories, the other major benefit to using points was that we could save more money every year. We could then use those savings to fuel our Later Money goals, like investing in real estate.

    That meant our net worth grew in the background while we were out having these amazing experiences.

    I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.

    If I notice that I’ve overspent, I can slow down my spending to get back on track.

    Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.

    When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.

    That said, nowadays, I’ve started using cash more frequently. 

    I’ve started using cash more often these days. 

    I still use credit cards more than cash, but I’m starting to use cash more often than I used to.

    There are a couple main reasons for this.

    I use cash for the convenience for smaller transactions.

    I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.

    Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.

    And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.

    For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.

    I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.

    Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.

    Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.

    Besides convenience, there’s another reason I use cash more frequently now. 

    Besides convenience, I’ve started to use cash regularly for another reason.

    It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.

    It’s for a different, and somewhat disappointing, reason:

    More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.

    These additional fees are sometimes referred to as “surcharges” or “processing fees.”

    Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.

    Why do businesses charge processing fees?

    For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.

    Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards. 

    For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.

    For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.

    There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.

    In recent years, more and more businesses have decided to pass these fees onto customers.

    Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.

    Have you also noticed these fees popping up seemingly everywhere these days?

    As a consumer, whether we like it or not, these processing fees seem to be sticking around.

    So, what can we do about it?

    We can choose to use cash instead of credit, or we can choose to not spend our money at that business.

    Let’s look at an example to help you make that decision for yourself.

    Who really cares about a small processing fee anyways?  

    A processing fee of 4% may or may not sound like a lot to you. 

    Let’s look at an example to put some real numbers on it. 

    Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.

    That TV now costs you $1,040.00 with the processing fee.

    That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV. 

    Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.

    Since you really shouldn’t be buying that TV unless you have the cash available to pay for it, is there any good reason to willingly pay a $40 penalty?

    We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.

    So, that really leaves only one potential benefit to using a credit card for this purchase.

    What about the points you can earn?

    Let’s play that out so you can decide for yourself.

    Aren’t points worth more than whatever the processing fee is?

    Let’s continue our same example of purchasing the TV for $1,000. 

    Including the 4% fee, the TV costs $1,040.00.

    Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase. 

    The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560). 

    Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.

    So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).

    Now, we can decide if paying the 4% service fee to earn points is worth it. 

    In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.

    In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.

    Does that sound like a good deal to you?

    Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.

    To me, this is not even a close call.

    No deal or a good deal? Hand turns a dice and changes the expression "no deal" to "good deal", or vice versa illustrating the thought processs of using a credit card with a processing fee or using cash.

    It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.

    I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.

    What if the processing fee was lower?

    Even if the processing fee was lower, say 3%, my decision wouldn’t change.

    At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.

    In this scenario, it’s true that the points are worth $1.67 more than the processing fee.

    I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.

    Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.

    Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.

    I went through this exact process when paying my property taxes recently.

    Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee. 

    I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.

    The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes. 

    Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.

    Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.

    These processing fees really bother me on principle. 

    You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.

    I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.

    Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.

    If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.

    I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.

    At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.

    I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.

    Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.

    Have you noticed this processing fees more often lately?

    Where do you come out on paying a processing fee to use a credit card?

    Do you want the points or the savings?

    Or, do you avoid that business altogether?

    Let us know in the comments below.

  • Good Credit Card Perks Besides Points

    Good Credit Card Perks Besides Points

    We recently discussed 10 credit card tips so you can benefit from credit card reward points without suffering from the penalties.

    Today, we’ll look at one of the other major benefits to using credit cards: the ability to easily track your monthly spending.

    This one perk can make staying on budget and fueling your Later Money bucket that much easier each month.

    When you consistently fuel your Later Money bucket, you’re moving closer and closer to financial freedom.

    Let’s take a closer look at how you can use credit cards as part of a healthy financial life.

    How to use credit cards to track your spending.

    Tracking your spending is a crucial first step in the budgeting process. But, that doesn’t mean that anybody actually likes doing it.

    The good news is that once you have created a Budget After Thinking and developed consistent habits, you no longer need to track every penny.

    Instead, you can track two simple numbers to stay on budget.

    Credit cards make it very easy to track these two numbers.

    Here’s exactly how I use credit cards to track my spending.

    When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.

    I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.

    I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.

    Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.

    Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.

    In just a few minutes, I can look at an entire month’s worth of spending to determine where my money went so I can make thoughtful adjustments during the next month.

