50% of Americans Fall for This “Free Money” Trick

The “Magic Card” Fantasy

SPEAKER_02 0:01

Why do you look like you just won the lottery? Because I basically did. I got this magic card now. Watch, I get free Chipotle, free Uber, and free anything I want. Wait, a magic card? Where do I get one? Uh, I don't know if it's for everybody. We're brothers, we share their wealth. It's exclusive, Austin. The letter said that I was specifically chosen. Chosen for what? Uh, to never work again, probably.

SPEAKER_00 0:26

Free money that shows up in the mail? That sounds fishy.

SPEAKER_02 0:31

It's not fishy, it's a gift. Some things in life are made for special people, like me.

SPEAKER_00 0:36

Stick around, because by the end of this video, we'll teach you some stuff that top finance people and most adults don't even know.

Realising It’s A Credit Card

SPEAKER_01 0:44

Seriously though, how do I get one?

SPEAKER_00 0:46

Brandon, how exactly did you get this magic card?

SPEAKER_02 0:49

Uh, it came in the mail. And then I went online and I filled out a little form. And then they sent me a shiny blue rectangle and said, congratulations.

SPEAKER_00 0:59

Brandon, do you mean a credit card?

SPEAKER_02 1:01

It said pre-approved. That sounds much better than credit card.

SPEAKER_00 1:05

Give me that. It says $2,000 available credit. Brandon, how much have I actually spent on this?

SPEAKER_02 1:12

I've been buying Chipotle for my class the whole week. I'm basically the king of school now, and everyone calls me Mr. Guac.

SPEAKER_01 1:20

Wait, it says you can pull cash off this, like an ATM. I know exactly what I'm doing with my life now.

SPEAKER_00 1:26

Are you talking about a cash advance? A credit card means someone else pays for your stuff today and you owe it back later.

SPEAKER_02 1:32

Wait, so I didn't buy Chipotle all week, I borrowed it all week?

SPEAKER_01 1:36

Plus extra. Don't forget

Minimum Payments And Interest Trap

SPEAKER_01 1:38

the extra.

SPEAKER_02 1:38

Extra what?

SPEAKER_00 1:40

The part you're about to hate. Average credit card interest rate is about 21%.

SPEAKER_02 1:45

21% of what?

SPEAKER_00 1:47

Whatever you don't pay off. Banks set the minimum payments low on purpose so it seems easy. They make it like $20.

SPEAKER_02 1:53

20 bucks? Easy.

SPEAKER_00 1:54

That's the trap. Almost none of it touches what you owe. It's mostly interest. The debt just sits there growing.

SPEAKER_02 2:01

So I pay every month and basically owe the same?

SPEAKER_00 2:05

Pretty much.

SPEAKER_01 2:06

ATM. Where's the nearest ATM?

SPEAKER_00 2:08

Austin.

SPEAKER_01 2:09

Wait.

Cash Advances And Investing Math

SPEAKER_01 2:10

I saw it. Cash Advance. I could pull cash off a credit card and invest it. Index funds average 10% each year. Free money, making more free money. Oh, that's actually kind of smart.

SPEAKER_00 2:22

A cash advance doesn't just charge 21%. It's closer to 28. And it starts charging interest the second you pull cash. There's no grace period like there is for the normal purchase.

SPEAKER_01 2:32

So?

SPEAKER_00 2:33

So you'd be borrowing at 28%. Invest in hopes for just 10. That's a nearly 18% loss to chase a 10% gain.

SPEAKER_02 2:43

Down 18 for sure. Up 10, maybe.

SPEAKER_00 2:46

That's not investing. That's paying the bank for the privilege of losing.

SPEAKER_01 2:50

Okay. When do you say it like that?

SPEAKER_00 2:52

I'm saying if debt costs more than what you make investing, kill the debt first, always.

SPEAKER_01 2:58

A guaranteed 25, beat a hopeful 10.

SPEAKER_00 3:01

Now you're getting it. A quick nuance. Something like a student loan costs around 6% interest. It's a different animal. It costs less than the market earns. So most economists say just invest and make minimum payments there.

SPEAKER_02 3:13

So it's the number that matters and not the word debt?

SPEAKER_00 3:16

Exactly, but a 21% credit card is never the invest instead

The True Price Of Mr Guac

SPEAKER_00 3:20

type. That's the one you kill on site.

SPEAKER_02 3:22

So what did the whole Mr. Guac week actually cost?

SPEAKER_00 3:26

$2,000 on the card. Chipotle for the whole class every single day.

SPEAKER_02 3:31

Okay, so how much do I actually owe?

SPEAKER_00 3:35

Minimum payments at 21%, that takes almost eight years to pay off. About $3,400 total. $1,400 of that is just pure interest.

SPEAKER_02 3:46

$1,400 for burritos I don't even remember eating.

SPEAKER_00 3:50

For a title that lasted exactly one week.

SPEAKER_01 3:53

And I'm down $500 on my cash advance already.

SPEAKER_02 3:57

Wait, you actually did it? I saw the potential. This is the worst invention in human history. Nobody should ever get one of these. This is evil. Agreed.

SPEAKER_00 4:06

It's not evil.

Credit Cards As A Risky Tool

SPEAKER_00 4:08

It's good and it's bad.

SPEAKER_02 4:09

There is no good. I'm in high school debt.

SPEAKER_00 4:12

You're not entirely wrong. 50% of the American people are in credit card debt.

SPEAKER_02 4:16

50% of the country did what I did?

SPEAKER_00 4:19

Paying 21% just to borrow money that was already spent. Here's the thing: if used responsibly, it can help you out of situations and it can help you build credit early in life.

SPEAKER_02 4:29

So it's not evil, it's just easy to mess up.

SPEAKER_00 4:32

Extremely easy. But we broke down exactly how to build your credit score on our credit score

Rules To Use Credit Safely

SPEAKER_00 4:38

episode. A credit card is not free money. It's a loan plus roughly 21%.

SPEAKER_01 4:43

Never cash advanced to invest. Please learn from me.

SPEAKER_00 4:47

Pay off the full balance every month and build your credit instead of letting it bury you.

SPEAKER_02 4:52

And don't become king of the school through debt, because that Mr. Guak title, it wears off fast.

SPEAKER_00 4:58

Credit cards are extremely dangerous. So just make sure that when you get one, you're gonna use it responsibly. And if you don't think you can, don't get one.