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Credit Cards: The Ultimate Present Hedonist (a.k.a. YOLO) Trap

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In 2014, I led a six-nation study on financial literacy with MagnifyMoney. The purpose of the study was to understand:

  • Is traditional financial literacy training sufficient to help people live financially healthy lives?
  • What role does a person’s time perspective play in how that individual makes financial decisions?
  • How does an individual’s national identity impact his or her approach to time and money?

We conducted the study in the United States, United Kingdom, Germany, Sicily, Hong Kong and Brazil. Every participant was given:

  • A traditional financial literacy exam
  • A “financial health” exam, which determined whether an individual was living a financially healthy life. Someone who is financially healthy would have retirement savings, an emergency fund and a good credit score. Someone who is financially sick would be in debt, have a bad credit score and possibly could have suffered bankruptcy or other defaults.
  • The Zimbardo Time Perspective Inventory, to determine an individual’s approach to time.

The results were groundbreaking. We found millennials are less financially literate than their boomer counterparts, but are actually more financially healthy. 33% of the American population tested as financially healthy, with the United Kingdom coming in with 54% and Brazil only 14%. Most importantly, we uncovered that an A+ math student doesn’t correlate to being financially healthy. What does matter, is the direct link of a person’s approach to time with financial behaviors.

The Failure of Traditional Financial Literacy and The Importance of Time Perspective

Traditionally, financial literacy training focuses on mathematical aptitude. A traditional financial literacy exam would ask people to understand inflation-adjusted returns and to calculate the impact that an interest rate change would have on the price of a bond. The implicit assumption underpinning traditional financial literacy education is that by understanding math, you can live a financially healthy life.

However, our study conclusively demonstrated that simply “understanding the math” was not sufficient to live a financially healthy life. A high financial literacy score did not translate into a high level of financial health. That does not mean that we encourage people to stop learning math. Quite the contrary. Instead, the data demonstrated that financial acumen is necessary but not sufficient to live a financially healthy life.

It’s a person’s time perspective that can really predict how financially health they are.

An individual’s approach to time has a big impact on financial health. People who took our quiz and scored a very high “past negative” score (meaning they have negative associations with past events in their lives) tended to be financially healthy.

But why?

Aversion to risk can be bad for your social life (keeping people from enjoying life and falling in love) but great for your finances. Because you are afraid of what might happen, you are more likely to save. Because you don’t trust people, you won’t buy into their next big speculative investment.

People who start saving early and invest consistently, without emotion, in a diversified investment portfolio do extremely well over time and are the most prepared for retirement. It seems that being past negative actually does have a benefit: when the next Ponzi scheme comes along, a past negative individual will reject it. Imagine your wise grandmother who lived through the Depression. She might not be able to calculate compounding interest, but she knows how to save and isn’t a fool. Your grandmother probably has more money sitting in her bank account than her flashy neighbors.

We found the strongest statistical relationship between “present hedonists” and financial sickness. And while intuitively this finding is not surprising, we now have data from six nations validating our intuition. Present hedonists want to enjoy the moment without thinking about the consequences. Imagine the investment banker making millions every year. He understands the complexities of derivatives, but he is unable to say no to a first class air fare and the VIP room at a club. Although he makes millions, he spends it all (and then some) as part of one big adrenaline rush. Present hedonism helps him work 80 hours a week on a big financial deal, completely focused on the outcome. But it also helps him lose all of his money on champagne and the other addictions found in close proximity to champagne.

And when we compared the different geographic limitations, we saw time perspective at work. The most “financially sick” country was Brazil, which is culturally a much more present hedonist than other surveyed nations.

While we might not worry too much about the intoxicated investment banker, we should worry about present hedonists and their impulsive indulgences. A single mother living on minimum wage knows that she needs to save. But she buys those concert tickets because they make her feel better. The hard-working husband knows that he needs to save for his children’s education. But during a trip to Vegas, the temptation of the tables proves to be too much for him. Present hedonists often make very bad financial (and life) decisions. They might feel fleeting regret, but it doesn’t last. They will search out their next present hedonist treat and repeat the pattern.