    This is how I stay on budget with two simple numbers.

    This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.

    Why I also track the payment due date in Notes.

    The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.

    If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.

    As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.

    We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.

    I automate some, but not all, of my monthly payments.

    While we automate most of our monthly payments and transfers, we don’t automate all of them.

    Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.

    We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.

    For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.

    That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.

    When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:

    • My primary job as a mesothelioma attorney
    • My wife’s primary job as an attorney
    • Rental Property 1
    • Rental Property 2
    • Rental Property 3
    • Rental Property 4
    • Law School Professor
    • Emergency Savings

    Using the Notes function helps me make the required payments each month after these income streams hit my checking account.

    What other benefits do credit cards offer?

    Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.

    Purchase Protection and Fraudulent Charges

    Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.

    Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.

    Credit cards help prevent against fraudulent transfers, which is one of the best benefits to using credit cards besides reward points.

    Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.

    Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.

    While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.

    Credit Score Monitoring

    Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.

    Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.

    This is a very nice perk, as long as you don’t obsess over your credit score.

    How can I see all the benefits my credit card offers?

    Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.

    I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.

    You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.

    I use the Chase Sapphire Reserve and Chase Freedom Unlimited. Each card has a detailed webpage that details all of the benefits offered with the card.

    My favorite credit card benefit is still the ability to easily track your spending.

    Even with all these other benefits, my favorite credit card benefit is still the ability to easily track your spending.

    I’ve found this to be the easiest way to ensure I’m staying on budget and hitting my financial freedom goals.

    Do you use your credit cards to track your spending?

    What are your favorite benefits to using credit cards, other than reward points?

  • 10 Credit Card Tips for Lawyers and Professionals

    10 Credit Card Tips for Lawyers and Professionals

    In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.

    I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.

    I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.

    My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.

    The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.

    With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:

    10 Credit Card Tips for Lawyers and Professionals

    1. Only charge what you can afford to pay off.
    2. Avoid overspending because you’re using credit instead of cash.
    3. Do not treat your credit card like an emergency savings account.
    4. Understand how credit card interest works.
    5. Never miss a credit card payment.
    6. Know the fees associated with your account.
    7. Learn how much points are actually worth.
    8. Use points for travel instead of cash back.
    9. Be strategic about what, and how many, credit cards you have.
    10. Don’t spend money just to earn points.

    1. Only charge what you can afford to pay off.

    While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.

    Let’s look at some scary stats about credit card use to solidify this point:

    Before you read the rest of my credit card tips for lawyers and professionals, you have to internalize this first rule.

    You need to commit yourself to only charging what you can afford to pay off.

    This means creating a Budget After Thinking and staying within that budget.

    If you’re having trouble with that, check out this post on my top ten strategies for staying on budget.

    2. Avoid overspending because you’re using credit instead of cash.

    Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.

    We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.

    Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.

    If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.

    The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.

    3. Do not treat your credit card like an emergency savings account.

    This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.

    33% of Americans report they have more credit card debt than emergency savings.

    The main causes of credit card debt are unexpected medical bills (15%), car repairs (9%) and home repairs (7%).

    None of us are immune from these types of unexpected expenses.

    Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.

    These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.

    4. Understand how credit card interest works.

    If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.

    This may be the most overlooked of my credit card tips for lawyers and professionals.

    Credit card interest is typically expressed as an annual percentage rate, or APR.

    If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.

    Credit card interest rates are typically variable, meaning they can change over time.

    In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.

    Let’s look at an example to better understand the consequences of carrying a balance.

    Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.

    At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.

    The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.

    If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.

    What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?

    You can see how a 15% penalty on each of these purchases can start to add up quickly.

    5. Never miss a credit card payment.

    Write this rule down in stone: never miss a credit card payment.

    If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.

    It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.

    Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.

    You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.

    If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.

    By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.

    What is the minimum required payment?

    Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.

    It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.

    Candid shot of focused woman wearing headband and casual shirt paying credit card bills online after reading credit card tips for lawyers and professionals on Think and Talk Money.

    Let’s look at another example to see what happens when you only make the minimum required payment.

    Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.

    In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.

    On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.

    So, on the next billing cycle, your total balance will be $1,997.39.

    Let that sink in.

    Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!

    Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.

    By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.

    How much money do credit card companies make in interest and fees?

    Hundreds of billions of dollars each year.

    6. Know the fees associated with your account.

    Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.

    For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.

    For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.

