Episode 5c--Credit, Credit Cards, and Insurance

 

[5c] Money: Credit, Credit Cards, and Insurance

 

I’m Feroz Bashari.  Today, let me tell you about some ways to buy things on credit, and also how to protect your wealth.

[Main Points:]

First, you need to know that every adult American has a credit score.  It may be good or bad, but they have one.

Secondly, there are specific things you can do to improve your score.  An improved credit score will save you money.

Third, obtaining a credit card can make it easier to pay for some things.  It is an important part of an overall financial plan, as long as you are responsible and pay your bill on time. 

Fourth, it is dangerous to build up too much debt.  This will cause you to have more and more interest charges and fees to pay.

And finally, insurance is a way to protect the wealth that you build up.  Without insurance, you could be faced with having to pay a very large bill when something goes wrong, even if it is not your fault.

 

Getting and Keeping a Credit Card

There are credit cards designed specifically for people who have not yet established credit under their name. There are credit cards for college students. Then there are credit cards for people with no credit but who are willing to put down a deposit in the bank to cover their charges. Another possible way to start having a credit card is for someone else to make you an authorized user on their account.  And there are credit cards with higher-than-average fees and interest rates for others who do not fall into these three categories.

Once you have a credit card, or after a merchant is letting you buy something on credit, it is important to pay your bill or loan in a timely manner.  Any bill not paid on time will usually result in an extra fee as well as a lowering of your credit score.

Choosing a Credit Card.  Not all credit cards are the same.  Look around for the best credit card rates.  Look on the internet or ask someone you know and trust to research rates with you. 

Your Credit Score

Each person has a credit score assigned to you by three large companies.  It is based on their history of whether they paid their bills on time.  It goes up and down as you buy things and when you pay off loans.  You have a right to know your credit score for free; you can obtain it by writing to one of the three credit reporting companies.  Having a low credit rating can result in being denied a loan for a house or a car in the future.  The rules for how to go about raising your credit score may make no sense to you.  But that’s not important.  Think of it as a game with high stakes.  If you play the game and follow the rules, then later you can borrow more money and at better rates in the future when you need it.

Preserving Your Money:  Don’t Get Trapped in a Cycle of High Debt

It is up to you to use a credit card wisely.  Some people use them only for emergencies.  As you gain experience with credit cards, you may find that you can responsibly use your card for everyday expenses.  This allows you to keep a record of purchases and to get a small amount of money back from the credit card company.  This is called an incentive programs.  While these programs vary, a typical incentive program might pay you 1% or more of your purchases on their card.  

In order to obtain the best interest rate and receive the best incentives it is good to have someone help you research companies on the internet and to ask people you trust for their recommendations. 

There is another advantage of using credit cards.  If a merchant does not deal with your fairly you can appeal to the 2 main credit card companies, either VISA or Mastercard.  Let’s say that an unscrupulous merchant sells you a used washing machine and it breaks down.  Then when you call him, he ignores your calls.  You can have recourse through the credit card company; they can exert their influence over the merchant to make it right.

One danger that comes with credit cards is that if you are not able to make the payments in full and on time, interest will be charged. The interest can run up to very high levels, even 25%. As a result, you can get behind in your credit card payments and the total balance just keeps going up, up, and up. Some people find themselves paying more and more to the credit card company until they can’t keep up and have to declare bankruptcy. Once they declare bankruptcy then they cannot borrow money again for several years.   This includes not being able to get a mortgage.

Protecting Your Credit Card Number.  If a credit card is stolen, report it immediately, so it cannot be used and so that you will not be responsible for the charges.  There are electrical devices that can illegally record the electrical signal given off by your card.  There are special metal wallets to prevent this.  If you are buying gas and you see someone hanging around for no reason you may want to stop and do something to protect your card.  Also be careful to only give your card number to genuine merchants. The same is true of the special three digit number on the card—protect it from people who would try to use it to make purchase for themselves. 

