Advertiser Disclosure

Building Credit

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

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Credit Cards

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
Professor Philip Zimbardo |

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

Get Personal Loan Offers
Up to $50,000

$

Won’t impact your credit score

Advertiser Disclosure

Building Credit

Build Your Credit Score: 6 Secured Cards With No Annual Fees – August 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Secured cards are a great way to build or improve credit. When you open a secured card, you submit a security deposit that typically becomes your credit limit. This deposit acts as collateral if you default on your account, but you can get it back if you close your account after paying off your balance. As long as you use a secured card responsibly — for example, make on-time payments and use little of your available credit — you may see improvements in your credit score. Unfortunately, in addition to the upfront deposit, this credit-building tool can have extra costs, like an annual fee.

You can avoid that expense with one of these six no annual fee secured cards, which have a variety of uses:

Cards to consider

Rewards

Discover it® Secured

APPLY NOW Secured

on Discover Bank’s secure website

Rates & Fees

Discover it® Secured

Annual fee
$0
Minimum Deposit
$200
Regular APR
25.24% Variable

The Discover it® Secured is a standout secured card that provides cardholders the opportunity to earn cash back while building credit. A cashback program is hard to find with secured cards, and the Discover it® Secured offers 2% cash back at restaurants & gas stations on up to $1,000 in combined purchases each quarter. Plus, 1% cash back on all your other purchases. In addition, there is a new cardmember offer where Discover will match ALL the cash back earned at the end of your first year, automatically. This is a great way to get a lot of rewards without needing to do any extra work.In addition to a cashback program, this card provides valuable credit resources such as free access to your FICO® Score and a Credit Resource Center — just note these services are available whether you’re a cardholder or not. Discover also takes the guesswork out of wondering when you’re ready for an unsecured card (aka a regular credit card) by performing automatic monthly account reviews, starting at eight months of card membership.

What to look out for: There is a high 25.24% Variable APR for this card, so you could end up paying a lot more than purchase prices if you carry a balance. Try not to overspend and make it a goal to pay each statement in full so you avoid interest charges.

Low deposit

Capital One® Secured Mastercard®

APPLY NOW Secured

on Capital One's website

Capital One® Secured Mastercard®

Annual fee
$0
Minimum Deposit
$49, $99, or $200
Regular Purchase APR
26.99% (Variable)

The Capital One® Secured Mastercard® offers qualifying cardholders a lower security deposit compared to other secured cards. You will get an initial $200 credit line after making a security deposit of $49, $99, or $200, determined based on your creditworthiness. Typical secured cards require you to deposit an amount equal to your credit limit, so this card has added perks for people who qualify for the lower deposits.You can also receive a credit limit increase without making an additional deposit after making your first five monthly payments on time. This is beneficial for people who need a higher credit limit and don’t want to (or can’t) tie up their money in a deposit. Also, you’ll have access to CreditWise® from Capital One® and Platinum Mastercard® benefits that include travel accident insurance and price protection.

What to look out for: The $49 and $99 security deposits are not guaranteed and depend on your creditworthiness — that means you may still have to deposit $200. Also, it’s not a good idea A carry a balance on this card because it has one of the highest APRs at 26.99% (Variable).

Average deposit

Citi® Secured MasterCard®

The information related to Citi® Secured MasterCard® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Citi® Secured MasterCard®

Annual fee
$0
Minimum Deposit
$200
Regular Purchase APR
24.74%* (Variable)

The Citi® Secured Mastercard® requires a $200 security deposit, which is typical of secured cards and a good amount to establish your credit line. You can deposit more money if you want to receive a higher credit line, but if you don’t have a lot of money available to deposit, coming up with $200 is manageable. This card doesn’t have any additional card benefits like rewards or insurances, but you can access Citi’s Credit Knowledge Center for financial management tips.

Low APR

Visa® Secured Card from MidSouth Community FCU

APPLY NOW Secured

on MidSouth Community FCU’s secure website

Visa® Secured Card from MidSouth Community FCU

Annual fee
$0
Minimum Deposit
$200
Regular Purchase APR
11.15% Variable

Because MidSouth Community is a federal credit union, you need to be a member to qualify for this card. Membership is limited to people who work, live, worship, or attend school in the following Middle Georgia counties: Bibb, Baldwin, Crawford, Hancock, Houston, Jones, Monroe, Peach, Pulaski, Putnam, Twiggs, Washington, and Wilkinson. If you qualify, you may be able to get a secured card with an APR as low as 11.15% Variable.

What to look out for: This card is very restricted, therefore few people will be able to qualify for this low APR secured card.

Unrestricted low APR

Affinity Secured Visa® Credit Card

APPLY NOW Secured

on Affinity Federal Credit Union’s secure website

Affinity Secured Visa® Credit Card

Annual fee
$0
Minimum Deposit
$250
Regular Purchase APR
12.85% Variable

The Affinity Secured Visa® Credit Card requires cardholders to join the Affinity FCU. You may qualify through participating organizations, but if you don’t, anyone can join the New Jersey Coalition for Financial Education by making a $5 donation when you fill out your online application. This card has an 12.85% Variable APR, which is one of the lowest rates available for a no annual fee secured card and is nearly half the amount major issuers charge. This is a good rate if you may carry a balance — but try to pay each statement in full.