    You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.

    For that reason, it’s important to do your homework before applying for a new card.

    So, how can you determine if you’re getting enough value out of your card to justify the annual fee?

    That leads us to our next tip.

    7. Learn how much points are actually worth.

    This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.

    I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.

    To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.

    With that information, you can then determine if a certain credit card is worth having in your wallet.

    For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.

    Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.

    Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.

    Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.

    The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.

    8. Use points for travel instead of cash back.

    Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.

    While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.

    Traveler with mobile phone camera and map in hand looking at a cathedral after reading credit card tips for lawyers and professionals.

    Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.

    If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.

    To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.

    Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.

    Did you know that talking about money, and credit card points, is not taboo?

    9. Be strategic about what, and how many, credit cards you have.

    There was a time in my life when I had ten different credit cards because I wanted to maximize the points I earned on every purchase.

    I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.

    My wallet was thicker than a Harry Potter book.

    I did earn a lot of points. But, it was so stressful.

    Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.

    In these credit card tips for lawyers and professionals, I recommend you keep things simple.

    I now have only two credit cards in my wallet: Chase Sapphire Reserve and Chase Freedom Unlimited.

    I use the Sapphire Reserve for travel and dining and the Freedom Unlimited for everything else.

    We still earn plenty of points and our finances are much simpler.

    One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.

    You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.

    Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited.

    10. Don’t spend money just to earn points.

    As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.

    It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.

    It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.

    Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.

    The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.

    Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.

    To recap, here are my ten credit card tips for lawyers and professionals:

    10 Credit Card Tips for Lawyers and Professionals

    1. Only charge what you can afford to pay off.
    2. Avoid overspending because you’re using credit instead of cash.
    3. Do not treat your credit card like an emergency savings account.
    4. Understand how credit card interest works.
    5. Never miss a credit card payment.
    6. Know the fees associated with your account.
    7. Learn how much points are actually worth.
    8. Use points for travel instead of cash back.
    9. Be strategic about what, and how many, credit cards you have.
    10. Don’t spend money just to earn points.

    Let us know your best credit card tips for lawyers and professionals in the comments below!

  • How to Use HELOC to Buy Investment Property

    How to Use HELOC to Buy Investment Property

    Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.

    The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.

    Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.

    Read on to learn what a HELOC is and how to use a HELOC to buy investment property.

    What is a HELOC?

    A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.

    Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.

    Just like with a primary mortgage, when you open a HELOC, the bank is protected by the equity in your home.

    Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.

    Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.

    This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.

    That opportunity might be using your HELOC to buy investment property.

    Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.

    Extract equity or obtain funds from your property using a home equity loan or a HELOC to buy investment property.

    Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.

    To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.

    You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.

    What to know about paying off a HELOC.

    If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.

    HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”

    The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.

    During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.

    These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.

    At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.

    The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.

    Four advantages to using a HELOC to buy investment property.

    Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.

    1. You can use a HELOC as you would use cash, including for a downpayment.

    Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.

    With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.

    This is a huge advantage if you want to use a HELOC to buy investment property.

    That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.

    On the other hand, cash advances from credit cards are typically not allowed for a downpayment on a conventional loans.

    2. HELOCs charge lower interest rates.

    The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.

    Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.

    According to Bankrate, here are the current average interest rates:

    As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.

    It’s also the primary reason why I have used a HELOC to buy investment property.

    Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.

    In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.

    From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.

    3. You only pay interest on HELOCs during the draw period.

    As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.

    Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.

    This is also another key reason why a real estate investor would use a HELOC to buy investment property.

    Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.

    4. You may have access to a larger sum with a HELOC.

    Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.

    While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.

    A larger available balance comes in handy when you want to use a HELOC to buy investment property.

    For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.

    The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.

    If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.

    How I’ve used HELOCs to scale my real estate portfolio.

    Using HELOCs can be an effective way to scale your real estate portfolio.

    As mentioned above, you can use your HELOC for a downpayment on another investment property.

    This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.

    Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.

    We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.

    After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.

    We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.

    As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.

    Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.

    Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.

    Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.

    We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.

    We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.

    Don’t ignore the biggest risk of using a HELOC to buy investment property.

    With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.

    HELOC equals debt.

    Like with all debt, if you abuse the privilege, you are going to get yourself in trouble.

    This is why Dave Ramsay is adamant that debt should not be used as a tool to build wealth.

    In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.

    If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.

    That’s a huge risk.

    Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.

