Credit Scores Primer

 I had started what I envisioned as a series on financial literacy back in October of last year, when I wrote about credit cards. The target audience was my kids - primarily my daughter, who, much to my surprise, is a full-fledged adult now. To her er..credit, she did not prod me for the next installment, so I thought I’d surprise her with one today.

This post is about credit scores, another vital factor in understanding your financial health. The same caveat as before applies: I am not a finance professional, and none of this should be taken as financial advice. Everything on these pages can be found across hundreds of thousands of blogs, TikToks, and books - there’s zero original content here, just a father's curated version.

What is a Credit Score?

 

The best way to think of a credit score is as a financial GPA, one that changes over time just as your grades did at school. It is essentially a three-digit number representing your creditworthiness. It serves as shorthand for lenders (banks, credit card companies, and even landlords) to assess the risk of lending you money. The higher the score, which typically ranges from 300 to 850, the more trustworthy you appear to the financial system.

The score isn’t just for loans, either. A strong rating is often a prerequisite for renting an apartment; landlords use it to gauge the likelihood of rent being paid consistently. You might have seen this as a new college graduate where a landlord asks for a guarantor (usually a parent) if your score isn't established yet. Some utility and cell phone providers will even waive security deposits if your history is excellent.

In the long term, the primary advantage is securing lower interest rates. The difference between Poor and Excellent tiers can be massive. Over the life of a mortgage or car loan, a high score can save you tens of thousands of dollars in interest.

Who creates these scores?

 A credit score is not generated by a single entity, but rather by a combination of data collection agencies who deal with specialized mathematical models. In the United States, three major national credit bureaus - Equifax, Experian, and TransUnion - are responsible for gathering data on consumer financial behavior. These companies collect information from lenders, utility companies, and your public records to create a report, which is a detailed history of your financial activity. If it sounds a bit creepy, that's because it is. Your data is definitely out there and it is being used to rate you, whether you like it or not. However, understanding this is critical for you to see how to use it to your advantage,

Now while the above bureaus hold the data, they do not create the score itself. That task typically falls to the Fair Isaac Corporation (FICO), or VantageScore. These companies use proprietary algorithms to analyze the data provided by the bureaus and distill it into the three-digit number that's your score. As each bureau may have slightly different information, and lenders may use different versions of the FICO or VantageScore models, it could happen that you might have different scores depending on which source is being consulted. I remember when I was looking at a car loan and was happy with my FICO score (used by most lenders) but surprised when the car dealership checked my Vantagescore, which was a bit lower. From what I understood, the Vantagescore tracks trends better, which some lenders like to check.

How do you find your score?

The easiest way to find your score is to check your bank or credit card app. Most institutions provide a free credit score feature within their app, which is updated monthly and free to view. Some of them offer a bit of detail, which can help you identify areas to improve your score.

You also have third-party services like Credit Karma which provide free access to scores and offer simulation tools which you can use to run what-if scenarios. Be warned though that these services are quite spammy, and will offer you up-sell products (like tax software or high interest loans). They need to make a profit too!

A third option is to check AnnualCreditReport, a free credit report service from the three credit bureaus I listed above. They are required by federal law to provide every consumer a free copy of their credit report each year, but these agencies now provide it weekly. The catch is that they do not give you a free score, just the underlying data that is used to generate your score (FICO or Vantage).

Regularly checking your score is a key part of your financial hygiene. You can use it not just to prepare for a loan, but to check against identity theft or reporting errors. You could have a scenario where a bad actor has used your Social Security Number, or maybe a financial institution still shows a paid-off loan as an open debt. These things happen a lot in real life, so it's up to us to be on the lookout.

What factors into a score?

 Your credit score is built from several distinct categories of financial behavior, each carrying different weight. The most significant component is your payment history, which accounts for 35% of the total score. This metric tracks whether your bills were paid on time. Even a single missed payment can have a disproportionate negative impact, while a long history of timely payments provides the strongest possible foundation for a high score.

The second most influential factor is your credit utilization, making up 30% of the score. This is the ratio of your outstanding balances to your total available credit limits. For example, if your credit card has a limit of $1000 and the amount you owe is $300, the utilization is 30%. Experts generally recommend keeping this ratio below 30%, as high utilization can signal financial distress. As I mentioned in the post about credit cards, always try and pay off your credit card statement by the due date for the full amount.