What to look out for: There may be a membership fee associated with this card if you don’t qualify through participating organizations. The fee you may have to pay is low at $5, but it may be an issue for people who don’t want to pay anything to open a secured card.

Unrestricted federal credit union

Savings Secured Visa Platinum Card from State Department Federal

APPLY NOW Secured

on State Department Federal Credit Union’s secure website

Savings Secured Visa Platinum Card from State Department Federal

Annual fee
$0
Minimum Deposit
$250
Regular Purchase APR
14.24% Variable

The Savings Secured Visa Platinum Card from State Department Federal is open to anyone, regardless of residence. If you aren’t eligible through select methods including employees of the U.S. Department of State or members of select organizations, you can join the American Consumer Council during the application process. There is no fee associated with joining since State Department FCU pays the $8 on your behalf. There is a rewards program with this card where you earn Flexpoints, which can be redeemed for a variety of options like gift cards and travel. The APR can be as low as 14.24% Variable, which is reasonable considering many secured cards from major issuers are above 23%.

What to look out for: If you decide to take out this card and become a member of the SDFCU by joining the American Consumer Council, make sure you do not go to the ACC’s website and submit a donation. That fee is waived by the SDFCU when you fill out your credit application. Simply select “I do not qualify to join through any of these other methods:” and select the ACC from the menu to avoid the fee.

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.

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at [email protected]

Get Personal Loan Offers
Up to $50,000

$

Won’t impact your credit score

Advertiser Disclosure

Best of, Building Credit

The Best Options for Rebuilding Your Credit Score – August 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Best Options for Rebuilding Your Credit Score

A strong credit score is a vital part of your overall financial health. But rebuilding a damaged (or non-existent) credit score can feel impossible. Don’t despair. There are plenty of avenues you can take in order to rehabilitate your credit score and it all begins with identifying your starting point.

How Bad is Your Bad Credit Score?

Before you start to panic about rehabilitating your bad credit score, let’s determine if it’s even bad. Where do you fall in the range of FICO® credit scores? Below you’ll find what your credit score is considered, with ranges from Experian.

  • Above 740: Excellent Credit
  • 670 – 739: Good Credit
  • 580 – 669: Fair Credit
  • Below 579: Bad Credit or No Credit Score/Thin File

Your credit score isn’t the only thing that will keep you from being approved for credit. These factors are common reasons for being declined.

  • Your debt-to-income ratio is above 50%
  • You have no credit score
  • You have been building up a lot of debt recently
  • You are unemployed

In order to focus on rehabilitating your credit score, you’ll need to start with getting a line of credit. This may sound impossible because you’re constantly getting declined. Fortunately, there are options tailored specifically for people looking to re-establish credit.

[Read more about bad credit scores here.]

Rehabilitating a Bad Credit Score (579 and under)

Get a Secured Card

You’ll use your own money as collateral by putting down a deposit, which is often about $150 – $250. Typically, the amount of your deposit will then be your credit limit. You should make one small purchase each month and then pay it off on time and in full. Once you prove you’re responsible, you can get back your deposit and upgrade to a regular credit card.

Check out two of our favorite secured cards below, and more options for a secured credit card here.

Discover it® Secured

APPLY NOW Secured

on Discover Bank’s secure website

Rates & Fees

Discover it® Secured

Annual fee
$0
Minimum Deposit
$200
Regular APR
25.24% Variable

Perhaps our favorite secured card, Discover it® Secured, has numerous benefits for those looking to rebound from a bad credit score. There is a $200 minimum security deposit that will become your line of credit, which is typical of secured credit cards.  Additional perks include a rewards program (very rare for secured cards) that offers 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter, plus 1% cash back on all other credit card purchases.This card has another great feature: Discover will automatically review your account, starting at month eight, to see if your account is eligible to transition to an unsecured card. Discover will decide if you’re eligible based on a variety of credit factors, and if you are, you will receive notification and get your security deposit back.

Capital One® Secured Mastercard®

APPLY NOW Secured

on Capital One's website

Capital One® Secured Mastercard®

Annual fee
$0
Minimum Deposit
$49, $99, or $200
Regular Purchase APR
26.99% (Variable)
Credit required
bad-credit
Limited/Bad

The Capital One® Secured Mastercard® is another option for those who want to strengthen their credit score. This card offers a potentially lower minimum security deposit than other cards, starting as low as $49, based on creditworthiness. Be aware the lower deposit is not guaranteed and you may be required to deposit $99 or $200. You can deposit more before your account opens and get a maximum credit limit of $1,000. There is a feature that will assist your transition from a secured to an unsecured card. Capital One automatically reviews your account for on time payments and will inform you if you’re eligible for an upgrade. However, there is no set time period when they will review your account — it depends on several credit activities. If you receive notification that you’re eligible, you will be refunded your security deposit and will receive an unsecured card.