    I would not use a HELOC as a beginner investor.

    While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.

    I say that for good reason.

    When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.

    I’ve experienced these negative emotions associated with debt. I only got comfortable with taking on debt as I learned to trust myself again with the responsibility.

    While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.

    If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.

    By responsible with debt, I mean:

    If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.

    How do you apply for a HELOC?

    Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.

    HELOC – Home with a Dollar Sign and Line Graph Symbolizing Borrowing Against Home Equity, which illustrates that using a HELOC to buy investment property can be a useful strategy to scale your real estate portfolio.

    If you’ve ever applied for a mortgage, you know this is not a fun process.

    The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.

    Let’s look at an example of using a HELOC to buy investment property.

    Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.

    For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.

    In this example, let’s say you bought a home five years ago for $500,000.

    • You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
    • For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
    • Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.

    Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.

    This is because you have paid the mortgage down every month and your home has appreciated in value.

    In this scenario, you may be eligible for a HELOC to buy an investment property.

    How do lenders calculate the amount of your HELOC?

    Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.

    What is Loan-to-value ratio?

    Loan-to-value ratio is a complicated name for an easy math formula:

    LTVratio = Mortgage amount / Property value.

    In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.

    So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.

    A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.

    That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.

    The bank does this to protect itself by requiring you to maintain 30% equity in your home.

    To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:

    • Value of home = $600,000.
    • First mortgage = $350,000 (approx. 58%)
    • HELOC = $70,000 (approx. 12% of value of home)
    • Combined mortgage + HELOC= $420,000 (70% of home’s value).
    • Remaining equity in home = $180,000 (30% of home’s value).

    Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.

    Have you used a HELOC to buy investment property?

    Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.

    Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.

    • Have you used a HELOC to buy investment property before?
    • What about using a HELOC for any other purpose?

    Tell us about your experience in the comments below.

  • No Need to Obsess Over Credit Score

    No Need to Obsess Over Credit Score

    Your credit score is very important.

    And, you need to stop obsessing over it.

    Here’s why both those statements are true.

    Your credit history will touch almost every important financial transaction you enter into today. I don’t just mean credit cards and loans.

    If you apply for a job, need insurance, or want to rent an apartment, those companies are going to review your credit report and credit score.

    So, even if you don’t intend to take out loans, your credit history and credit score are still important.

    But, obsessing over your credit score is counter productive.

    Has obsessing over any number ever served you well, anyways?

    GPA…

    Weight…

    Social Media Followers…

    Yes, these things may be important to you. But, obsessing over the number itself is not how they improve. The habits behind the number are more important.

    If you want to improve your GPA, you need to study more.

    To lose weight, you need to practice healthy living.

    For more social media followers, you need to create better content.

    The same logic applies to credit scores.

    If you want a good credit score, the best thing to do is to practice strong personal finance habits that we routinely discuss in the blog.

    Obsessing over your credit score number is a waste of mental energy.

    With this backdrop in mind, we can discuss credit scores.

    What is a credit score?

    As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. 

    Credit also refers to a person’s trustworthiness or history of repayment.

    We then learned that a credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.

    Your credit report will typically include:

    • Personal information (name, social security number, current and former addresses)
    • Credit accounts (current and historical accounts, including credit cards and any other loans)
    • Collection items (missed payments, loans sent to collections)
    • Public records (liens, foreclosures, bankruptcies)
    • Inquiries (when you apply for a new loan)

    Now, we’ll talk about credit scores.

    A credit score is a three-digit number calculated based on your credit history that represents your present day creditworthiness. 

    Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.

    We each have multiple credit scores depending on the scoring service. While there are many others, the two main scoring services are FICO and VantageScore.

    Keep in mind that your score may vary depending on the type of loan you are applying for. For example, an auto lender looks at different factors than a mortgage lender.

    For that reason, FICO alone has more than 50 different versions of your score that it may send to lenders.

    What is a good credit score?

    FICO and VantageScore each assign a score ranging between 300-850.

    For both services, if you’re around 800, you’re doing very well. If you drop below 650, you’ve got some work to do.

    Businessman trying to improve credit score with the lessons learned on Think and Talk Money.

    Before we look at the factors that go into your credit score, I can’t emphasize this next point enough:

    Don’t obsess over your credit score.

    You certainly want to pay attention to dramatic changes in your score so you can understand where you need to make adjustments. That said, you should not be concerned with slight movement in either direction.