Other contributing factors include the length of credit history (15%), which rewards those who have maintained accounts over many years, and the credit mix (10%), which considers the variety of accounts held. Your credit cards, student loans, auto and home loans contribute to this mix. Finally, your new credit (10%) looks at how many new accounts have been opened recently. Frequent applications for new credit can lead to what are called 'hard inquiries', which may temporarily lower a score. Some institutions like American Express do a 'soft pull' when you apply for an additional card, but most applications will lead to a hard inquiry.

How do you improve your score?

To use a cliche, improving your credit score is a marathon rather than a sprint. The most effective strategy is the consistent use of automation to ensure no payment is ever missed. You absolutely need to setup autopay for every credit card statement or loan repayment from your bank account. Building a good credit file involves maintaining older accounts and using them occasionally for small, manageable purchases that are paid off in full each month. This demonstrates to lenders that credit can be managed responsibly without accruing unnecessary debt.

Monitoring the score is equally important. Checking your own score, like the soft inquiry I mentioned above, does not affect your rating and can be done through most banking apps or through the agencies discussed earlier.

Ultimately, maintaining a healthy score is about demonstrating reliability and restraint. By keeping balances low and paying bills on time, you'll build a rating that provides you with flexibility and savings for decades to come. Onward!

Superb Owls, Steampunk Towers, and Heated Hockey

Week of February 1, 2026  ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

February is the weirdest month. It's shorter than the others, even if you account for that extra day which leaps in every few years. This is the month when winter rolls up its sleeves and gets down to work, cranking down temperatures and blowing snow all over your precious driveway. February boasts of hosting the Grammys and the SuperbOwl, two American festivals which are little seen and little regarded outside of this country. Well, maybe not the Grammys, but I feel they have lost their relevance compared to previous years. Valentine's Day shows up as well smack in the middle of the month, which is apparently celebrated as Cow Hug Day in India these days. The month also features two birthdays from this household, both within five days of each other and both of which I will sadly have to miss this year thanks to upcoming travel. A superb owl Here's to a short month and a shorter intro to this week's books and binges!   A book The Books of Babel series by Josiah Bancroft I have never been a fan of the steampunk genre, both in books and in movies. I've always found them confusing, with their emphasis on Victorian-era aesthetics, full of corsets, gas lamps, and gadgets made of wood, copper, and steel. So it was with some amount of trepidation that I started reading Senlin Ascends, the first in the Books of Babel series by Josiah Bancroft. However, the writing turned out to be excellent, and the fantasy yarn that Bancroft weaves goes beyond corsets and gadgets, though you do see a lot of the latter. The story centers around a mysterious structure called the Tower, visited by a school headmaster called Thomas Senlin, and his newly-wed wife Marya. They get separated before entering the tower, setting up the quest for Senlin which covers pretty much the entirety of the series. The world-building is fantastic, and the overall commentary on the nature of tyranny and despots in particular resonated with me. The one complaint I had was that the intricate descriptions of gadgetry and the various kingdoms that form the tower take time to visualize, which honestly is not surprising for a work of fantasy. I enjoyed reading all four books, and would recommend them to anyone who is interested in world building and fantasy in general.   A movie Jay Kelly on Netflix If there's one thing that Hollywood loves, it's movies about itself. About its stars, the troubled writers, the auteur directors, the reclusive heroines, and oh the handsome men who wrestle with their inner demons yet put on a cheery smile in front of the camera. Netflix's Jay Kelly is about such a man, the dashingly debonair George Clooney seen here playing himself. It is a pathetic excuse of a movie masquerading as high drama. It's made by Netflix after all, who instructs filmmakers to repeat their plots three to four times because their target audience is presumably distracted by their phones while watching. Adam Sandler is just about okay, Laura Dern, Billy Crudup and a few others have minor roles, and Clooney appears as himself in almost every scene. A painful, infuriating watch, with no sentimental value. Not recommended.   A show Heated Rivalry on HBO/Crave Alright, let's get this out of the way, shall we? The show Heated Rivalry on HBO has a lot of sex. The show doesn't quite fade to black after a long kiss, or switch to two flowers gently brushing against each other either. The fade does happen, but the next scene features the same two people indulging in intense, passionate sex, shown in graphic detail. If that's not something you'd want to watch, then this show is probably not for you. However, you should know that sex in this show is not random titillation; it actually drives character development. The two leads learn about each other and, crucially, about themselves. It doesn't leave you feeling sleazy; it leaves you with a smile and a spring in your step, thankful for some romance in the world. The show is based on the second in a series of books called The Game Changers, by Canadian author Rachel Reid. The backdrop is the fictional major hockey league called, well, Major League Hockey (MLH), where two rookie players get drafted into Montreal and Boston (yay) sports franchises. They play against each other, with each other, and develop feelings for each other. It's well-written, brilliantly shot, and has two of the hottest young actors to grace TV screens. Recommended.   