Since our study in 2014, we have been looking at financial products that bring out the worst in present hedonists. And we have focused on one product in particular: credit cards.

Credit Cards: The Perfect Present Hedonist Trap

Present hedonists are driven by two key driving forces:

  1. They want it now. There is a strong desire for instant gratification.
  2. They do not want to think about the consequences. And if you force a present hedonist to think about the consequences of their actions, they might move on to the “next easiest adventure.”

Credit cards have been designed to take full advantage of a present hedonist.

I will explain the trap in a moment. But first, it is important to understand that this is not an indictment of credit cards for everyone. A financially healthy past negative individual can make excellent use of a credit card. He or she can find a credit card to be a convenient way of paying. Credit cards can be a convenient way to make transactions all over the world. A responsible individual could earn rewards or airline miles, which can result in free trips. And so long as the individual does not spend more than he or she can afford, most credit cards are virtually free. If you pay the credit card balance in full and on time every month, you will never pay any interest expense. So, for a financially responsible individual, a credit card can be both a convenience and a way to earn rewards. In fact, credit card companies lose money on responsible people. But they more than make up for it with present hedonists who overspend.

And for a present hedonist, a credit card is like a loaded gun.

Why is a credit card so dangerous for present hedonists? Because it’s a carefully designed product to trap those willing to live beyond their means:

A credit limit that is much higher than your monthly gross income.

When you apply for a credit card, you will be assigned a credit limit. Most credit card companies will assign a credit limit that is significantly greater than your monthly gross income. If you make $3,000 a month, you might get a $6,000 or even $10,000 credit limit.

The credit card company charges a minimum due that is usually 1% of the principal balance (and includes any interest that accrues). For example, if you have a $10,000 balance on your credit card, your minimum monthly payment would only be only $225. The credit card company will be happy if you only pay $225 a month (the minimum due) because $125 of the payment would go towards interest. And for someone making $3,000 a month, a $225 payment could be affordable.

But that big credit limit is a huge temptation for a present hedonist. In the heat of the moment, a present hedonist has at least $10,000 available that could make today more fun. Do you see shoes that you would like to buy? Do you see a new iPhone you would like to buy? Your big credit limit makes it easy.

There is no “pain of paying.”

Present hedonists want to enjoy the moment without any thought of the consequences. At the moment of the transaction, any barriers to that payment removes fun, slows down time and makes the consequences more visible. With credit cards, a payment is instant and easy. A simple swipe of the plastic and the purchase is complete.

A credit card makes it possible to spend very large quantities of money with very few barriers or moments to create thought. Retailers are willing accomplices. At Amazon, you can make a purchase with just one click. Retailers and credit card companies have created a world where present hedonists can indulge quickly and easily, with no thought of the consequences.

Automate Payments and Eliminate Statements

Credit card companies offer the ability to automate your monthly payment. You can easily set up a recurring monthly payment that only covers the minimum payment due. You can also sign up for electronic statements, which removes the monthly physical reminder of the decisions you made and the cost of those decisions.

Tactile therapy has proven an effective way of helping present hedonists. A monthly, physical statement would force a present hedonist to stop and think about his or her financial statement. But once those are turned off, all can be forgotten.

What to Do

Because of the importance of time perspective, individuals must self-diagnose. Financial literacy training should include a mandatory self-assessment using the Zimbardo Time Perspective Inventory.

Present hedonists need to know and understand who they are. They should consider cutting up their credit cards. Perhaps cash is the best way to ensure financial health. If the money in the wallet is gone, there is nothing to lose.

Credit card companies should consider creating tools to help people reduce their credit limits and limit their spending. For example, maybe a credit card would allow people to turn off the ability to make transactions after 10 PM, making it impossible for the hedonist to spend wildly in dangerous situations.

But one thing is certain: teaching a present hedonist how to calculate compounding interest and then handing him or her a credit card is not the way to ensure a financially healthy life.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Professor Philip Zimbardo
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Professor Philip Zimbardo is a writer at MagnifyMoney. You can email Professor Philip at [email protected]

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How (and why) to Request a Credit Limit Increase With Capital One

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Credit Limit Increase with Capital One

Getting a credit limit increase may be beneficial — as long as you maintain responsible spending habits. Here, we’ll tell you how to increase your limit when on a Capital One credit card.

