Credit Cards 101: How to build your credit score ASAP and leverage your money

What's up you guys? It's Graham here. So this is probably one of the most important videos I've made so far, and it's how to get a good credit score.

Now I have a bit of a confession to make: I'm a bit of a nerd when it comes to credit cards. So I'm going to be sharing with you why this is so important, why you need a credit card right now, and how this can make you money.

I used to believe that credit was stupid. I thought that you should only buy something if you could actually afford it, and I thought the people who needed credit cards to buy something were totally irresponsible. I mean, that's just how I was raised.

So when it came time that I wanted to buy real estate, even though I had a six-figure income, six figures saved up cash in the bank, and I've never needed a loan before in my life because I paid for everything in cash, I thought Banks would love me for that. Banks disagreed, and no one wanted to give me a loan because I had zero credit history, and I've never had a credit card or any sort of loan in my name before ever.

That is a mistake, by the way, that probably cost me over $500,000 in lost real estate because I couldn't leverage my money when I was buying properties in 2011 and 2012. So that's when I decided to make a change, get a credit card at 21 years old, and then spend the next 5 years building my credit score up to a 780.

I now have over $100,000 in available credit. I got the lowest rate possible on the loan I got last year on a home I purchased, and I will continue to get the best rates possible on every single loan I get because I have a good credit score.

To start, your credit score shows Banks how responsible you are at paying back money that you owe. Your credit score ranges from about 300 to 850, with the best rates being given to credit scores above 740. It's kind of like getting a grade in school, except your credit score shows banks how likely you are to default on the loan that they give you.

So the lower the score, the more likely you are to default on a loan that they give you, which means that they have to charge you a higher interest rate to make up for that. Or worst case, they just say, "Nah," and they want nothing to do with you because, if you're like me, you didn't have any credit score to begin with.

Likewise, if you have a high credit score, you're less likely to default on the loan, and you're a safer bet for the bank. They will charge you less interest because of that, saving you money. So if you want to invest in real estate, get a business loan, leverage your money, grow your wealth, you're going to need a good credit score.

It's not so much about getting in debt, by the way; it's just showing banks that you're responsible with the debt that you're given and can pay it off on time every single month as agreed.

So they calculate your credit score based off several factors. Now the first factor is how long you've had credit. The longer you've had your credit, the more history you have, and the higher the score you'll get. That's why it's so important: if you don't have a credit card right now, get a credit card because you're able to start the history earlier than if you had waited another year or so.

The next is how much credit you actually use compared to how much credit you have available to you. This is called the utilization rate, and generally speaking, they like to see a low utilization rate, which means you only use a small percentage of the total amount of credit that you have available to you.

The next one is obvious: it's on-time payments. You want to make sure that you pay off your credit card on time every single month, and that will help your score. The next one is a diversity and mix of credit cards and loans that you have. They generally like to see different types of credit cards and different types of loans, which show to the bank that you're responsible not only for paying off a credit card but also an auto loan, a lease, or a mortgage.

So by showing this, generally, you'll get a higher score. The last one is total credit inquiries, which means that every time you go and apply for a new credit card or loan, it's marked on your credit report as an inquiry. Banks don't like to see a lot of inquiries in a short amount of time because it gets them nervous that you're out there seeking as much money and credit as possible, and you're seen as a bit of a risk.

But I wouldn't worry about this too much because credit inquiries only lower your score temporarily for about 6 months. So I wouldn't be too concerned about this, and for everyone starting out, it doesn't really matter anyway because you really don't have any credit to work off.

If you're just starting out right now and you have zero credit, the first thing that you need to do is go to a local bank and get what's called a secured credit card. This means that you put down a few hundred and in return, they give you a credit card with your deposit that you've given them as collateral against the credit card, which means if you don't pay off your credit card, they hold a deposit from you that they can pay off the credit card with.

Generally, I recommend a $300 to $500 limit, which means that you put down $300 to $500, and in return, they give you a $300 to $500 credit card. This is the best and easiest way for any bank to accept you as a first credit card.

Now one thing I want to make very clear is do not spend money you wouldn't ordinarily spend just because you have a credit card. Treat the credit card exactly as you would cash by putting normal expenses on it: little meals, gas, food, whatever it is. Keep minimal expenses on the credit card, and make sure you pay it off in full every single month.

There's a myth out there that says you should pay interest and carry a bit of a balance to increase your credit score, which is totally false. You don't need to pay any interest or any money to try to increase your credit score. That's false! Just pay it off in full every single month and use it responsibly.

I'd recommend doing this for about 4 to 6 months, and that should give you enough time to build up some credit history. So after this, you'll have established a bit of credit history, and you can go and apply for an unsecured credit card. I recommend the Capital One card or a Bank of America cash rewards card. I have both of these, and in fact, the Capital One was the first real unsecured card I got.

I think I got a $500 limit at the time, but it really doesn't matter what limit you get, just get something. And then again, do the same thing: put minimal expenses on it and pay it off in full every single month. It's very important not to get carried away by having a limit and spending more money than you would otherwise. That defeats the purpose of having credit; you don't really need to do that. Just keep it minimal and make sure you pay it off in full every single month.