Coming Up It Was Just An Accident Have a great week! Sunday, February 1, 2026 Of Voices, Villages, and Vigilantes We are a month into this newsletter now (!!), hoping no one's noticed the week that was skipped over. Thanks to all nineteen of you who cared enough to hit the subscribe link, and the three who were added without their consent but still haven't cancelled, being the good wife and children they are. Speaking of, how do you folks pick the content you consume? Is it recos from friends? Critics you like? Subreddits, podcasts, blogs, vlogs, newspapers, that weird aunt who vaguely smells of ginger and garlic and has a thing for Russian playwrights? I get mine from all the above, and am constantly on the lookout for more. I am a big fan of the Pop Culture Happy Hour podcast from NPR for instance, and while I may not always agree with their views, the pop culture artifacts they review are almost always worth a look. I also have this self-imposed "minimum consumption time" for art. It's usually the first thirty pages for a book, though there are times when I've given up after the first two hundred (I'm looking at you, book eight of Malazan Book of the Fallen). With a movie it's usually the first five to ten minutes, as most movies introduce themselves fairly well in that timeframe. I have found that a lot of the Hindi movies from the last few years do not last more than five minutes, though. Your mileage may vary, of course. I try to watch the entire first episode of a show before giving up, as shows often have a twist or a gimme-more gimmick at the end of the pilot - a hook that's supposed to make you quickly click on the 'Next Episode' button. The first episode of Paradise is a great example, if you want to try one out. Alright, on to this week's books and binges! A book Hitman Omnibus Edition, Vol 1 My introduction to Garth Ennis was through the groundbreaking Preacher series, the one that took a chainsaw to your concept of Christianity, God, and Texas, not necessarily in that order. I had found it explosively funny at the time, and an ode to male bonding and friendship. I don't think it holds up as well now though, but it still remains one of the most prized comic book series in my collection. I then went on to read Ennis' run on Punisher MAX (vicious, brutal, testosterone-pumping) and The Boys (superheroes get the chainsaw this time around), and liked them too. I could spot his recurring themes by then: nihilism, cynicism, grit, war, Ireland, dark humor, and tough men making tough choices. Hitman has all of the above, with the humor and camaraderie dialed up. The main character is Tommy Monaghan, a hitman who could have been at home in the pulp novels we discussed in the previous newsletter, with his hard-boiled character, laconic outlook, and x-ray vision plus telepathy thrown in as bonus. He lives in the DC universe, which allows Ennis to bring in some of their best known characters and take the piss out of each one of them. With the possible exception of Superman, who is the one superhero Ennis hasn't really skewered. I should confess that I have not yet read Vol 2 of the Omnibus, which I'm told is even better than the first, but I mean to correct that shortly. Recommended. A movie Su From So (Kannada, on Hulu/Jio Hotstar) There is a particular genre of movies, especially in Indian cinema, which centers around the village. We like them because they remind us of an innocent, simple, happy past - one which never really existed, truth be told. We were young then, not exposed to problematic issues of caste, bigotry, and misogyny, and lived inside a protective bubble created by our parents. That said, years later, we need those moments of innocence, particularly now when everything around appears sordid and malevolent. I would happily go back and rewatch a Peruvannapurathe Visheshangal on a Friday night after another week of soul-crushing brought on solely by reading the news. Su from So is that kind of movie. It's the directorial debut of JP Thuminad, and does not feature any major stars (as far as I could tell). Set in a coastal village in Karnataka, it has a bunch of characters who are not quite the stereotypes you'd expect. The humor is lighthearted, the plot takes a shape of its own as the characters develop, and it's just emotional enough to leave an impact. The subtitles are thankfully not trite, and you do not need to know Kannada to enjoy the film. You finish the movie with a smile on your face, reminding you to ask your mom to watch it if she is able. Recommended. A show Delhi Crime (Hindi, Netflix) Let's go back to malevolence, shall we? If you were in India in 2012, or reading news about India in 2012, you would know what I mean. The Nirbhaya case remains a watershed moment in Indian history - probably the first time the entire nation raised its voice against violence towards women. There have been numerous similar incidents later on, almost numbing our collective consciousness, but this one still lingers. The Deputy Commissioner of Police who led the Special Investigation Team tasked with solving the crime was Chhaya Sharma, already known for her work in investigating the Baby Falak case and exposing the human trafficking network that enabled it. Her bio is outstanding, if you want to check it out. Delhi Crime Season One is all about the Nirbhaya case, and is a banger of a procedural. It stars Shefali Shah as DCP Vartika Chaturvedi (stand-in for DCP Sharma), the ever-dependable Rajesh Tailang as her second-in-command, and a host of other actors who flesh out the