    For example, FICO considers a score between 800 and 850 as “Exceptional.” Once you’re in that range, it makes no difference whether your score is 804 or 837. You may notice slight variation from month to month. That’s normal and perfectly fine.

    Instead of worrying about fluctuations in your score, spend your time and energy on more important financial wellness strategies, like writing down your Tiara Goals.

    What factors go into your credit score?

    Regardless of the scoring service, your credit score generally consists of these factors:

    • Payment history
    • Current unpaid debt
    • The types of loan accounts
    • Length of credit history
    • New credit inquiries
    • Amount of available credit being used
    • Collections, foreclosures or bankruptcies

    Of course, not each factor counts equally. For example, FICO weighs each factor like this:

    • Payment history: 35%
    • Amounts owed (credit utilization rate): 30%
    • Length of credit history: 15%
    • Credit mix: 10%
    • New credit: 10%

    VantageScore does not assign percentages to each factor, but does define the importance of each factor like this:

    • Payment history: Extremely influential
    • Total credit usage: Highly influential
    • Credit mix and experience: Highly influential
    • New accounts opened: Moderately influential
    • Balance and available credit: Less influential

    In comparing the two main scoring methods, we can see that both methods generally look at the same factors. They both also place the highest emphasis on payment history and place less emphasis on new accounts opened.

    Here’s all you need to know about each factor.

    There’s no reason to overcomplicate what each factor means.

    Here’s all you need to know:

    Payment history reflects whether you consistently make on-time payments.

    Amounts owed, credit utilization rate, and total credit usage refer to how much of your available revolving credit you are currently using.

    Revolving credit mostly refers to credit cards, but could also include loans like a line of credit.

    For example, if you have a credit card with a monthly limit of $1,000, and you are currently charging $300 per month on that card, your credit utilization rate is 30%.

    To maximize your credit score, aim for using 30% or less of your available credit. This ratio applies to each individual account and to your total account balances.

    Length of credit history refers to how long various accounts have been open.

    The longer the accounts have been open, the better your score will be.

    Credit mix looks at what types of loans you have open.

    Generally, lenders prefer to see a variety of loans, like credit cards, auto loans, and mortgages.

    New credit refers to how many loans you’ve applied for recently.

    Applying for too many loans in a short period can negatively impact your score since you may seem desperate for loans to fund your lifestyle.

    What factors are not considered in your credit score?

    Credit scores do not take into account personal information like race, gender, age, or marital status.

    Credit scores also do not consider income or employment history.

    Keep in mind that while personal information or employment history is not a factor in your credit score, it certainly will be considered as part of your application by lenders.

    For example, mortgage lenders and landlords will want to confirm your history of steady employment and income before entering into a financial relationship with you.

    Don’t get caught up in precisely how your score is calculated.

    FICO and VantageScore provide the above information as general guidance. However, each of our credit scores is determined on a unique set of circumstances that changes over time.

    While these factors are generally considered for everyone, specifically how each factor is weighed varies for each of us.

    As FICO explains:

    Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.

    Like we mentioned before, it’s important to not get hung up on the different methodologies that each scoring service uses. For the most part, your score won’t vary significantly from one service to another.

    The key point is to pay attention to the general factors that impact your score but understand that your score is always changing. Don’t waste your energy trying to decipher how much weight is given to each factor.

    How to check your credit score.

    These days, it’s easier than ever to monitor your credit score.

    Most major banks offer free credit scores to their customers.

    You can also sign up for credit monitoring, including credit scores, with the major credit bureaus, Equifax, Experian, and TransUnion. Note that only some services are provided free of charge.

    Of course, there are also no shortage of apps and websites providing similar services, sometimes free and sometimes for a price.

    If you’d like additional guidance on how to obtain your credit score, please reach out on the socials or by replying to our weekly newsletter.

    What should I do instead of obsessing over my credit score?

    Instead of obsessing over your credit score, focus on the strong financial habits we discuss regularly in the blog.

    You should not have to worry about your credit score if you:

    When you can make these habits part of your regular life, your credit score will automatically rise along the way.

    Look at credit scores from a potential lender’s point of view.

    I hope this goes without saying, but lenders are in the business of making money. They make money by gauging risk. The lower an applicant’s credit score, the more the lender’s risk increases.

    When the lender’s risk increases, it may decide to not lend you money. Or, it may choose to lend you money and charge you a higher interest rate to compensate for that higher risk.