Pay Cash When You Can

This doesn’t mean actual paper money; rather it means not buying on credit.  Some financial advisors suggest paying only with cash or something similar such as a check or debit card.  Others say that it makes sense to use a credit card and then immediately pay it off.  It all depends on how much self-discipline you have.  If you pay off your card every month then it may be wise to use a credit card and get 1% cash back.  But if you're tempted to let the credit card balance pile up, then it's much better to pay for things with cash.

Taking Out a Loan

Loan rates.  When buying a house or a car you are very likely going to take out a loan from a bank or credit union. Loan rates fluctuate. Getting a good loan rate keeps your monthly payment cost down.  Your loan rate and monthly payment will be somewhat dependent on your credit score.  What you will want is both the best price on a car or home and then the best loan rate you can get.

You may want to get a long-term loan because it has a lower monthly payment. However, in the long run a loan with a longer time to pay it off will mean that you will pay more on a house or car due to the added interest.

Buying Large Appliances

Buying a large appliance such as a washing machine or refrigerator can be done with cash or on credit. You may not have a choice. For example, if your refrigerator goes out you may have no choice but to buy one immediately on credit. If you do, find out exactly what your monthly payments will be and how much you are going to pay in total.

To choose the brand and type of appliance you are going to buy start by asking friends for their recommendations.  Also look in magazines such as Consumer Reports for scientific tests comparing different models and brands. A librarian at the public library will be happy to help you with that, although you may need someone to translate it from English to your language. Try to consider the features you want, the price, and how reliable it will be in the long run, that is, whether it is likely to need a lot of repairs.  So in buying a large appliance remember these four points:

            1.  Do your research, both on the internet and at the public library.

            2.  Look at it in person.  You want to go to the store and see if it is convenient for you to use.  Is it too tall or too low for you to reach into it? If the model you like is gas operated, such as some clothes dryers, make sure that you have a gas outlet where you are going to put it.

            3.  Americans do not typically negotiate about buying appliances.  But you may be used to bargaining and there is no harm in asking the salesman if there is a way to get a lower price.  For example, you can ask the salesperson if there Is there is a “cash price” which is lower if you pay cash and don’t use a credit card. 

4.  Find out what the price will be after delivery, installation, and taxes are added.  If buying on credit, ask what the sum total cost will be after all payments.

Buying a House or a Car

One of the biggest financial decisions you will make in America is when you buy a house or a car.  We are going to be discussing this in another video.  Your decisions in this area will have a lot to do with how much money you have left in savings.  Look for our video on this.  Even a small mistake can cost you thousands of dollars.  When buying a house for the first time, it is best to use a real estate agent who will protect you against unscrupulous people.  There is no such thing as a car buying agent, but you can have an experienced friend assist you.

Insurance:  A Way to Protect Your Wealth

It’s not enough just to make money.  You need to save it and protect it.  Insurance is one way of protecting money.  There are a variety of kinds of insurance.  Some are absolutely necessary to life in America, and others are not.  For example, you are required by law to purchase liability insurance for your car.  That way, if you are involved in an accident and the policeman says it was your fault, the other driver can get the money to fix his car from your insurance company.  If the driver or passenger is hurt, their medical bills will be paid by your insurance.  If you didn’t have liability insurance, you would have to pay for the damages out of your own pocket, and it could amount to many thousands of dollars.

You can also buy comprehensive insurance for your car that will pay for your car to be repaired.  Comprehensive insurance will cover you if your car is stolen or damaged, but it is more expensive than liability insurance.

If you rent a house or an apartment you can get renter’s insurance to cover your belongings against theft or fire. 

If you own a home, your mortgage company will require you to have homeowner’s insurance.  That way if the house is damaged in some way, it and its contents will be repaired or replaced by insurance.

If you have a family, you will probably want to have life insurance so that if you die, your family will have money to help them pay the burial expense. (Burials in America can cost $10,000.)  It would also pay them money that they can use for living expenses (rent, food, and so on).