Just remember, all of this is just showing the bank that you're able to pay off your debt on time as agreed. So after about a year of building your credit and paying it off on time, in full every single month, it's time to apply for a charge card.

This is a card where you don't carry a balance at all, but you pay it off in full every single month. This is great because charge cards don't show a limit on your credit report, which means that if you spend $5,000 on it, it doesn't impact your utilization rate because it doesn't show a top-end limit.

Now my favorite of the charge cards is American Express. Now I personally have the gold card, which offers amazing rewards and points. I'll go into more detail in a future video, but essentially I've been able to travel to and from Canada to visit family for totally free just paying with points, which is pretty cool.

So now from here, you can just continue to add to your mix of credit cards, pay it off on time, and continue to get some credit history behind you. Eventually, you can start getting more advanced and start signing up for credit card reward bonuses, which is essentially you sign up for a credit card, you get a whole bunch of points for signing up for it, and you can use that for free airfare, trips, hotels, rental cars.

Even though some of these are more advanced techniques, you can totally do this and take advantage of them when you have a good credit score. If you're interested in learning more about this, I recommend Googling credit card churning and reading more about it because it's pretty cool, and I definitely take advantage of as many credit card offers as I can.

You can now also begin applying different types of debt to your mix, such as getting a mortgage, getting a car loan, a car lease. All of these things help diversify your credit report and help improve your score.

So now, these are a few credit card myths that I want to debunk: you don't need to pay interest to increase your credit score. You also don't need to carry a balance each month to help improve your credit score. Just pay it off in full every single month, and that'll be sufficient.

The next is that it does not hurt to check your own credit score. I personally check my score every single month, and I use Credit Karma. I like to check it and just make sure everything's there and everything is as it should be.

The next one is that it's also false that having too many credit cards will decrease your score. In fact, the opposite is true: the more credit cards you have, the more credit you have available to you, which lowers your utilization rate.

So as an example, let's say that you spend $3,000 and you have $10,000 of available credit to you. Your utilization rate is 30%. Now instead, let's imagine you have $100,000, but you still spend $3,000. Now your utilization rate is 3%. That is a huge difference between 3% and 30%.

So I recommend having as much credit available to you as possible because that lowers your utilization rate and that helps increase your score. Now, of course, I just have to disclose: spend responsibly! Don't use a $100,000 just because you have it available. Still, keep your spending to a minimum, but having it available will help your score.

Now this one I want to make very clear to you: do not close a credit card, especially if it's an old account. Now when you close a credit card, it also closes off all that credit history, and credit history is a huge component of what makes up a high credit score. The more history you have, the higher the credit score, so you always want to keep your credit cards open, even if you don't use them, because that keeps your credit history intact.

If you have to pay an annual fee for the credit card, still keep it open, but see if they can downgrade you to a free credit card instead.

Now the last bit that I want to talk about is the mindset that debt is bad, because this is false. So there could be good debt, like a mortgage, a car loan, or a business loan, where your money makes you more money being invested than you're paying off in a loan, or there could be bad debt like the $5,000 Hawaiian vacation that you couldn't really afford, but since you put it on a credit card, you can pay it off in low monthly payments over the next 10 years. That's bad debt.

There's a very, very, very clear distinction between having good debt and having bad debt. Debt is a great way to leverage your money and have it work for you, earning more money than you're paying in interest. So for instance, on a rental property, if you're paying 4% interest but the property is making you 10%, essentially, you can leverage your money and profit the difference between 4 and 10 and you profit 6%.

Now keep in mind that a credit card is something to use responsibly. Now that doesn't mean you should go out and buy that really expensive Hawaiian vacation or that really cool flat-screen TV just because you have the credit available to pay for it. Use a credit card the exact same way as you would if you had cash or a debit card, and treat it responsibly.

Put your normal expenses on a credit card instead of paying with cash or a debit card, and pay it off in full every single month. Now if you forget to make a payment on time and you get a late payment, keep in mind that stays in your credit report for 7 years. So you really want to treat this responsibly and make sure you pay it off in full every single month.

I recommend you set it up just to be paid off automatically every single month, so you don't even have to think about it, but just make sure it gets done.

And that's it! I mean, it's really that simple: put a small amount on your credit card every single month, pay it off in time, and get more credit cards and do the same thing: pay it off in time in full. That's it! It's really simple.

Do this for a few years, adding different credit cards to the mix, adding different loans to the mix, and you're going to have an amazing credit score to get pretty much whatever loan you want. Lenders will love you, people will be throwing money at you to borrow, and you'll be able to take full advantage of all the great credit card reward travel perks that you can imagine. Look up credit card churning because that's what I do, and it's so much fun to get into it!

As always, you guys, thank you so much for watching this! This has been a really fun video for me to make because I'm so passionate about credit cards. I was in a terrible position when I was younger that I didn't have a credit card, and I messed up massively.

So if someone else is in a similar position and doesn't have a credit card yet, I really hope that this will have an impact. Get a credit card now, and just pay it off and be responsible with it. 20 years from now, you're going to be in a great position with a whole bunch of credit history behind you, and you will definitely be thankful that you did that.

So as always, thank you again for watching. If you haven't already, click subscribe. You know what to do, just click that little button. Subscribe! I'll wait. I'll wait for you to do that. Do it!

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Thank you again for watching, and until next time!