Rebuilding from a Fair Credit Score (580 – 669)

Apply for a Store Credit Card

You might be used to checking out at a store and being asked if you’d like to open a credit card. While these credit cards come with really high interest rates and are great tools to tempt you into buying items you don’t need, there is a big perk to store credit cards: they’re more likely to approve people with low credit scores. Just be sure to only use the card to make one small purchase a month and then pay it off on time and in full. Unsubscribe to emails about deals and don’t even carry it around everyday in your wallet if you can’t resist the desire to spend. Read more here. 

Those unable to get a store credit card should apply for a secured card to build credit. With proper credit behavior, you can see your score rise and then you may qualify for a store card.

Here are our picks for two store credit cards:

Walmart Credit Card®

APPLY NOW Secured

on Walmart’s secure website

Walmart Credit Card®

Annual fee
$0
Rewards Rate
Save 3% on Walmart.com purchases including Grocery Pickup, 2% on Murphy USA & Walmart gas, and 1% at Walmart & anywhere your card is accepted.
Regular Purchase APR
19.15% - 25.15% Variable
The Walmart Credit Card® offers a three-tiered cashback program to benefit avid Walmart shoppers. Save 3% on Walmart.com purchases including Grocery Pickup, 2% on Murphy USA & Walmart gas, and 1% at Walmart & anywhere your card is accepted. Your cash back will be issued monthly as a statement credit for all earnings during that period. Note: This card can only be used at Walmart Stores, Walmart Supercenters, Neighborhood Markets, Walmart.com, Walmart and Murphy USA Gas Stations and Sam’s Clubs.

 

Target REDcard™ Credit Card

APPLY NOW Secured

on Target’s secure website

Target REDcard™ Credit Card

Annual fee
$0
Rewards Rate
5% at Target & Target.com
Regular Purchase APR
25.15% Variable

The Target REDcard™ Credit Card offers great perks that are sure to please frequent Target shoppers. You receive 5% off every eligible transaction made at Target and Target.com. The discount automatically comes off your purchase — no redemption needed. Other benefits include free shipping on most items, early access to sales and exclusive extras like special items, offers, and 10% off coupon as a gift on your REDcard anniversary each year.* Recently, cardholders received early access to Black Friday deals. Reminder: This card can only be used at Target and on Target.com.

Check If You Pre-Qualify

If you’re on the higher end of the spectrum, you may want to consider checking to see if you’re pre-qualified for any cards. This will help minimize your chance of rejection upon applying because pre-qualification performs a soft pull on your credit. This doesn’t harm your credit score.

Your goal in this credit range should be to use no more than 20% of your total available credit. Pay your bills on time and in full. And keep pumping that positive information onto your credit report until you reach the 700+ category. 

Who You Need to Avoid

Access to credit and loans may come easier than you expect, but that should also be a danger sign. There are several lenders who are willing to provide lines of credits or loans to people with poor credit. These options are often very predatory. If you’re simply trying to rebuild your credit history and improve your credit score, then there is no need to take these offers.

Here are the options you need to avoid when trying to rebuild credit:

1. Payday and Title Loan Lenders – There is never a need to take out a payday or title loan if you’re trying to merely rebuild or establish credit history. Most of these lenders don’t report to the bureaus and you’ll likely end up in a painful vicious cycle of borrowing and being unable to pay it down.

[How to get out of the payday loan trap.]

2. First Premier – The bank claims to want to offer people a second chance when it comes to their finances, but its fee structure and fine print prove the exact opposite. First Premier charges you a processing fee of up to $95 just to apply for a credit card. Then it levies a $75 annual fee on the credit cards and most cards only come with a $300 limit. You’re paying $170 for a $300 credit line! The APR is a painful 36%. In year two the annual fee reduces to $45, but then you’re charged a monthly servicing fee of $6.25. And to top it all off, you’ll be charged a 25% fee if your credit limit is increased. Stay away from this card! Use the $170 it would take to open the card and get a secured card instead.

3. Credit One – Credit One does an excellent job of confusing consumers into thinking they’re applying for a Capital One card. The logos are eerily similar and easily confused.

Creditone

Capital one

While Credit One is not as predatory as First Premier or payday loans, there is really no need to be using one of its cards to rebuild your credit score. For starters, all Credit One cards have annual fees that range from $0 to $75 for the first year, then $0-$99 in subsequent years. If you’re approved for a card with an annual fee, it will be deducted from your initial credit limit. For example, receiving a $300 credit limit and $75 annual fee means you’ll only have access to an initial $225 credit limit. In addition, there is a high 20.24% - 26.24% Variable APR. Given the high annual fees, we recommend saving your money and using a secured card with no annual fee to begin rebuilding your credit score.

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.

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at ale[email protected]