    The same logic applies when other entities besides lenders are reviewing your credit score.

    For example, an employer may check your credit score to determine your level of trustworthiness before offering you a job.

    A landlord may check your credit score before agreeing to rent you an apartment to confirm whether you are likely to make the required payment each month.

    Always remember why credit scores are used in the first place.

    If nothing else, remember why credit scores are used in the first place:

    Credit scores are used to measure how risky it would be for someone else to enter into a financial relationship with you.

    In other words, can you be trusted with money.

    If you have a history of not making on-time payments, or not paying loans back, that indicates you are not responsible with money.

    When you are using up most of your current credit and carrying high balances, that demonstrates that you have a hard time limiting your spending.

    If you are constantly applying for new credit, it shows that you may be dependent on credit to fund your life.

    In any of these scenarios, the risk of entering into a financial relationship with you increases.

    Credit scores are especially important before big purchases.

    If you have a big purchase coming up, like buying a home or a car, it’s important to have your credit score in a good spot before applying. This is because your credit score will impact the interest rate you are offered.

    For a big purchase, even slight variations in the interest rate can make a huge difference.

    Because it’s normal for your credit score to change frequently, it is worth waiting to apply for that loan until after you’ve improved your score.

    The best ways to improve your score in the short term are to pay off debt and avoid applying for new credit.

    By paying off debt, you’ll improve your payment history and your credit utilization rate, two of the most important factors in your score regardless of scoring method.

    The best thing you can do to avoid the costly consequences of a poor credit score is to implement the personal finance fundamentals we routinely discuss in the blog.

    Have you ever needlessly obsessed over your credit score?

    Let us know what that felt like in the comments below.

  • Why Credit Reports are So Important

    Why Credit Reports are So Important

    I first learned about credit when I was in law school. My teacher wasn’t a professor, though.

    My teacher was a surprisingly pleasant debt collector.

    I spoke to this debt collector after breaking my wrist snowboarding.

    For the second time in a year.

    Let me explain.

    About six months earlier, my friends and I took a road trip to go snowboarding in Wisconsin. I had never been to this location before and wanted to explore the entire ski area. After a few loops on the main run, I found my way to the terrain park.

    My plan was to scout out the terrain park and report back to my friends. I must have forgotten the plan as I approached a jump that I had no business approaching. That turned out to be a mistake.

    Heading towards the jump, I had too much speed and, for lack of a better word, panicked. My friend reported afterwards that as soon as I jumped, my body and snowboard turned parallel to the ground like I was lying in bed.

    After all these years, It almost seems peaceful to picture myself lazily flying through the air on a beautiful, blue sky, sunny day.

    Almost.

    To state the obvious, this was not a good position to be in since I needed my feet and snowboard to hit the ground first and land safely.

    I ended up landing on my backside with my hand and wrist hitting the ground first. The unpleasant result was a trip to the emergency room and a broken wrist.

    My reputation for having fragile wrists was secured.

    OK, back to the debt collector.

    A few weeks after returning to Chicago, I received a bill in the mail from the emergency room for approximately $200.

    I didn’t understand why I was receiving a bill since I had insurance and provided that information to the emergency room. I figured it must have been a mistake to send me a bill, and that my insurance company would pay for it.

    So, I crumbled up the bill and threw it in the trash.

    Healthcare and medicine. Medical and technology. Doctor working on digital tablet on hospital background illustrating how I first learned about the importance of credit history.

    Before you shake your head, remember that I was still in school and on my parents’ insurance. This was my first interaction with a medical provider where the bills came to me instead of them.

    I didn’t know at the time that even with insurance, I could potentially be responsible for some portion of the bill.

    For the next few months, I continued to receive bills from the emergency room. And, I continued to throw these bills straight in the trash.

    At some point, I received a new type of letter in the mail. This one caught my attention. It was from a collections agency.

    The letter said something to the effect of, “Call us immediately to dispute or pay this medical bill before we are forced to take action against you.”

    The scare tactic worked.

    I picked up the phone and had a surprisingly nice conversation with the debt collector. The debt collector explained how the collections process works and the potential impact failing to pay would have on my credit report.

    Credit report?

    Never heard of that before. Don’t think I have one.

    After hanging up the phone, I did some research and realized the debt collector wasn’t scamming me.

    I certainly did have a credit history, as reflected in my credit report, that I needed to be mindful of.

    I wrote a check to pay the bill the next day.

