Are Credit Cards The Enemy? PART 1 - BOD009

0:00Yeah, but what if you're like, no, I don't want to be a part of politics and don't vote. which to be honest given the state of things I do kind of get it. Yeah, yeah. But look, it's capitalism, baby. Ew. This is the system that we're in. Hmm. Segway. Wow. Reeling you in, aren't we? Yeah, yeah. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad, Pete. Hello. And we're here to teach you the money lessons we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Absolutely. How are you doing? I'm good, thank you. How are you?

0:31I'm good. We're here again. were slightly nervous because there's roadworks going on outside. I mean, there's roadworks and there's roadworks. Right now, there's a massive digger, like drilling and saws all happening outside. So we're hoping that the noise gate and the mics do their job. But you might hear a little bit of sawing, but we decided to plough ahead because we need to get some recorded. Yeah, we're not behind as such, but we like to have several in the... Yeah, that's it. It feels like we're behind because we're not ahead. Yes, exactly. The last one that we've got ready, goes out tomorrow as of the day of filming.

1:05As of when we record, yeah. So, yeah. Be good to get a few more in the can. In the can, as they say. What did we talk about last week? Last week, we finished off our topic of ices. We did two part on ices. And the first episode, we talked, you know, the basics. And the second episode was more about the rules and the sort of intricacies of it. Yeah, important stuff. Yeah. And I feel like we give it a good thrashing. Yeah, and probably one of the most asked topics in DMs and comment sections and emails that we've had so far has been about ISIS. So hopefully that was helpful for you. Absolutely. I'm sure we'll come back to it because there's inevitably more to cover and we'll get questions and stuff.

1:40Yes. Good. We're starting to have some questions coming in, aren't we? We are, yes. I've currently got a little folder in the email inbox ready for it. What we are doing currently, what we have been doing is responding to you and letting you know that we've got the question and if there's any sort of immediate... Yeah, we can answer them. ...we are doing, but also it's good content for us. Yeah, for sure. So hopefully it'll get to the point where we can't keep up and answer each one individually and we'll have to do it on the show. Yeah, that'll be quite a nice problem to have. It's good that they're coming in though.

2:08So what's this week? Today is a fun one. Well, I think it's an interesting one. And I've entitled it, Are Credit Cards the Enemy? Part one. I don't know. Let's see, shall we? It's a good question though. Yes. And there's loads of anxiety, confusion about credit cards, about debt in general. So I think it's important that we break it down. We're actually going to do it over two weeks. We are indeed. Yes, I'm sorry. It is another two-parter, but we don't want to have a really, really... You and I can yap. No. So now we do it on a podcast. Exactly. So before we dive into credit cards, it's time for...

2:50Wanky Word of the Week. It's time for Wanky Word of the Week Every time we've under-danced I think I can have a little trigger here Yeah, you said that for the last three episodes Okay Better get on with it Act on it, please Okay We would like a button What is this week's Wanky Word of the Week? This week's Wanky Word of the Week is probably an obvious one but a good one anyway Yep Credit limit Credit limit Limit So that is the limit on the amount of credit that you are offered. You are good money. In this case, by a credit card company. So in other words, how much can you borrow? All right. And, you know, that is set in different ways.

3:36And we're going to get into all that. I'm going to talk quite a bit about credit score today, which is important. And I had to do a bit of research on this. I was going to say. Not really my bag, but I did do some research. And so I think I can answer stuff reasonably intelligently. A credit limit is simply the maximum amount you can borrow, usually on a credit card. Okay. Succinct. We like that. Okay. That's good. Yeah, it is good. Start as we mean to go on, four minutes in. We'll see. Right, so let's start with the basics. Yep, good place to start. Always, yep, start at the beginning, very good place to start and all that.

