Expert Interview Series: Jacob Lumby of Cash Cow Couple on Using Credit

Jacob teaches more than 80,000 monthly readers how to build lasting wealth and secure financial freedom on his site, Cashcowcouple.com. He is a Ph.D. candidate in financial planning, and has completed the CFP® exam.

We recently checked in with Jacob to learn more about his philosophy on personal finance and find out how he uses credit. Here’s what he had to say:

Tell us about your background or interest in personal finance/money management?

Growing up, my family never had a lot of money. I remember personal finance being a stressful topic, so I began studying the topic. I wanted to find ways to cut expenses so that my family and I could live a more abundant life.

My interest in personal finance continued to grow, and I eventually began blogging while completing my Ph.D. in financial planning. Most of my time is now spent reading and writing about various money related topics.

What are the most important lessons you’ve learned so far in life about using credit?

Your credit score (and report) is extremely important. More and more financial institutions are using your credit score to evaluate your worthiness as a customer. Insurance premiums, loan interest rates and a number of other important financial decisions are partially determined by your credit score.

What’s your family’s approach to using loans/credit for purchases?

We use credit cards to purchase almost everything that can be repaid in full. We have a number of credit cards, each with different bonus categories. We use the card that offers the most rewards for any given purchase. This approach works well for us, because we pay the balance in full and never pay interest for the purchases.

For bigger items, it depends. Mortgage rates are extremely low, making them attractive for those considering a new home. For cars and other depreciating assets, we never finance them. We save enough to pay cash in full.

What advice can you offer on evaluating credit/lending options? What should borrowers be on the look out for? What should we steer clear of?

First, verify the trustworthiness of any potential lender. You don’t want to be scammed, so choose a lender with a long track record. Consumers should also be aware of hidden fees. Some lending institutions are notorious for slipping in additional fees in a contract, hoping the consumer fails to read the details.

For example, I placed an offer on a home last year through the listing agent. She sent me the paperwork to sign, mentioning no additional fees beyond the closing costs already discussed. I read the contract in full, and found a ridiculous fee padding her compensation. I directly addressed the problem, and told the agent that if she did not remove the fee, I would find another agent. She caved and eventually removed it, but I’m sure many homebuyers have been taken advantage of.

What are some dos and don’ts for maintaining good credit?

First and foremost, everyone needs to have a credit history. That means having some type of credit available that is reported monthly to the major credit bureaus. If you don’t have a credit history, many financial institutions will not lend to you.

When you have some credit established, it’s very important to establish a solid history of timely payments. A large part of your credit score is based on your payment history. Paying the balance in full each month will result in a healthy, upward trending credit score.

It’s important to check your credit report once per year to verify activity and prevent fraud. Everyone can access their credit report once per year (per bureau), completely free.

You want to avoid a high utilization ratio. For example, if you have a $5,000 credit limit, try to avoid charging more than $1,000 at a time (a 20 percent utilization ratio). Using more than 20 percent of your total credit is often frowned upon.

Why do you think it’s important to create financial goals? What are the benefits?

Yogi Berra said it best, many years ago. You have to plan ahead and set goals to be successful.

“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” – Yogi Berra

Financial goals are the basis for planning, implementing and measuring the progress of your financial situation. Without goals, it’s very difficult to find financial success.

How do you keep yourself honest when trying to reach your financial goals? What have you found keeps you motivated?

I share all of my goals with Vanessa, my spouse. Having a partner that can help keep you accountable and on track is a huge benefit. Writing the goals down, and reminding myself of the importance is also helpful.

Financial freedom is what keeps us motivated. We desire the ability to make major life decisions without worrying about money.

What are some of your favorite tools for helping to manage your money?

Personal Capital is an awesome free tool. Through the online interface, you can track all income and expenses, investment assets and much more. It provides a full snapshot of your financial situation.

Betterment and Wealthfront are the best robo-advisors for individuals who don’t want to manage their own portfolio.

What’s one piece of financial advice you find yourself repeating over and over again?

Three things:

1. Track your income and expenses (Personal Capital is the best free solution)
2. Spend less than you earn
3. Invest your savings in stocks/bonds/real estate (preferably via low-cost index funds)

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