characters they portray with remarkable zeal. I was particularly fond of the tenacious cop Sudhir (played by Gopal Dutt) who takes time to talk with victims and passers-by, searching for any possible clue that would help the investigation. The show does not veer into theatrics and pretty much stays the course of a good cop show featuring humanized police doing their job. This was true of the second season as well, where the plot was about a gang terrorizing the elderly in Delhi. I felt the third season, based on the Baby Falak case, faltered a bit with its plot despite adding two good actors in Mita Vashisht and Huma Qureshi. I'd recommend the first two seasons, but don't go into the third expecting the same. Coming Up Have a great week! Monday, January 19, 2026 Of Platforms, Pulp, and the Pain of Shoveling Ever since moving to Massachusetts, I constantly complain about the winter. It's too long, running for a solid six months from November through April. It's bitterly cold, with temperatures dipping into negative territory - in Fahrenheit - every January and February. Shoveling snow is literally a pain in the backside even if you use a snowblower, and that too one which obstinately refuses to turn its head when you need it. Massachusetts Man endures pain trying to maneuver an obstinate snowblower And yet. And yet there are some days when you stand near the window overlooking your backyard, cuppa in hand, stunned. I know I will keep complaining about winter, about the cold, the frigid air. But I am also thankful for moments like these which I do not want to ever take for granted. Alright, on to this week's books and binges! A Book You already know what Enshittification is about - the title is pretty much self-explanatory. Cory Doctorow talks about how almost all tech platforms deteriorate over time: first, they are good to their users. Next, they throw users under the bus to bring in business customers. Third, they throw those customers under the bus to make a ton of money for themselves. He provides examples from all the companies you can think of (Facebook, Amazon, Google), and walks through the process with data and examples to back up his theory. Unlike a lot of other books though, he provides a couple of ways to solve this problem, through the right of exit and the end-to-end principle. The book is oriented towards (or perhaps against) the tech industry, but I would wholeheartedly recommend it to everyone. You do not need a tech background to feel angry as you read, and a teeny bit hopeful as you finish. A Movie So, about the French. I use the term loosely, as some of these folks are not, strictly speaking, of French origin, though their most famous films have been in the language. I have not come close to watching their entire filmography but I have absolutely loved the ones I've seen of Truffaut, Renoir, Melville, Varda, Tati, and our homme du jour, Godard. I'd actually watched the American remake of Breathless (Richard Gere) before I watched the original (Belmondo). And since you might ask, no, please don't bother. The French New Wave (or Nouvelle Vague, as you might have guessed), emerged in the 50s and was championed by some of these auteurs, stemming from the magazine Cahiers du Cinéma. All this to say that the Richard Linklater creation Nouvelle Vague on Netflix is an ode to these movies. It's a lovely, fun film about film. About art. About Godard for sure, but also about creating something totally new, going against established norms and expectations. It's shot similar to the movies of that era, in black and white and in French. I watched the entire film with a big stupid smile on my face, in love with the movies all over again. Highly recommended. A Show I grew up on a diet of all genres, but one that I enjoyed the most was pulp. You know, books written by folks like John D McDonald, Elmore Leonard, Ed McBain, Robert B Parker, and if you go back a bit more, Jim Thompson. They usually have covers with fonts like the one below, and feature all the usual noir elements - a woman (sultry), a man (hard boiled), and a twisty, winding, often incomprehensible plot (unimportant). The Lowdown is in the same vein, with a dash of humor thrown in. It features an incredible Ethan Hawke playing a "truthstorian" in Tulsa, Oklahoma, a white man who cares (the worst type, according to a few characters in the show). Its plot takes several twists and turns, people aren't who they seem (but of course), and you are not quite sure if every loose thread was wrapped up at the end. But you enjoyed the ride. Recommended. Coming Up Have a great week! Sunday, January 11, 2026 AI Nightmares, Poetic Cinema, and Belfast Cops We made it to week two! Thanks to all of you who clicked on the subscribe link and wound up finding this post in your mail. So to speak. I have been following a few artists/writers on Instagram for several years, especially since I jumped ship from Twitter. Folks like Brian K. Vaughan, Jeff Lemire, Stephen King, and Pia Guerra. Pia has been doing editorial cartooning for over fifteen years now, contributing to The New Yorker, The Washington Post, and the occasional MAD Magazine issue. She is better known though for her breakout work on Y: The Last Man, collaborating with Brian K. Vaughan. Y was the first comic series that I ever read from start to finish, and has stayed a firm favorite. So, when Pia announced a year-end clearance sale of some of her pages, I couldn't resist. I got in touch with her, paid for a page after consulting with Satya, and carefully unwrapped it yesterday. I don't usually collect comic art, but this felt special. The published & the original Alright, on to this week's books and binges! A book Karen Hao's Empire of AI: Dreams and Nightmares in Sam Altman's OpenAI covers pretty much what it says on the tin. It's incredibly well-researched, diving deep into the environmental costs of