4:08So what is a credit card and specifically how is it different from a debit card? Right, so a card is just the mechanism sort of by which you pay for stuff. Of course, most of us put our cards on our phone now in Apple Wallet or Google Wallet or whatever. But obviously a card is a physical plastic representation and that's just, it's a security device, right? So the card number is unique to you. The sort of info in the chip and stuff is unique to you. Your pin is unique to you. So it's a security thing really. But essentially it's a vehicle for borrowing money, a credit card is, right? and it's just a particular kind of borrowing.

4:45So as opposed to, say, a personal loan where you ask the bank, I want to borrow£5 ,000 and they agree and they put£5 ,000 in your bank account and you spend it and of course you have monthly payments and you have a term that you pay back over. A credit card is a kind of, think of it as like a facility. It's an amount that's available to you and you can borrow what you need when you need it. So if you have a£5 ,000 credit limit but you don't ever use it, you're not paying interest. Yeah. All right? And you've no monthly payments if you haven't used it. Whereas if you then go into a shop and you use your credit card to buy something, and let's say that's 500 quid, you've got a 5 ,000 pound limit, you spend 500 quid, you've now got 4 ,500 pound left you can borrow, but you owe 500 quid now.

5:31Yes. A debit card, by contrast, simply facilitates the taking of money out of your bank account. Yeah. So you've got to have money in the bank account. It's money that you have. You already have, yeah, yeah. So debit means deducting from your money, whereas credit means you are lent money by somebody else. So that's the difference, really. Cool. All right? Oh, damn it, I've done my first call. Oh, yeah. You see, I never hear it, so. It's really, it's the same time as well. It's when you finished a point. I'm sort of segwaying into the next thing. Cool. Well, part of it, I think, is probably just because you might not have looked ahead quite early enough.

6:08And so it's a little bit of a filler. Yeah. and then i'm it's fine no it drives me mad i did a cool count you have to edit though i have to edit exactly yeah then the video that goes live tomorrow there's a cool count is that because it was doing my head in i was like i need to say it before someone else comments it okay fair enough so that yeah well work in progress we're on number one for the the progress okay so how do credit cards credit credit cards credit cards work where does this money come from? Well, it comes from the lender. So it might be a bank or there are specific credit card companies and that's kind of all they do.

6:47And, you know, this is their business model. They lend you money. They charge interest very often at quite high amounts, which is what you have to pay them for the facility of using their money essentially. So it's simply a loan. But like I said earlier, it's kind of a facility that you can draw off rather than loaning you all in one go, they sort of make a facility available and you can draw off it as you need and obviously you pay back there is always a minimum payment though, that's really important, so whereas with a personal loan, you borrow five grand from the bank, they'll say right, you pay it back at X amount per month over three years you make that payment, you know at the end of the three years it's gone with a credit card they'll give you a minimum payment that you have to make and that basically will just be treading water, you won't be paying hardly anything off your balance Not when you include the interest.

7:36No, exactly, because the interest is payable pretty much from the end of the month that you borrow first, right? So if you end the month and you still owe money, you're paying interest on that. And then you've got your minimum payment, that'll come off what you owe a little bit. But credit cards are not good if you're only making minimum payments, which we'll get into. And we covered that a little bit on debt as well, about how minimum payments work. Yes, we did. Which is good. So it's good that we can reiterate that. So is there a minimum age to have them? You've got to be 18. Yeah. I mean, I remember getting mine for the first time, and it was when I was about to go off to uni, and I opened my student bank account with what was then Midland.

8:16That's how old I am. HSBC to you. Was it Midland Bank before? It was the Midland Bank, yeah. The Midland Bank. Yeah. There was only one. Yeah, the Bank of the Midlands. I mean, it was a British thing, and it was bought by HSBC, which is Hong Kong-Shanghai Banking Corporation. I didn't know that. Yeah, there you go. So it's, I mean, HSBC's, you know, global mega bank, isn't it? So there you go. I guess. But you might not have known that, but I mean, it's a huge international corporation. No, I was going to say, I only considered it as a British thing. No, no, definitely not. Hong Kong, Shanghai Banking Corporation.

