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I wanna start out this lesson with a bridge between our comparison of credit
and debit cards and today's topic, of building and boosting your credit score.
To cross this bridge, let's start with this hypothetical, but
all too common scenario.
Let's say your current credit card debt is around $5,000.
And you messed around a bit with some late payments on your bills, so
now you're stuck with a penalty interest rate of 25%.
Yes, that's right.
Credit card companies can charge rates as high as 25% or more,
even when interest rates in the broader economy are only in the single digits.
How do you spell, loan shark?
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Now, let's further assume that the only thing you ever do with
your credit card balance is to pay the minimum payment each month.
In fact, you just take a pair of scissors, cut your credit card in half and
toss it in the trash.
[SOUND] Now, fast forward seven years, at this point you
will have paid over $5,800 in interest alone,
that's way over your starting balance and you haven't even spent a cent.
In fact the amount of interest you will pay on your credit cards
is highly sensitive to the interest rate the credit card company charges you.
For example, as you can discover at a website like creditcard.com,
if you have a $5,000 balance with a 16% annual percentage rate,
and you make a payment of $125 each month,
you would need 4.8 years and $2,000 in interest to pay off your balance.
Okay, that observation leads to our first key point.
Simply that paying the minimum balance on your credit card every month,
rather than also paying down most or all of your balance is a losing move.
1:51
And here's a little key insight into the mind of the average credit card issuer.
When you only pay the minimum balance that card company likes you.
>> And I can't deny the fact that you like me.
Right now.
>> These credit card companies really like you, because you are forking out interest
payments at obscene rates and you never default.
Good for the bank, but way bad for you.
So, here's your first big tip.
Pay off your credit card balances as quickly as you can,
to avoid having interest payments erode your buying power,
particularly when you're being charge obscene interest rates.
And that key tip, brings us to our first key question.
How the heck do so many credit card customers
wind up paying exorbitant interest rates like 25% or more?
>> Well, it's all about the risk the credit card companies claim you pose with
the possibility of you defaulting on your credit card bills.
Enter stage right, your own unique credit score and credit report.
Now hear this.
These two metrics are the single greatest determinant of both whether you can get
credit to begin with, and whether you'll be charged the lowest or
highest interest rates.
So we really need to understand how credit reports and
credit scores determine both your access to credit and the rates you'll be charged.
Now, on to part two, when your ready.
[MUSIC]
Dr. Peter NavarroProfessor