First, it’s important to understand that each credit card company has different requirements for limit increases. Before sharing the criteria Capital One uses to grant or deny a limit increase request, let’s discuss why you might want a credit limit increase in the first place.

How to increase your credit limit with American Express and Barclays

Why increase your Capital One credit limit?

Capital One offers flexible credit cards for personal or business use that provide several benefits and perks, from bonus rewards and Uber ride discounts to  cashback and 0% intro APR promotions. While the perks of using a Capital One credit card are nice, if you are spending near or close to your limit each month, your credit may be taking a negative hit. It’s important to ensure you’re using credit cards for convenience and to improve your credit, not because you need them in order to get by.

Keeping your utilization below 30% of your credit limit each month is ideal for credit-building. Plus, if you are spending less than 30% of your credit limit, it will be easier to pay off the balance in full in month, allowing you to avoid paying high interest rates. Even if your card currently has a 0% APR for a limited time, it’s best to get into the habit of paying off your balance in full each month, because that promotion won’t last forever.

With that being said, a credit limit increase may help improve your credit score, just as long as you don’t inflate your spending. If you keep your spending at the exact same level after the credit limit increase, your utilization will automatically drop. For example, say you spend $300 a month on a card with a $1,000 limit – a 30% utilization rate. You requested an increase and now have a $2,000 limit, but continue to spend just $300 a month. Without doing anything differently, you’ve lowered your utilization to 15%, which could help improve your credit score.

What to know when considering a Capital One Credit Line increase

Capital One allows users to request a credit line increase either online or by phone. Accounts not eligible for a credit line increase include those that are less than three months old, as well as those that have received a credit line increase or decrease within the past six months.

When you submit a credit line increase request, Capital One looks at a variety of factors, such as on-time payment history, average monthly payment amount and your credit score. A credit score of 700 and above is generally considered good.

They will also look at your current utilization rate. If you are responsibly using your card and paying more than the minimum each month, this tells Capital One that you can handle potential increased monthly payments if they offer you a credit increase.

What’s nice about this process is that it will not negatively affect your credit. When you submit a request to increase your credit limit, Capital One will use the information they normally receive from the credit bureaus each month, so your credit report will not be pulled.

How to request a Credit Limit increase with Capital One

Requesting a credit limit increase is easy, and it only takes a few minutes. First, we’ll walk you through how to do it online, then explain how the phone option works.

Step 1

Once you’ve logged in, click on ‘I Want To…”.

Step 2

Under Offers and Updates, click on Request Credit Line Increase.

 

Step 3

Fill out the short form to the best of your ability, then click Submit Request.

In some cases, Capital One says they can approve credit limit increase requests immediately. If they do not, you will be taken to a confirmation page. As stated on the confirmation page, Capital One will notify you with the outcome of your request in two to three business days if you are signed up for a paperless account, or within 10 business days if you receive paper statements.

If you prefer to request a credit line increase by phone, you can call 1-800-955-7070 and choose the ‘More Options’ prompt to get to the credit line increase request option.

What’s next?

If you’re denied a credit limit increase, Capital One allows you to apply again at any time, but there’s no guarantee your request will be approved. It’s best to work on addressing the reason or reasons why you were declined in the first place.

In addition to making payments on time, and making more than the minimum payment each month, Capital One recommends you keep your income and employment information up to date, as these factors are crucial for determining  if you’re eligible for a credit limit increase. They will also help you to build a strong credit score overall.

If you’re approved, your new credit line will be available immediately. Try to stick to responsible spending habits, and continue using your card wisely.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Chonce Maddox
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Chonce Maddox is a writer at MagnifyMoney. You can email Chonce at [email protected]

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Do Credit Builder Loans Actually Work?

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If you have no credit or bad credit, getting a loan may seem impossible.