8:45It's not the most British name, isn't it? Not particularly, no. So, yeah, you have to be 18. Really, you, yeah, you certainly won't get one as a child. Remember, 18, that's a kind of, it's a legal thing, age 18. You are a child before that. You're an adult after. I still feel like a child now and I turn 23 in a couple of weeks. Sometimes I still feel like a child as well. But, you know, it's the age of seniority. You're a minor under the age 18 and you're an adult the second you pass age 18. And that's a legal thing. I don't know why it's that age. But yes. But it just is. It just is. I'm sure there's legal precedent.

9:27Yeah, I'm sure. There may even be some psychology behind it. Maybe. So we talked about credit limits in Wanky Word of the Week. We did. Which, by the way, we've had some comments on the jingle. People are loving it. Ah, good. That's fun. It makes me laugh every time. It makes me giggle. But yeah, credit limit. Who decides this number? Do you get to say, right, I want my limit to be this much? You can ask, but usually you are kind of assigned a number. So a credit limit by the lender. You are assigned or is it generic? No, they wouldn't have a standard amount because it's based on a few things.

10:00so whenever you apply for a loan of any kind credit of any kind there will be questions you have to ask about your salary yeah you know you've been considering getting a mortgage that's obviously the biggest loan you'll ever have so they go pretty deep on things like salary uh if you owe any more money elsewhere extra earnings extra earnings whether you're paying into a pension or any insurances and obviously what uh you can afford dependents all that sort of stuff might not got quite so deep with a credit card because the amounts are a lot lower. You're not like borrowing six figures, you might be borrowing four figures, a few thousand maybe.

10:38So based on your affordability generally is one thing. And the other key variable is your credit score. We're going to go into this. Which we're going to get into. But that's a really important factor. And it's a sort of, well, we'll get into what it is in a second because otherwise I might get into it. So I'm not going to get into it yet. All right. Good It's restraint. Well done. So to sum up, the credit limit is decided by the company based on a few things. You can ask, but they get to choose. Yeah. Okay. You can't just go, I want£25 ,000 a month. Yeah, from every credit card company in the country.

11:15You'd be doing all right. Well, you wouldn't, but that's... Not advisable. No, yeah. Don't do that. It's interesting you said about the house, actually, because I... about me looking to get a house because I haven't had a credit card up until now. You don't need one. No, you don't need one now in a sense. No, I've been fortunate enough not to need one. However, that doesn't exactly mean I have much, if any, of a credit score. Which we're going to get into. Indeed. Exactly, and it's part of the reason building up a credit score is good. Yes, so I've got one. And do you remember I just said, Dad, can you look over my shoulder whilst I apply for this?

11:48And it took, what, a minute? Do you remember? Yeah, Monzo, isn't it? It is Monzo, yes. Yeah, so you already bank with them, so they know. Yeah, and it was literally, like, there was a little section, and I think it was, you know, apply for Monzo Express or whatever it's called, the Monzo credit card. And so can you just watch me do it, just to, you know, check I do it right, I've never done it before. And we just were both like, yeah, that, that, done. And it arrived the next day. I know, it's unbelievable. And I had it in my wallet then. Yeah, on my Apple, on my phone wallet. Amazing. It was like, yeah, cool, you've got this amount.

12:22It worries me that it's quite as easy as that. That's what you said then, yeah. Sorry to be predictable. That was scarily easy. Well, it is. And to be honest, it's kind of always been like that. And it's not necessarily a good thing. You could argue having that be so accessible can be a good thing if in a real sticky situation you've got it. If you're in a bind, yeah. But then that can be a slippery slope as well, can't it? It can be. They have their dangers, shall we say. We'll get there. Yeah, we will. Do you need to have a job or an income in order to get one?