AI as well as the human element. I hadn't fully considered the colonialism aspect she highlights, specifically the labor and economic impacts on the Global South, which was an eye-opener. It reads like a book written by an engineer-turned-journalist (which is exactly what she is). The tech is interesting, as are the machinations behind closed doors. Highly recommended, no matter where you stand on AI and its implications. A movie I've always tiptoed around Terrence Malick's work, worried it might be a bit too slow or dense for me. That changed last September when I watched Days of Heaven and was completely blown away. I probably should have moved on to Badlands or The Tree of Life, but I'd recently snagged the Criterion edition of The New World, so I settled in for that instead. It features a stellar cast, with Christopher Plummer, Colin Farrell, Christian Bale, and Q'orianka Kilcher. The movie is gorgeously shot - just astounding, poetic in its appeal. It's also... a bit plodding? Parts of it actually reminded me of Indian films like Hum Dil De Chuke Sanam or Mani Ratnam's Mouna Ragam. Even with the slow pace, I'd recommend it for the visuals alone; it's basically poetry on film. A show It's a truth universally acknowledged that if you're the son of a pathologist and married to another, you're going to end up watching a lot of crime procedurals. Luckily, the genre has produced some of the best TV ever made. I don't know if Blue Lights is quite at the very top of that list, but it's pretty damn close. Set in Belfast, it follows a group of rookie cops dealing with organized (and disorganized) crime. The characters are well-defined, the plot is highly engaging, and it never insults your intelligence. I've watched all the three seasons that have been released so far, and cannot wait for the next. It might be hard to find on your favorite streaming service unless you are in the UK, but it's absolutely worth the search. I wouldn't have stumbled across it if Mujib hadn't mentioned it. Highly recommended. Coming Up Have a great week! Sunday, January 4, 2026 Now Reading, Now Showing So, I have been mulling over this for a while. Last year was when I experimented with posting screenshots of the books I read (on Whatsapp), and brief takes on the movies and shows I watched (Bluesky). I was honestly surprised when a few folks responded to these takes, and asked me for recommendations.  Now my system so far when I get these requests has been to turn it back to the person and ask them to list the last three books (or movies) that they enjoyed, which would help me think of similar books which I could recommend. However, Sindha, who keeps me sane (most of the time), gently informed me that people hate doing this. They just want a reco which they could then decide to try out - or not. I was backing them into a corner by asking them their preferences, which was what they wanted to avoid thinking about in the first place. The second related thing that happened last year was when I had dinner with a few friends and got into conversations about books, movies, and TV shows. I spoke about Slow Horses. About Murderbot. somebody somewhere. My friends asked me to write about these shows and tell them about it. These two instances made me do the mulling bit I spoke about earlier. Which led to thinking about an email format, in what was called the year of the newsletter. Substack was a no, which made me consider beehiiv, with a setting to automatically post to my blog as well just to keep that mostly ignored thing alive. Let's try this out, shall we? The idea is to list a book, a movie, and a show that I consumed. You will not need to pay anything to subscribe of course, and I intend to do this every week (ish). Let me know what works and what makes your eyes glaze over, please. Off we go! A Book Kiran Desai's The Loneliness of Sonia and Sunny is a novel that really gets into the heads of its two main characters as they navigate the disconnection that accompanies an immigrant experience. I could relate to how this fuels their feelings of isolation, their fragmented sense of self, the hopes and letdown that come with seeking a new identity. That said, the book was overlong and there was a point where I wanted the damn thing to end. I had purchased the hardcover and could skip my dumbbell workout when I was reading it. I wanted to like this book, I really did. I wound up putting it on my shelf with a sigh of relief at the end. Not recommended. A Movie Kishkindha Kaandam was my favorite Malayalam movie of 2024, so I knew I had to watch the new film by the same folks b. Eko is written and shot by Bahul Ramesh, and directed by Dinjith Ayyathan, two people I still don't know much about but whose careers I plan to follow with interest. Eko is supposedly the final installment of Ramesh's Animal Trilogy, following Kishkindha Kaandam and Kerala Crime Files (the TV show). This is one of those movies which you need to experience yourself, going in as blind as possible. It has a lot to do with dogs, if you must know. I liked it quite a bit despite a few misgivings, and plan to watch it again sometime soon. Recommended. A Show The Beast In Me has Claire Danes, she of the quivering lip, and Matthew Rhys, with his steady Russian/American smirk, playing two unlikeable characters doing unlikeable things - not to each other though, thankfully. It leans heavily into the "suburban noir" feel with lots of tension, good cinematography, and that constant feeling that everyone is hiding something behind their polished front doors. Rich white-people problems, mostly. I wound up liking it but will stop short of recommending it as it does fall into the trashy category. And that quiver from Danes can get grating quickly. Coming Up The Tower of Babel series by Josiah Bancroft Playing on Hulu/Disney/FX/your favorite torrent site On Netflix Have a great week!