    This is how a broken wrist and a debt collector first taught me about credit reports.

    What is a credit report?

    As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.

    Credit also refers to a person’s trustworthiness or history of repayment.

    A credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.

    Your credit report will typically include:

    • Personal information (name, social security number, current and former addresses)
    • Credit accounts (current and historical accounts, including credit cards and any other loans)
    • Collection items (missed payments, loans sent to collections)
    • Public records (liens, foreclosures, bankruptcies)
    • Inquiries (when you apply for a new loan)

    Every time you open a loan, like a credit card, auto loan, or mortgage, it will appear on your credit report. Likewise, whenever you make a payment or miss a payment, that information will be reflected on your credit report.

    When someone has “good credit,” it means they have a reliable history of repayment. When someone has “bad credit,” it means they have not previously demonstrated a reliable history of repayment.

    Remember this key point: your credit report represents a complete picture of your interactions with credit over an extended period of time. Your credit report will include information about you going back years and years.

    This means that the information reflected on the report will follow you for the long term. Any negative information on your credit report will typically stay on your credit report for 7-10 years, depending on the credit reporting agency.

    What is a credit reporting agency?

    In the United States, there are three credit reporting agencies:

    • Equifax
    • Experian
    • TransUnion

    By law, you are entitled to receive a free copy of your credit report from each credit reporting agency every year.

    To do so, simply visit annualcreditreport.com.

    If you haven’t obtained your credit report recently, I highly encourage you to do so.

    Regularly checking your credit report is the best way to make sure that nobody has fraudulently opened any accounts using your social security number. It’s also the best way to monitor all the loans you are currently responsible for.

    Believe it or not, it’s not uncommon for people to forget about loans they have previously opened.

    Did you ever go to a Cubs game in college and sign up for a credit card just to receive a free XXL white t-shirt with a blue W on it?

    No?

    Uhh… me neither.

    How about signing up for a new credit card while making a purchase at your favorite store to save a whopping 10% that day?

    You may never end up using these credit cards and completely forget that you opened them. They’ll still appear on your credit report, and you are still responsible for those credit cards.

    Is a credit report different from a credit score?

    Yes, credit reports and credit scores are different.

    We’ll soon discuss credit scores in detail. For now, understand that a credit score is a number calculated based on your credit history that represents your present day creditworthiness.

    Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.

    Unlike a credit score, your credit report does not change quickly. Like we mentioned earlier, any negative information on your credit report will typically stay on your credit report for 7-10 years.

    Why does my credit report matter?

    We typically rely on our ability to borrow money to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase.

    In these scenarios, lenders will “pull your credit” or do a “credit check” before agreeing to give you a loan.

    If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.

    On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money.

    Or, a lender may agree to give you a loan and charge you a higher interest rate to compensate for the increased risk. This could end up costing you lots of money.

    Poor credit history can lead to lost opportunities.

    Besides just financial consequences, a poor credit history can also lead to lost opportunities.

    As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. Most major rental property search websites, like Zillow and Apartments.com, offer credit checks as part of the standard application process. My wife and I require a minimum credit score for all potential tenants.

    It makes sense why a landlord would pull an applicant’s credit. When you rent an apartment, you are signing a contract (a lease) to pay a predetermined about in exchange for a place to live.

    Landlords rely on those rent payments to pay for the property’s mortgage and upkeep. These rent payments can also directly impact the landlord’s livelihood.

    It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.

    Just as a landlord is sizing up your ability to pay the rent each month, other lenders, like a car dealership or mortgage lender, are sizing up the likelihood you can repay its loan.

    Don’t ignore your credit history.

    Have you checked your credit report this year?

    My wife and I check our reports at least once per year to make sure there are no red flags.

    Fortunately, I realized my mistake with the debt collector before that red flag ended up on my credit report.

    If I hadn’t, I would have seen that negative mark on my credit report for 7-10 years. This would have severely impacted my ability to qualify for mortgages and grow my real estate portfolio.

    I’m glad I learned that lesson about credit reports.

    I’m also glad that I haven’t been back to a terrain park since law school.

  • Good Credit with Unicorn Cake

    Good Credit with Unicorn Cake

    Something can be good and bad at the same time.

    I’ll give you an example. This weekend, we hosted a birthday party for my five-year-old daughter. She wanted a rainbow unicorn theme.

    When asked what she wanted for a present, she would unhelpfully respond, “No clue.”