When lenders are considering a loan application, their main concern is whether the applicant can pay the loan back. If there is no loan repayment history, or a record of late payments or loan defaults, a lender will likely determine that the applicant is too risky.

A credit builder loan is one way you can start building a strong credit history that should eventually help qualify you for other loans.

What is a credit builder loan?

Building good credit, whether you are starting from scratch or repairing a bad credit history, requires patience. You’ll need to put in the work to show lenders you are a consistently reliable borrower who makes on-time debt payments.

A credit builder loan is a great way to begin establishing a good credit history. Here’s how it works:

A financial institution such as a credit union, which typically issues credit builder loans, deposits a small amount of money into a secured savings account for the applicant. The borrower then pays the money back in small monthly installments — with interest — over a set period of time. At the end of the loan’s term, which typically ranges from six to 24 months, the borrower receives the total amount of the credit builder loan in a lump sum, plus any interest earned, if the lender offers interest.

LendingTree
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As low as 3.99%

Credit Req.

Minimum 500 FICO®

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.


A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

As of 28-Feb-2019, LendingTree Personal Loan consumers were seeing match rates as low as 3.99% (3.99% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

How a credit builder helps boost credit

A credit builder loan helps borrowers build credit by providing an opportunity  to make small monthly payments. As the lender reports regular loan payments to credit reporting agencies, your credit history will show you can make regular, on-time loan payments over the life of a loan.

Most credit builder loans are small, ranging from $300 to $1,000, which means they also have small monthly payments. Interest rates vary by bank, so be sure you compare all your options to get the best rate.

To apply for a credit builder loan, you can visit a local lender’s branch or apply online. Because you won’t receive any money until the loan is paid in full, credit builder loans are typically easy to qualify for.

What to watch out for

Credit builder loans are not free, so be sure to ask about fees and interest rates. Some lenders may charge an application fee, and interest rates vary widely among lenders. While some offer rates in the single digits, other lenders’ rates may be significantly higher.

Where to get a credit builder loan

Here are examples of a few types of credit builder loans.

Credit unions

Many credit unions list details of their loans online and provide an online application.

1st Financial Federal Credit Union, for example, offers these terms:

  • Minimum Loan Amount: $300
  • Maximum Loan Amount: $1,000
  • Loan Term: 12 months
  • Interest Rate: 12%
  • Payment history reported to credit bureaus
  • 50% of interest refunded back with on-time payments

Banks

Some regional or local banks offer credit builder loans with the intention of helping clients build a good credit score as they work toward good financial health.

The Sunrise Banks Credit Builders Program, for example, places loan funds into a Certificate of Deposit (CD) for the borrower. The CD earns interest as the borrower repays the loan, which can be withdrawn when it’s paid in full. Consumers can borrow $500, $1,000 or $1,500, and they are assigned a repayment schedule of monthly principal and interest payments. Payments are reported to Experian, Transunion and Equifax.

Self Lender

Self Lender, based in Austin, Texas, is designed to help consumers increase their financial health. Working in partnership with multiple banks, Self Lender offers a credit-builder account that is essentially a CD-backed installment loan. In other words, you open a CD with the bank and they extend a line of credit to you for the same amount. When you make payments, they report it to the credit bureaus.

The money you put in the CD itself is what secures the loan.

Self Lender offers four loan amounts, each with 12 or 24 month terms. Borrowers can receive loans of $525 to $1,700. Fees vary from $9 to $15. See Self Lenders website for more details.

Pros of credit builder loans

  • A credit builder loan forces you to save money, as you are essentially making payments into a savings account.
  • Credit builder loans are secured by the money the bank has deposited for you, so they are typically easy to apply for.
  • When the loan is paid off, you will receive a payment in the amount of the loan. Some lenders also pay you dividends, or refund a portion of your interest.
  • You will develop good savings habits through a credit builder loan, which requires you to set aside money every month for a loan payment.
  • As you make payments on time every month, you’ll develop financial discipline that you apply to bigger loans.

Cons of credit building loans

  • Late or missed payments will be reported to credit reporting agencies, which could hurt your credit score.
  • They aren’t all free. For one, Self Lender charges a $15 non-refundable administrative fee.