All About Credit Cards

Who this is for 

A recent poll conducted by NEFE shows that four out of five adults in the US wish they were required to complete a personal finance class while they were in school. My daughter, who graduated college a few months ago, is one of them. We discuss personal finance a lot when we meet, with topics ranging from investing in the stock market to taxes to credit cards to why she wasn't born rich. Not that I'm an expert, but I've learned from my many mistakes (see why she wasn't born rich). There's nothing I'd like more than to help provide a foundation of financial literacy for her. I'd love for her to stand on her own feet making thoughtful decisions about managing her money, and not be reliant on anyone else. This is true for my son too by the way, but he's been interested in this space the past couple of years, learning quite rapidly on his own.

So, with that said, I intend to write a few posts covering various topics related to personal finance in the US. The caveat is that I am not a finance professional and none of this should be taken as financial advice. Everything on these pages can be found across hundreds of thousands of blogs, tiktoks, videos, and books - there's zero original content. My target audience is just one person, and I hope this is helpful to her.

Let's start with credit cards. Those pieces of plastic that people whip out at restaurants, or use on their phones when checking out at grocery stores.

What is a credit card anyway?

 A credit is when you receive a product or a service which you plan to pay for later. In this case the product is money, and the way you get it is through a credit card. Think of it as a loan you get from a financial institution. Instead of paying for things directly with money from your bank account, you're borrowing money from the credit card company, which you agree to pay back in time. 

A big benefit of using a credit card over a debit card is that you pay for your purchase much later. Your money continues to remain in your bank accumulating interest until your statement due date. With a debit card, you pay for your purchase instantaneously. I cannot remember the last time I used my debit card for a purchase, honestly.

How credit cards work

When you use a credit card to make a purchase, the credit card company pays the merchant on your behalf. This creates a balance on your credit card statement: the amount you owe, usually the total cost of the items you purchased. At the end of a billing cycle (typically once a month), you'll receive a statement showing all your purchases, the total amount you owe, and a minimum payment due. This statement will have a due date, which is the last day to pay off the amount before accumulating interest. 