12:57Well, you should. But honestly, it depends on the criteria. I mean, the fact that it took you about 90 seconds to apply for yours, if that... And I don't think it asked about jobs. Well, I mean, your salary got paid into Monzo. You're also your boss of Bagman Nationwide, don't you? No, but somehow it worked out that they were linked. You might have linked them first. Although... Not consciously. Well, part of your credit score is a credit report, and that will have your, basically, it's a financial kind of picture that all the financial institutions build up and can share. Yes, so I think it was from that.

13:31Because I could see my score, and I was surprised I even had one, and it described it as low building stage. Oh, okay. It wasn't low bad. No, but low building. It was low building stage. You know, you haven't had a credit card, so you're not going to have a score. No, perfect. Okay, that makes sense. But yeah, so it did talk to Nationwide, which is the bank that I get paid into. That does make sense. I mean, you really should, because if you don't have an income, are you going to pay it back? But, you know, you may be on benefits, and so there may be an income coming in. The fact that it's Social Security income, still an income.

14:05But there should be, and there is, something of an affordability check. We'll get into that in the credit scoring in a minute. Okay, so where do I get one? And how do I decide who to get one with? I went with Monzo because I already bank with them. It was easy, wasn't it? It was easy. Most people do that. Probably they'll get one with whatever institution they're already with. They almost all offer them. Yeah. Right? And there's a couple that I'm... Actually, no, I'm thinking of joint beck-in-couts. I was about to say there's a couple that I can think of that are just credit cards, but I don't think...

14:36There are just credit cards. Yeah, but I don't think that. I think I was mixing in my head. I mean, I think we need to just say, look, tread carefully with credit cards. because like all debt, they're fine if you manage them well. Credit cards are the definition of bad debt because they're usually very high interest and are often used to buy stuff which goes down in value. Yeah. Remember, that's the definition. Not always, though. Sometimes they're used in an emergency, right? But generally speaking, the interest rates are high. So you must tread carefully with credit cards. We talked about, I think when we talked about debt, we talked about buy now, pay later as well.

15:09We called it a gateway drug. Yes, because it's so easy to forget. Yes, it is. and even with credit cards it's like yeah I kind of owe some money and yes you'll get a statement every month it's easy to ignore though well yeah this is why online banking is good you don't have to wait for the paper statement you can just open your banking app and in my case Monzo there are the banks available but the ones I feel like we should be sponsored by Monzo I know we do mention this just because I use them and they're really good if Monzo wants to sponsor that would be amazing we're really cheap thousand quid an episode to start um but it literally has when you open the app it's got my card my debit card and just peeking behind it i can see my debit card my credit card sorry and the amount on it okay or the balance that you owe on it yeah as like a a fraction it's like minus 58 over three grand or whatever if i've spent 58 pounds so whenever i open it i don't know if that's the same with others as I don't have any other credit cards.

16:10Keeps it front of mind. Keeps it front of mind. Okay, cool. So in order to get one, where do you go? Yeah, how do you know which one to go for? Is there a... There is, like so many financial things, there is comparison sites. Boring money? Excuse me. Boring money. I'm not sure if they do credit cards. I wouldn't be surprised if they did. The one I tend to point people to is money-saving expert. Oh, okay. So Martin Lewis, probably the most well-known financial commentator in the UK. and he has a really good we'll put a link in the notes but really good sort of comparison um but also things like specifically credit cards to build your credit score or if you've had financial difficulty in the past and you you need credit for whatever reason but you're finding it hard to get it there are cards that cater specifically for that that's good very high interest for sure that's the price because you are a high risk to them so yes they need to earn something from you.

17:04And they're usually very small credit limits, but still, it might be just a way back to get back on your feet sort of thing. So, money-saving expert, we'll put a link in the notes. Yeah, so that'll be bankofdad.show forward slash episode nine. With all the show notes in? I know. Go us, we're nearly at the double digits. Get in there. We will be after this evening's recording session. Yes, yes, indeed, we will. We should talk about credit scores, I think. That's, yeah, absolutely. So, let's start with the really obvious one. What is a credit score? Well, its definition is it's a numerical measure of how risky it is for a lender to lend you money.