Learn more:

Why your credit score matters

Credit scores are calculated by using your credit report, which is a record of your credit activity that includes the status of your credit accounts and your history of loan payments. Many financial institutions use credit scores to determine whether an applicant can get a mortgage, auto loan, credit card or other type of credit. Applicants with higher credit scores typically qualify for larger loans with lower interest rates and better terms.

Three federal credit bureaus, Equifax, Experian and Transunion, collect information from data providers and lenders, and use it to calculate your credit score.

Consumers typically have multiple credit scores. The two key scores are FICO and VantageScore.

FICO scores

FICO scores represent the likelihood that a borrower will pay back a loan on time. Scores range from 300 to 850, and over 90% of lending decisions in the U.S. are influenced by an applicant’s FICO score.

Five factors determine a consumer’s FICO score:

  • Payment history (35%)This is a record of your loan payment, and notes whether they were on time, late or missed.
  • Amounts owed (30%)Also known as utilization, this shows how much you use your credit limit. For example, if you have a credit card with a $15,000 limit and you have a debt of $3,000 on the card, your utilization is 20%. Ideally, your utilization should be less than 30% on all debts combined.
  • Length of credit history (15%)This measures the length of time you’ve had credit. If you opened your first credit card 20 years ago when you were a college student, for example, your credit history likely would be slightly higher than someone who took out their first loan a year ago.
  • New credit (10%)New credit looks at how frequently you’ve inquired about your credit and opened new accounts. For example, when you open a new credit card, your credit score could be slightly lower for six months before going back up.

VantageScores

VantageScore, which also measures your credit risk, is used by 20 of the 25 largest financial institutions. As is the case with FICO scores, higher Vantage scores lead to better loan opportunities. VantageScores range from 300 to 850, and are available for free online. VantageScore takes six factors into account.

Extremely influential

  • Payment history

Highly influential

  • Your age and type of credit (maintaining a mix of accounts over a long time is beneficial)
  • Percentage of your credit limit used (utilization)

Moderately influential

  • Your total debt balance

Less influential

  • Recent credit inquiries and credit behavior (don’t open a lot of new accounts at one time)
  • Available credit

How do I get my credit score?

There are numerous ways to get your FICO and VantageScore for free. Check out our guide on Ways to Get Your Free FICO Score.

Other ways to build credit

Credit builder loans aren’t the only way to establish a good credit score. Here are some other options if you don’t want to take out a loan.

Secured credit cards

Like credit builder loans, secured credit cards are an easy way to build or rebuild credit history. The application process is the same, but secured credit cards require a deposit between $50 and $300 into a separate account. The bank then issues a line of credit that is typically equal to the deposit, allowing you to build a credit history without putting the lender at risk.

Many secured credit cards allow you to “graduate” and move to a traditional credit card after you’ve proven you can make payments consistently. Lenders will report your payments to credit reporting bureaus, and some offer autopay, online payments and alerts to help ensure you pay your monthly bill on time.

Keep in mind: Some secured credit cards have annual fees and APRs as high as 25%.

Unsecured personal loans

Unsecured personal loans can be easy to qualify for, and can help you build credit. These loans typically range from between $2,000 and $50,000, and some lenders will offer them to borrowers with lower credit scores.

The borrower will receive the money in a lump sum upfront, and can then use the money to repay the loan.

Using an unsecured personal loan to build credit, however, can be risky. Many unsecured personal loans come with origination fees, and interest rates can be high, which means the loan can be an expensive way to build credit.

LendingTree
APR

As low as 3.99%

Credit Req.

Minimum 500 FICO®

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

Advertiser Disclosure

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.


A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

As of 28-Feb-2019, LendingTree Personal Loan consumers were seeing match rates as low as 3.99% (3.99% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

The bottom line

While credit building loans can be a key step in establishing a strong credit history, it’s imperative that you make all your payments in full and on time. When you are committed to building a strong financial future, successfully paying off a credit builder loan can be a significant factor in someday getting favorable terms on a mortgage and other loans.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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