Installment 4- Adulting 101: Credit Building

March 26, 2017

 

Adulting- a termed coined by the Millennial and Generation Z population, primarily referring to performing tasks that are commonly associated with being an adult. However, simply from observation and conversation, it seems that a good portion of us feel like we’re failing at it. The question is what do we think we’re doing wrong? Is there some holy grail of knowledge that most of us missed the memo on? Or is it that everyone assumed we knew, and that we didn’t have to be told? Well consider this piece an introduction on a few “adulting” items, that we all should know. Some of you may know these already and some of you may not, but don’t worry, like planet fitness, this is a judgment free zone.

 

Let’s begin with credit. Whether you’re applying for your first apartment, getting a car, or attaining a credit card, your credit score is always something of which you should be aware. My first high school accounting teacher, Ms. Conway, told our class something, that I lived by as soon as I got my first credit card. She said something to the effect of “use credit it to buy a pencil, pay it off, and repeat.” Credit building is not buying something extravagant; it’s buying something and paying it off. Creditors just need to see that you know how to pay things on time. A good way of doing that is buying that pencil on credit, and paying it off immediately. Most of us have online banking available, and of course there’s “an app for that.” Most banks and credit unions, have a mobile app to allow easy access to your account. Utilize this is in paying off your credit card too. Remember credit is not evil, but interest is. My first credit card by the way, was a secured card for $250, for which I had a co-signer. A secured card meant that the bank/credit union took $250 cash from me or my co-signer to open the line of credit. This meant that if at any time, I was unable to pay off my maximum $250 balance, then the financial institution would use that $250 to pay off the balance. This gave little to no risk for them, and an opportunity for me to build my credit. Win-Win.

 

Now if you’re a Millennial or Generation Z’er, then the odds are that you may already have a start on your credit, student loans. You may not be thinking about it, but trust and believe your creditors are. They are waiting for your graduation to start those “gentle” reminders. If you’re like me, then it may take you a minute to find your first job. I took several contracting jobs, but it took a minute for things to stick. I knew the importance of credit and didn’t want to miss any payments. So, I deferred my loan payments for 3 months while I continued my job search. However, please be careful when deferring your loans. This is a slippery slope that can become a cliff hanger very quickly.

 

During the deferment period, your creditor is silently packing on interest they would have gotten from you, on to your principal of your total loan amount, which extends your pay off date that much longer. However, this is an option if immediate payments are not feasible and you don’t want to negatively impact your credit score. When you’re ready to begin payments then this can be a solid start to building your credit.

 

Personally, I do recommend getting a very small line of credit before you graduate. This will start the clock on your credit, and give you a longer credit history, by at least 1 year depending on when you open your card. Know your personal limits when applying for a credit card. Just because your local bank wants to give you a $5,000 limit doesn’t mean you need it. Odds are your first card will come with a very high interest rate, because you will be a risk with little to no credit history. High interest plus high balances equals high payments. Tread lightly and get the lowest limit they allow. If it’s not under $1,000 then walk away and find another institution that can help you.

If you already have a credit card, from your favorite store or local bank/credit union, then you’ve already begun building your credit history. The question is, have you seen your credit history? Do you know what your credit scores are? If you answered no to either question, then I recommend credit karma. They have a website and a mobile app. I’m not getting paid for this endorsement (personal goals). I’m just an honest fan of their service. It’s not perfect, but it is free and effective. You will see some time lag. For example, if you just open a new credit card, or have an updated balance, it may not show immediately on your credit karma account. There’s also 3 credit scores, Transunion, Experian, and Equifax. Only two of the three scores can be found on credit karma. However, whenever I’ve checked my credit scores using their service, and then went to apply for a car loan or larger credit balance, the scores were very similar, and I wasn’t surpirsed when the creditor pulled my report. You can check it as often as you want, and there is no negative affect on your score. If credit karma, is not your cup of tea, then you could also get an annual credit report. You are entitled to a free credit report each year. For more information, you can visit the Federal Trade Commission’s page on the topic, https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report .

 

Most apartment complexes would like a credit score of 620 or higher. If you check your credit and you’re not quite there, then don’t panic. First you need to understand the biggest factors that affect your credit scores. Of course, the number one item is on time payments, which we touched on earlier. The second is credit utilization, meaning how much of your credit is being used. Creditors only like to see about 30% of your credit being used at one time. This shows not only responsibility but also it doesn’t look like you’re running out of money. Even if you are, there’s no need to show that to the banks. In other words, fake it until you make it.

 

Now you may remember, that I suggested getting a low balance card to start out. You may be thinking if you have a $250 line of credit, and only use 30%, then that’s only $75. What gives?? Well, allow me to explain a step further. I also recommended that you pay off your purchases immediately. In other words, instead of using your debit card linked to your checking account or cash, then use your credit card, and pay it off with the money you already have. A 30% utilization rate only really applies to a standing balance. If you pay off the balance within the same month of purchase, then that balance never has an effect on your credit score, only the successful on time payment you made.

 

After the top two factors, the others are important, but basically tie for third place. Be wary of applying for too many lines of credit, each hard inquiry has a negative effect on your credit score. However, it does go away in a couple years, but be mindful of this when wanting a line of credit. If you’re not sure that you want it, then don’t even allow them to run your credit, it’s not worth it. Lastly, the average age of your credit is also a factor, and unfortunately the one thing that you don’t have too much control over. This is why I recommend starting as early as you can with a small line of credit. It’s also never too late to start credit building; everyone needs to start somewhere. For more information on other credit factors, you can visit credit karma’s article on the subject https://www.creditkarma.com/article... .

 

Thank you for reading the start of adulting 101: credit building. Stay tuned for the next installment! If there’s any issues that you are particularly interested in, then feel free to message me directly using the link on the Facebook page, or emailing me at WCDTU1@gmail.com.

 

Until next time, remember adulting may be a pain, but we’re all going through it, and can do it together.

 

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