I’m back! Sorry for being totally MIA this week – work has been absolutely crazy, which left me almost no time to have lunch, blog, or poo. Yes, I just said “poo” on my blog.
So one of my top reads this week was Ramit Sethi’s Big Wins Manifesto which is a helluva long article but superduper highly recommended (If you’re too lazy to read the whole thing, go knock your head against the wall like 10 times cause you’re an idiot, but the summarized message is that you should be focusing on a few “big wins” that would give a disproportionate effect on your personal finances, rather than many different small “tactics” that could save you a couple of bucks here and there but wont really make a real difference. And wow, that was a long sentence.)
So Ramit talked about his 7 big wins of personal finance, which I simply loved. It’s kind of like an awesome to-do list. I’ve blogged previously on some of ’em, like 1. Automate your finances and 2. Start investing early, so I figured I’d blog a little bit about what I know about number 3, which is to improve your credit score.
The hidden cost (or benefit) of credit cards
So we all have credit cards, and we all love/hate ’em. We all know that they give us awesome perks like 1-for-1 drinks (woot woot!) and frequent flyer miles. We also know that they’re a pain in the freakin’ ass cause you have to check your statement every month and trudge to pay ’em off. (By the way, if you’re still doing that, first shoot yourself in the head, and then read my post on automation) We’ve also all heard the same tired arguments that you should pay ’em off on time, or we’d get charged a really high interest rate, yadda-yadda.
But did you know that credit cards could potentially cost you tens of thousands of dollars without you ever realizing it?
There’s a hidden cost of not paying your bills on time other than a couple of extra bucks of interest on what you owed last month – every late payment you make affects your credit score, and that has a bigger impact on your finances than you think.
This example from Iwillteachyoutoberich.com says it all: Consider 2 people, one has a great credit score, and one has a poor credit score. Both decide to buy houses which cost $200,000. “Simply by virtue of having different credit scores, the person with poor credit will pay over $68,000 more than the person with excellent credit.” (In Singapore, where houses cost easily 3x that amount, that difference is even larger).
For my Singaporean friends, don’t assume that this applies to Americans only. Credit Bureau Singapore states that paying your bills on time as far as possible is the number 1 way to improve your credit reputation.
Control your nuke
A lot of people don’t realize that credit cards are more than a cool way to pay for stuff – they’re a freakin’ nuclear weapon on your personal finances. Use them well, and you could boost your credit score and save tens of thousands on your house. Use them poorly, and they could erase your entire gains from investing/working your ass off.
So how do you maintain control, and not have them blow up in your face?
The answer: Automate your credit card bills, which will ensure that they’re paid off on-time, every month. How many times have we missed a payment because it was just too much of a hassle to remember to pay it off, not realizing that it could have cost us thousands of dollars in interest? Don’t leave it up to your own “effort” – you’re bound to forget sooner or later. Instead, check your statements when they come, and if there are no mistakes, let the system take care of it for you.
There are other ways to improve your credit rep, which you can read about here, but I won’t go into them for now. First focus on automating your bills, and notice how awesome life is when you don’t have to worry about remembering to pay your bills on-time. You’ll also be able to sleep soundly knowing that you’re quietly building your credit rep in the background and saving tens of thousands of dollars.
PS: anyone had any experience with the effects of credit cards on your housing loan? I’d love to hear from you. Leave a comment or drop me an email at cheerfulegg [at] gmail.com – I read every one 🙂
barely managed to understand your post! 😛 I dont have a credit card for the obvious infamy. Would really appreciate if you can give me a few pointer on where i can start my readin!
Hey justaparna! You might wanna google around on the basics of using a credit card first – it’s kind of common knowledge that’s why I didn’t wanna blog about it. You could check out http://money.howstuffworks.com/personal-finance/debt-management/credit-card.htm for a REALLY detailed article on how credit cards work.
You’re right that credit cards are infamous, but if they’re used wisely they could help you in your finances, which was the point I was trying to make 🙂
thanks! 🙂
I had a mortgage set up where i was allowed to make direct debits directly from the mortgage account, plus have my wages fed directly into it. Then I had a credit card set-up where the monthly balance was paid off before the due date direct from the mortgage account. all bills, groceries- EVERYTHING I could put on the credit card I did. And that way the money deposited each week stayed in the mortgage until the last possible moment, meaning the interest calculated each day was less, and money i was depositing was coming off of the principal amount as well. because of a reduction in interest with my money staying in the mortgage, the balance started coming down more and more each month. I simply made sure the credit card limit was less than i’d earn in a month, and that way I didn’t get into trouble.
PS: I can’t believe you wrote ‘poo’ in your blog, that is so immature
PPS: The word ‘poo’ also appears in my blog somewhere. We are champions.
That’s awesome – I didn’t know you could actually pay credit card bills off a mortgage account? Though would the extra interest saved each month really make that much of a difference?
PS: yes using ‘poo’ on your blog is way awesome
it depends what mortgage lender you’re with, there might be more options and flexibility in Australia for that sort of set-up, but we actually noticed a huge saving over a short periof of time. It obviously isn’t worth it if you get a lender who charges a ridiculous interest rate for the use of direct debit facilites straight from the mortgage account, but ours was pretty good in comparison to other lenders who didn’t offer the service. Just pays to shop around.
Thank you for giving all these handy tips. For me the Coursera thing was a total winner! Would never have found it without your blog. I therefore would like to nominate you for an award. See (http://pleunblog.wordpress.com/2012/07/02/my-very-first-award/) for the details.
Thanks very much for the nomination! I don’t really participate in blog awards all that much, but I like your blog 🙂 Congrats on the award and keep writing!
Thank you and I will keep writing. I never thought I would participate either, but it was my first and therefore exciting! haha
You keep up the good work too!