    OK, great.

    Fortunately, the local toy store was stocked with rainbow unicorn items: puzzles, books, stuffed animals, craft kits, etc. The kids at school must be on the same page with their interest in rainbow unicorns this year.

    The rainbow unicorn party went well. We started with pizza, decorated cupcakes, and had a unicorn egg hunt.

    The highlight of the party?

    The birthday cake.

    We ordered a rainbow unicorn cake from one of the most popular bakeries in Chicago, Sweet Mandy B’s. The next time you’re in Chicago, do yourself a favor and pop in for a cupcake or cookie.

    After singing “Happy Birthday,” I started cutting pieces of cake for the kids. A few jumbo pieces of cake later, one of our guests came to my rescue and showed me how to cut smaller, kid-appropriate pieces.

    It’s a good thing she did because with the way I was cutting the cake, we were going to run out before all the adults got a piece. And that would have been a bad thing.

    See, this cake was incredible. I’m not always a cake guy (unless it’s ice cream cake), but this one was special.

    Vanilla confetti cake with buttercream frosting. It had the perfect balance of cake and filling. Sweet, but not too sweet. Soft and also firm.

    It wasn’t just me. I never saw a cake disappear so fast. Usually, we end up with so much cake leftover that I’m sneaking bites every time I open the fridge for the next week. Not this time. Sadly.

    By the end of the party, we had barely a single piece left (which was devoured within 24 hours).

    Half eaten cake on a plate symbolizing too much of a good thing like using too much credit can lead to debt which would be a bad thing

    There is a bright side to finishing the cake, though.

    If I had an unlimited supply of this cake, I’m not sure I could stop myself from eating it. The temptation would be too strong to sneak back to the fridge all day long, fork in hand. One little bite at a time.

    It’ll be fine.

    What does birthday cake have to do with personal finance?

    You know where this is going.

    Eating a wonderful cake at a birthday party is a good thing.

    Eating cake every day for the next week, no matter how good it is, would be a bad thing.

    You see? Something can be good and bad at the same time.

    And that leads us to our next major topic in the blog: the responsible use of credit.

    What is credit?

    Credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. In this context, think of “credit” as another way of saying “debt.” When you use credit, you’re taking on debt.

    Credit also refers to a person’s trustworthiness or history of repayment. When someone has “good credit,” it means they have a reliable history of repayment.

    It’s important to always remember that credit and debt go hand-in-hand. That’s why before we discuss how credit can help us, we learned scary stats about debt. We discussed three big reasons why we’re in debt. And, in a preview to our conversation on credit, we learned the difference between Good Debt and Bad Debt.

    We typically rely on credit for big purchases.

    We typically rely on our ability to borrow money, or our credit, to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase. That ability to borrow money is known as credit.

    If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.

    On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money. Or, a lender may charge you higher interest rates to compensate for their increased risk.

    This could end up costing you lots of money.

    Poor credit will cost you more than just money.

    Besides just financial consequences, a poor credit history can also lead to lost opportunities.

    As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.

    These reasons, and other reasons we’ll soon discuss, illustrate why it’s so important to responsibly use credit.

    In our initial series on credit, we’ll discuss:

    • The basics of credit reports and credit scores and why they each matter.
    • How the responsible use of credit cards can fit into our personal finances.
    • What you need to know to maximize the benefits of credit card reward programs.
    • How to use other forms of credit, like a Home Equity Line of Credit (HELOC), to accelerate your progress towards financial freedom.

    By understanding what credit is and how your credit history is tracked, you’ll gain the confidence to use credit responsibly as part of a healthy financial life.

    I am in favor of the responsible use of credit.

    As I previewed in our discussion on Good Debt, I’m in favor of people responsibly using credit as part of a healthy financial life.

    That applies to our every day choices, like using credit cards to track our spending. It also applies to other forms of credit, like Home Equity Lines of Credit (HELOCs), to acquire assets. We’ll discuss these and other benefits of responsibly using credit in our upcoming posts.

    The important caveat, however, is that like the Sweet Mandy B’s birthday cake, we have to know when a good thing can become a bad thing.

    If we abuse the privilege of credit, the consequences can be severe. I abused the privilege of credit cards at the beginning of my career, and it took years to dig out of the hole.

    By understanding how credit works and how your credit is tracked, I hope you can avoid falling into a similar mess.

    I want you to happily enjoy the cake without the potential negative consequences.