17:41That's a funny way of putting it. Well, look, they're in it to make money, right? Yeah, of course. But they have super smart people called actuaries who will work out, okay, for every 1 ,000 people we lend money to, we're going to have two or three or 10 that don't pay us back. is that an acceptable risk? And how can we minimize that? So they will have built into their business plan and all their numbers a certain level of defaults, that is people not paying back, right? But obviously they want to minimize that and the credit score is a kind of figure that they can come up with and it's almost a risk.

18:18So the higher the score, the lower the risk. The higher the score, the better bet you are. You're more reliable. It's like you've earned more points of being a reliable creditor. Yes. Creditor? No, creditor is the one who gives you the credit, isn't it? Yes. Reliable borrower. Yeah, so you're a reliable borrower. So if you think of the score as like the headline, there's a bunch of stuff underneath that you don't immediately see, unless you choose to look past the headline, which informs that number. Okay. Right? So more than just do you pay back on time? Oh, yeah, that's one factor. We'll get into the factors in a sec.

18:54but this credit report is kind of all the detail behind the number. Yeah. And that's what will have been checked by Monzo when, and, you know, they'll have cross-reference because Nationwide will have access to that as well. All the financial institutions have access to that and contribute to it. Yes. So basically it's like, you know, Big Brother is watching. Somewhere there is a score. There are three main credit referencing agencies in the UK. Equifax, Experian, and another one I can't remember, which I should have written down. I'll put it here. Okay, so, but I mean their whole job is to collate information on you, right?

19:33Sure. So they are funded, I think, by the industry and I'm sure they're very highly profit-making but their job is to essentially collate information on you so every time you apply for something, every time you're late on a payment, all that stuff gets toyed up, right? And it's that qualitative data, the actual information underneath that culminates in the score at the top. Interesting. Yeah, it is, actually. Yeah, I would be really intrigued. I mean, obviously it's a computer, but I'd be really intrigued to see how all of those communicate and work together. Yeah, just a massive database. It would be interesting.

20:06I don't know or care that much, but it's there. I say it would be interesting. It's interesting in concept. I think if I actually had to see the process, we'd have to sod this. Yeah. Somebody explained it to you. I'd rather curl up the book. Moving on. Thank you very much. Okay, so how does using a credit card affect your credit score? So, you know, why have I chosen to get a credit card to look better when buying a house? Okay, so because you read that it benefits your credit score to have a credit card and use it well. I did, yes. Your question is how does using your credit card affect your credit score?

20:48depends how you use it yes exactly so payment history would be a factor so if you've paid on time that'll be a big tick yeah every time yes I suppose because in my sense I'm applying for a really huge big version of a credit card a mortgage mortgage yeah yeah so they want to know how well you've managed a credit card because that's the smaller debt yeah it's like a taste of debt right so payment history yeah how you've used it so have you used a lot of credit, you know, so, and also how, so yes, how well you've kind of managed it, how well you've paid back, um, how often you've re-borrowed. So if you've paid a load back and then had to re-borrow it again, um, how kind of lumpy or smooth is that?

21:32Are you kind of managing? Is it a nice, or you're suddenly having panics and then having to borrow a load, taking ages to pay it back, right? How long you've had credit. So by definition, if you've got two people with identical financial situations, you would expect a 40-year-old to have a better score than a 20-year-old because they've had credit for longer. Credit mix. So that is, you know, do you have just credit cards? Do you have credit card overdraft personal loan mortgage? Right? Crikey. It's not to say one that more is better, but it's a qualitative factor. It's, you know... Qualitative versus quantitative.

22:07Yeah, so touchy-feely, subjective rather than hard numbers. Numbers, yeah. Qualitative, right? recency of credit card applications or credit applications generally. So have you applied for a lot recently? You're right. You're just looking uncomfortable. I'm just, oh, my foot has like gone full pins and needles. It's like, how can I move without anyone noticing and then I bash the mic stand that kind of undoes that. so much better. Recent credit applications. So every time you apply for a credit of any kind, it appears on your credit report. So if you've got a lot of recent applications, that might sort of go against your score a little bit.

