Professor Stealth Wealth

Hello, class. Welcome back. I hope you all had a relaxing break because we are about to straight to work with credit cards. 

Credit cards are a tricky subject. They are so many different types with so many different rewards: Mastercard, Visa, Discover, 1% cash back, 2x back on miles, etc. They are so confusing too, having been known to be a danger to anyone who don’t know how to use them. Even my father was concerned when I started asking about getting one.

 So you might be asking “Professor, how do credit cards work and how can I use one correctly?” Well, this article is for you and I am going to teach you the basics of credit cards and how you can use them responsibly and get a high score on that all-important credit report. 

There is so much history about the credit cards and what all goes into figuring out your personal credit score. These are topics for another post, but I will describe one aspect of the credit score later in this article in order to help you obtain a basic foundation.

Credit cards are issued by many different companies:Capital One, Discover, American Express, etc. They don’t give them out simply to be kind and generous. The purpose of a credit card for them is to make money. They do this by charging what is known as interest. For example, if I loan you $100 dollars, I would want some extra money for all the effort, trouble, and risk I’m going through. After all, I am giving you money that I could spend on myself. And there is no guarantee that you will actually give me the money back. 

Therefore, I will come up with some number (credit card companies and banks usually put this number in percents, called an interest rate) that you must pay me back in addition to the money I loan you. The original amount I loaned you is called the principal and the extra money you pay is called the interest. 

This is one of the processes by how credit companies make money: by collecting this interest, which can range from around 15% to 20% (per year). This gives them the money they need to run their businesses (have more money to lend out, pay employees, give out dividends, etc.)

Now at this point, you are saying: “Professor, I don’t want to give the credit card companies extra money!! Isn’t there some way I can avoid paying them this ridiculous interest rate while building my credit score?” The answer is absolutely! There is no reason why you should be forced to pay your hard earned money and there is a way to avoid this entirely while obtaining excellent credit!

The answer to the problem? Don’t buy things you can not afford and pay off your balance IN FULL each month in time. Unlike borrowing from people, you don’t have to pay interest to the credit card companies if the amount owed ( the balance) is completely paid. They only charge interest if the balance is carried from month to month, which is then referred to as revolving balance. If you can afford to pay your balance off, then this will be easy to avoid. 

AND, if you do pay your balance off in time (hopefully before the bill is due), you are building your credit score by doing something extremely important: creating a payment history. 

That’s right. Just by simply paying the credit card company back (on time, mind you), you are working towards a great credit score. The company then know that you are a responsible borrower and they know it is far more likely that they will get their money back. So they give you a reward by reporting to the credit bureaus (yes, bureaus, there are three of them!) that you are making your payments on time. 

So what have you learned today? It can be summed up like this: Credit cards can be helpful if they aren’t misused and/or used recklessly. Pay off your credit cards each and every month on time and you should be fine.  

Leave me a comment if I made a mistake during this lecture or if you just want to have a discussion!

 I will see you back in lecture hall next time. Class dismissed.

Welcome back, class. Last time, we went over some simple ways one could apply to get “good credit”. Now that you have a basic foundation of credit cards and how to use them (If you missed that lecture, read it here.), let’s dive deeper and talk about something intimately related to credit cards. Credit Score. What is it and what goes into it? These are some of the questions that I know that you all have and don’t worry because we will address them. After this lecture, one should have a basic knowledge about credit and theoretical ways in which one can actually improve one’s credit score. 

Now, let’s begin.

A credit score is basically just a three digit number, ranging from (for people) 300 to 850. This number represents how “creditworthy” somebody else. In other words, it is a gauge used by companies to see how risky an individual is. Weather forecasters have thermometers to tell temperature, physicists have scales to determine weight, Companies have credit score.

You might be asking yourself at this point, “What about that number tells others how creditworthy I am?” Well, it is the “amount” of the digits. If we had two people credit scores, one significantly higher than the other (let’s say one had a score of 600 and the other had a score of 780), the one with the much higher credit score would be seen as more creditworthy. 

(This is a simplified version of the truth. This is enough to get you started but also keep this in mind. There are many more factors that play a part in determining your personal creditworthiness, such as payment history and age of all your accounts. But we answer those questions.)

How do they figure out this number? Easy. They watch an individual’s behaviors, keep track of them in what’s called a credit report and use those records to determine their creditworthiness at any one time. 

 Calm down, CALM DOWN. I know this seems very NSA/Jame Bonds-ish but this is the only method of determining it. And before any of you ask, no, they don’t watch you while you’re sleeping. They aren’t Santa Claus.