Let's go with a made-up example. You used the credit card for a month at a few merchants and got a statement at the end of the month for $100, with a minimum amount of $10 owed by Nov 10. Now the best thing to do is to pay off the entire amount of $100 by Nov 10 so that you can avoid interest charges. If you do not have the $100 by Nov 10 then the next best thing to do is to pay the maximum amount you can afford, thereby reducing your outstanding balance. Interest rates, or Annual Percentage Rates (APR), on credit card debt are incredibly high, ranging from 17% to 29% or more.

Paying the minimum balance is not the worst thing you can do, by the way. The worst thing is not paying anything at all. Not only will you incur higher interest rates on your outstanding amount, you'll have to pay late fees as well. Stick to paying the entire billed amount every cycle and you will be fine.

Most credit cards have a credit limit associated with your account. Banks decide this based on your credit worthiness which takes into account your credit score (more on this in a later post), your payment history, credit history, and credit utilization - the amount of credit you are currently utilizing compared to your total credit available. Another factor is your ability to repay, which is mostly determined by your income. Beginners or students with limited credit history may have a low credit limit (say $1000), but this will increase as you use your card, make regular payments, and add to your income.

Credit card fees

 Some credit cards charge an annual fee for their usage. These cards would have additional perks which to some may justify their high fees. I spend $325 per year to use the American Express Gold card for instance. I do this because I value travel points (see below for details) a lot more than cash back, and the Amex Gold gives me 4 points for every dollar I spend at restaurants and grocery stores. For example, a grocery run at Roche Brothers that costs $50 gets me 200 Amex points, which I can transfer to airlines and get at least a $2 discount on travel tickets. 

Now I realize $2 doesn't seem like much but this spend adds up quickly, giving me fairly significant discounts when I book travel. Amex Gold also gives me $10 a month as Uber cash which I can use for rides or ordering through Uber Eats. They give an additional $10 a month on Grubhub as well, which we use quite often. You can likewise get an $84 annual credit for spending at Dunkin' and another $100 credit for eating out at Resy restaurants. So if you make use of the full amount of all these credits, you'll pick up $424 worth of value, completely covering the annual fee. I confess I don't use Dunkin' but I do use most of the rest, plus the discount on travel, which makes this card worth it for me. That said, I don't think this is a card for beginners, and I would advise picking cards without annual fees and give cash back when you are just starting off. 

Some banks charge a foreign transaction fee if you use the card outside the US, by the way. I personally think this is an outdated system, and there are plenty of institutions that provide cards without annual and foreign transaction fees, and offer cash back points and other perks as well.

Credit card rewards

Many credit cards offer rewards to encourage you to use them. These rewards can be a great way to get extra value from your spending. The typical rewards are:

• Sign-Up Bonuses: These are rewards you get for meeting certain spending requirements within a specific time-frame after opening a new card. For example, "Spend $500 in the first three months and get 20,000 bonus points." I have obtained significant sign-up bonuses by opening new cards, which I've redeemed for either cash or miles with airlines. 
• There is a catch here though: some financial institutions track the number of credit cards you've opened in a two year period, and if it's more than five, they are likely to deny your application. They do this to reduce credit card churning, where you open multiple cards just for the sign-up bonus and don't use them later. Chase has an unwritten rule, widely referred to as 5/24, which does exactly that: they will deny your application if you have opened more than 5 credit cards in the past 24 months.
• Cash Back Points: With cash back cards, you earn a percentage of your spending back as cash. This might be a flat rate (say 1.5% on all purchases) or higher percentages in specific spending categories (eg: 5% on groceries, 2% on gas). You can usually redeem these as a statement credit, direct deposit, or as gift cards. This is extremely useful when you are just out of college and starting your career, as you'd usually want to make every dollar stretch as much as possible. So if your credit card bill was $100 and you've accumulated 500 points as cash back, you would owe them just $95 as each point is valued at 1c. You should be able to do this on your credit card app or on their website fairly easily.
• Travel Points/Miles: These cards earn points or miles that can be redeemed for travel, such as flights, hotel stays, or car rentals. The value of these points can vary depending on the card and how you redeem them. Some cards like my American Express Platinum offer 5x points on travel-related purchases. So if I book a $500 travel on say Delta Airlines using my Amex Platinum, I get 2500 points in my Amex account, which I can redeem for at least 2500 miles which usually converts to a minimum of $25 reduction from my next booking.
• The way to do this is to transfer your Amex points to the airline of your choice. You will need to have a frequent flier account with that airline, and choose that airline as your transfer partner in Amex. Let's say you frequent Delta, and you have 20,000 points in your Amex account. You can transfer this 20,000 to Delta, which almost always shows up right away in your Delta account, which you can redeem for your next flight ticket purchase. 
• Other Perks: Most credit cards have a lot of additional perks, which can come in handy. They include travel related perks such as insurance and roadside assistance, vehicle rental coverage, concierge services, events access, special discounts, cellphone insurance, etc. While you don't want to pick up a credit card just for these perks alone, they definitely don't hurt. What's usually not listed is the benefit of getting extra days to make your payment. That $100 purchase won't hit your bank account right away, unlike using your debit card or Venmo/PayPal. Your money stays in your bank gathering interest until the credit card statement due date.