22:48Even if you don't take the debt out, don't ask me why, because I don't know. Okay. Can you see that? I was about to... Why? That doesn't seem fair. It might not be, but that's... That's just the rules. And then lastly, just general public records are part of your credit score. So whether you're on the electoral roll at the house you live in, all right? So if you are not registered to vote, that would count against you. Really? That's not a political thing. It's just because you're not on the electoral roll. well does it make you look like less of a human like less of a real person or honestly i don't know it's like i am here i am part of society if i'm an electoral role yeah but what if you're like no i'm you know don't want to be a part of politics and don't vote which to be honest given the state of things i do kind of get it yeah yeah but look it's capitalism baby this is the system that we're in so if you want to be a part of it you kind of need to be registered okay so electoral address history if you moved around a lot might not look so good also if the address that you live at sometimes that can have a bad history now that shouldn't affect you but so if the person who lived in your house or your flat before you had like 20 credit cards and was really bad at paying them back that could go against you it shouldn't go against you or is it more area bias maybe i don't know that either all right i feel like i'm doing a great job today obviously if you've been insolvent or bankrupt that is oh yeah that would be that's a matter of public record so that would show on there as well and that's officially declared bankrupt not just I'm bankrupt yes yeah do people like say hey I'm bankrupt you know but it's when people say they're broke and they've got 300 grand of savings it's very different bankruptcy is a massively serious thing exactly hence why I clarified it thank you good yeah right excellent clarification my job is to clarify it is to challenge and to ask me questions I can't answer, it seems.

24:38I'm doing well at that. No, this isn't technically your area of expertise. No, it isn't. But there's some good resources. We'll put them all in the show notes as well. Okay, so how do I build a credit score? And what is considered a good one? Like when I went on it, I was expecting a 1 to 10 thing. The three different providers use different scores. one is something like maxes out at 990 one maxes out at 999 I think the other one maxes out at something like 710 which is just weirdly random right so basically the higher the better but I don't know what makes a good score for a 23 year old living at home who hasn't bought a house yet I don't know right it's for them to decide okay so I don't know if you're aiming for a number say that in a report don't they like how Mondo said it's low but it's only because you're starting it's not low because you've got a really bad history like they do they will tell you that's good well if you want to build it up all the sort of things that affect it that I just went through you need to sort of work at so the biggest by far is to pay everything on time yes so we have talked about putting a lot of things on autopilot so very often obviously with a credit card the minimum payment you have to set that up by dera debit and that will just get set up and will go out of your account but you can actually set them to fully pay them off every month by direct debit.

26:02So you're never late and you never carry a balance. I think that's what I've got to ask. Well, probably because you've got it there to build a score. You're not actually using it in anger, are you? You're not sort of maxing it out and then paying it off over a year or anything. No. But I have that on. I have a credit card and I have it to automatically pay off in full. What do you buy on a credit card? Not a lot. Sometimes it's just for, you know, decent-sized online purchases. I might do it on a credit card because there's some protections on it. Get into that next week. Segway. Wow. Reeling you in, aren't we?

26:36Yeah, yeah. Don't max your credit limit. So if you've got a£3 ,000 limit, say. Don't think of it as£3 ,000 to spend. It's not something to aim for, right? One thing I read said to aim for about 30%. Wow, that's not a lot. £3 ,000 limit, that's£900. Yeah. Right? So, you know, try to keep your borrowing there or less. If you're going to hold a balance, then try to keep it at that. It's not a lot. It's easy to rack up a£900. Oh, yeah, for sure. So don't max it. Avoid lots of applications. Another thing that came up as I was researching this thoroughly. We do appreciate the research. Be on the electoral register and stay on it.