In fact, the information they do receive is pretty limited, all things considered. They do not track all of our purchases made. They do not track our location. They only track a couple of things. I’ll write it here on the board: 

• How well one pays their debt (Payment History, we discuss that last time.)
• How much one owes (things like auto loans, mortgages, credit card bills) (Amounts Owned or Credit Utilization)
• What is the average age of all your credit accounts (Length of credit history)
• How much “New Credit” you have
• What types of credit do you posses (Credit Mix)

See? That’s not a lot of information. (There are a few more things, but these are the most important ones.) Now, all things considered, each of these five do not contribute equally to a credit score. I think the breakdown of a credit score is around the lines of 35% comes from Payment History, 30% from Amount Owed/Credit Utilization, 15% from Length of Credit History, 10% for New Credit and 10% for Credit Mix. 

So, if one takes all this information into account and wanted to improve their credit score by a large amount in the shortest amount of time, what would they do? Well, they would work on making something with a larger percent (like Amount Owed) better than something with a lower percentage (like Credit Mix). 

 To review, it would be advantageous for an individual to focus more on Amount Owed than Credit Mix, in theory, because Amount Owed carries more weight and can change one’s credit score in a bigger way than Credit Mix can.  

Alright, I think that is all the time we have today. It seems you all were a little quiet today. If you have any questions, just drop a comment and I will try to get to you as soon as possible.

I will see you all next time. Class dismissed. 

Hello, class. Welcome back. I hope everyone is well rested and ready to get going because we are going into something with a little more depth today. And we are jumping right in so get ready.

 We are going to go over investing.

 Investing is the cornerstone of building wealth. Without it, it is virtually impossible to become “rich”. In fact, it is impossible! 

One might wonder about that statement that just came out of my mouth and ask “What about lottery tickets??”. Well, in order to win the jackpot, wouldn’t a person have to go and purchase a ticket? 

In other words, wouldn’t a person have to invest in a ticket.  This is the basis of investing: Putting money into something, hoping that it will produce more money than one put into that something. 

The idea itself is simply and many of us apply it daily. We use money to purchase professional attire so that we can go to a job interview in hopes of getting a job. We use money to buy gas so that we can go to work and make more money. This list goes on and on.

Now, the difference between this and the word investing is purely nuance, aka it exists only in our minds. So what is the actual difference? Investing raises the thoughts of stock markets, Dow Jones, recessions, etc: stuff that would bore the average person to tears. 

Because of the complexity associated with it, people tend to avoid this type of “investing” all together. They don’t understand and therefore, they leave it alone.

Now, investing can actually be a little complicated. BUT! It doesn’t have to be. And besides, you all are here to learn, right? Before I jump into the specifics of “investing”, I feel as though you aren’t completely sold on the idea of investing. 

“Why should I invest in the first place?” 

“Why should I risk my hard-earned money for something that has been compared to gambling?”

Those are all questions that people have asked before and don’t worry: we are going to cover them all.

Why should one invest and potentially lose money? That one is an easy one. One with an answer that might shock you. Or not if you already taken an economics course before mine. 

We already are. Every day, every second. We are losing money. I am not talking about opportunity cost (The time doing one thing could be better spent doing something else.) I am talking about inflation. It is how money itself loses value. How can it do that? Well, I remember how my grandmother constantly told me how stuff was cheaper back in the day and how outrageous prices are today.

What she was complaining about? In the most simple terms possible, inflation. It’s how prices rise over time. Well, if prices rise and one’s level of income stays the same, then the amount of stuff one can buy decreases. For example, if a pack of gum costs 0.50 cents and I only have a dollar, then I can buy two packs of gum. But, if the price of the pack rises to a dollar, I can only buy one pack.

If I increase my income using investing, then I could potentially keep up with inflation. (In fact, I can actually beat inflation and have more money in the long run!)

Second, one can make those golden years shiny. No one wants to be forced to work for the rest of one’s life. And one doesn’t have to be work. With investing and something called the rule of 72 (I will cover that late on, but basically, it is used to determine how fast one money doubles when investing.)There are a GREAT many examples of individuals saving and investing their money and not working at ALL in retirement.

 In fact, there are some of them that save enough to actually retire EARLY and still have enough money to live comfortably. (A lot of these people follow a method call F.I.R.E. – Financial Independence Retire Early. Again, I’ll cover it in another class.)

Third and finally, it means more money in the long-term. Now, probably not immediately. But, it is very conceivable for someone to have invested for a while and have millions of dollars to play with at the end. With that fact in mind, who would be willing to turn down a method that people have been using for decades to get rich?

And there you have it. At this point, we have covered what people think of when they hear the word “investing” and why you should invest. Now, we can finally go over ways you get started investing. 

Yes? The time? 

Oh. We did run out of time, didn’t we? Well, good thing this is a two part class. Go ahead and take a break and we will start back here. 

Write a comment if I made a mistake or if you just want to open the floor for discussion.

(Sorry, guys! I haven’t had time to write some ways that one can use to invest. Don’t worry! I will put it up as soon as I can! Thank you so much for all of your support!)