How to pick the right card

 As with anything, you need to decide what works best for you. At an early stage, I'd argue going for a card without annual fees would work best, particularly one that provides a good cash back rate. If you value travel a lot, then you can look for a card which gives you 2 to 3x travel points for every dollar spent, ideally with zero annual fees or with low fees which you feel confident about recovering through their reward programs. You should also look for sign up bonuses, which offer you say 50,000 miles if you sign up and spend $5000 in the first three months. Remember, you can sign up for more than one card if you like!

Another factor to consider is the ecosystem you'd want to be part of, if you really think long term and want to maximize your points. The American Express cards operate slightly differently compared to the Capital One cards, which are again a bit different from the Chase credit card family. Most of these differences are in their travel and hotel partners, and in how you accumulate points. For instance, accumulating points from the Capital One Venture X card is drop-dead simple: any transaction anywhere gets you 2x points. On the other hand, Amex Platinum gives you 5x only when you use the card on the airlines they support, and nowhere else. You get just 1 point per dollar if you use the Amex for a shoe purchase, for instance. 

I've avoided adding details about backend payment processors like Visa and Mastercard, as there's little to differentiate between the two. They provide payment rails for credit cards like Capital One, Chase, et al. You would rarely need to factor those into your decision around picking the right credit card. Be aware though that while these two heavyweights are usually accepted anywhere in the world, others like Amex and Discover are not. That small restaurant in Kerala might take your Capital One Savor Visa card, but is highly unlikely to accept the American Express Gold.

There are lots of resources out there which explains the pros and cons of each ecosystem so you can make an informed decision.

What to watch out for

The main drawbacks of credit cards are pretty much what you'd imagine: high-interest rates and fees, the temptation to overspend and accumulate debt, and the potential to damage your credit score if not managed carefully. You also run the risk of fraud and identity theft, which is not uncommon these days. 

Regularly check your credit card statements for unknown expenses, no matter how small. Some fraudsters who've gotten access to your card start off with small purchases for a dollar or two, testing out the waters before buying an 85" OLED TV and the latest PlayStation.

You can set up transaction alerts so anything above a certain amount will be flagged right away. The usual caveats around security apply here too: never share your password or PIN, be cautious of emails or texts asking for information, avoid clicking on links from unknown senders, etc. Adding your physical card to your mobile wallet adds an extra layer of security as well. 

What I use

I'm on the Amex ecosystem primarily, though I made the mistake of signing up for the Platinum first, which prevented me from getting a signup bonus for the Gold card. If I had to do it over, I'd start with the Blue Cash Preferred, then get a sign up bonus to upgrade to the Gold, and then get another to upgrade to the Plat. However, I like this ecosystem mainly because of the travel that I do every year, as Amex provides access to a lot of lounges. They also automatically give you Gold status at Marriott, Hertz, and a few other places. In addition to a lot of other rewards and perks, of course.

I like Capital One too, and am an authorized user of my wife's Venture X card. This is a really simple card to earn points with, and their annual fee of $395 pretty much pays for itself with their $300 travel discount and other rewards.

We also use the Chase Amazon credit card that offers 5%+ discounts on all purchases at Amazon, which add up pretty fast. This card does not have an annual fee and has zero foreign transaction fees as well, which makes it a no-brainer to get if you are a heavy user of Amazon.

I have a few other cards too, most of which were obtained for signup bonuses or as part of other investments, which I do not use as regularly as the above set (eg: the Robinhood gold card). I'm still learning though, and there are new cards and updates pretty much every year that keep me on my toes. 

Happy spending!