Most smart investors and economists are now finally recognizing that the stock market is in a bubble. Asset prices and commodities are at an all-time high. Employers are looking for workers but can’t find any, and wages are increasing.
Anyone that understands sound economics knows that this can’t last. But right now, the economy is hotter than ever. That’s why it’s critical to play your cards well in the near future.
You want to get the best out of the bubble economy. But, you also don’t want to get caught holding the bag during the crash. You don’t want to buy up a bunch of assets at inflated prices during the boom, only to have to sell off at a loss or borrow money at crazy interest rates when the sell-off begins.
It’s much better to build-up reserves and access to credit so that you’re prepared for the crash, when and if it comes. (Most likely when it come…but, that’s another topic for another day.) As a bonus, you might also be able to buy cheap when asset prices start crashing down.
That’s why building your credit score is one of the best things you can do right NOW.
Why Care About Your Credit Score?
Your credit score is basically an assessment of your ability to pay back your debts. This is usually expressed in terms of a FICO score, which ranges from 300 to 850.
The better your FICO score, the more money banks will lend you, and the better the interest rate you’ll receive. This is very important when buying real estate or when investing in a business, as a lower interest rate could save you tens of thousands of dollars.
If your FICO score is about 620, you can expect to get an interest rate of about 4.2%. At a FICO of 720 and more, you’ll get something like 2.6% interest. This may not sound like much, but it adds up fairly quickly.
For example, a 30-year fixed-interest loan of 2.6% on a $300,000 house will cost you about $130,000 in interest. That same loan at 4.2% will cost you over $220,000 in interest! That’s a $90,000 difference or $250 per month you save if you have a good credit score.
This is why the rich often pay less. They have cheaper access to capital. Cheaper capital allows them to grow their businesses faster and to scale more effectively, allowing them to make even more money.
They also don’t allow a perfect opportunity to pass them by just because they don’t have the money at hand.
How to Build Credit?
Everyone can start building credit. And contrary to popular opinion, it doesn’t have to cost anything.
All you need to do is have a credit card and pay your bills on time. There are good credit cards out there that don’t cost any money.
But to start building credit, you need to understand your FICO score.
Your FICO score is determined by combining different credit data, with the most important pieces being your payment history and amounts owed.
Your payment history is just a metric of whether you pay your bills on time. This accounts for 35% of the score.
Your amounts owed account for the percentage of your current credit lines you use. That means that if you max out all your credit cards, your amounts owed score will be bad. This accounts for 30% of your credit score.
Your First Step to Financial Independence
Most cards will require you to have a certain minimum credit score to qualify. This could be an issue for people who are just starting out.
But there are good options for absolute beginners as well. Discover it Secured credit card is geared specifically for people who want to start building (or re-building) their credit.
All you need to do to qualify is to pay a $200 refundable security deposit. Then, just charge some of your expenses with it and make sure to pay on time.
The best thing is that there’s no annual fee and the card offers 1% automatic cash back, 2% cash back on gas stations and restaurants, and an unlimited cashback match for the first year.
It also tracks your FICO scores for you, for free, so that you can instantly see whether you’re on the right track.
Discover it Secured is not the only free credit card you should have, but it’s really great for those just starting out. If used correctly, it could be your first step towards better credit and ultimately, financial independence.
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