Give Yourself Some Credit:
None of this came as a solitary piece of advice. There was no singular moment when the clouds parted and a trusted mentor or fortuitously placed stranger turned to me and uttered….well any of this. Rather, it has come to this, after many years and many more lessons.
When I was a wee lad my uncle, a successful man, often advocated the importance of credit. He did this overtly, by stressing those very words, but also covertly, living a lifestyle that can be achieved by heeding those words. Since then, after realizing that there might be something to this whole “credit” thing, I undertook the task of understanding just what the **** it all means.
This is what I have learned.
Credit: it matters. A lot. Let this be the first and foremost point made, and if all of what is to follow becomes lost in financially questionable decisions, then hold fast to this. As is the case with most erroneous things in this world, ignorance is often to blame, but don’t let that be your excuse.
To bring everyone up to speed, we should establish a working definition of what credit is which, for our purposes, boils down to risk. Credit is more or less how risky of an investment you are. Your credit score and credit report reduces the ambiguity of the word “risk” into a 3 digit (hopefully) number. The higher the number the better off, and less risky you are. There are a lot of factors that go into this equation and I am not going to explain all of them but you better believe that they matter. Why? Because having great credit opens a lot of doors for you. Doors are good because doors are options and having options means having the freedom to choose which option is best for you. And we all know that freedom is good because…well, America.
With strong credit you get all sorts of nifty perks that come in handy as you get older and start doing adult things: qualifying for loans, having lower interest rates on said loans, being approved for housing, having access to elite credit cards, and generally being considered a responsible, respectable citizen.
From the age of 18, which the vast majority of you are, we begin living with credit. It is from this very point that you should begin taking steps to strengthen that credit. Many of my friends, who are in their mid-twenties, still have yet to begin building their credit mostly due to ignorance. Now, if you are 21 and reading this makes you panic a bit, don’t fret; you have not missed the boat and there is plenty of time. The point I am trying to make is that the sooner you start helping your credit, the sooner it can begin helping you, and if it isn’t helping you then it’s hurting you.
There are a number of ways to begin building your credit from a young age and it is important to note that you don’t need a high income, or a portfolio, or a library’s worth of financial knowledge, or any of that stuff to build your credit. All you need is some discipline and good sense. Building your credit is like building muscle or getting in shape. You’ve got to make your money (or lack thereof) work. You can do this by accepting the responsibility of debt and then paying it back in full, in a timely manner. The more you do this the more you establish yourself as a credit worthy (low risk) individual and then the doors start opening.
I recommend applying for and obtaining a credit card as soon as you are able. This card will likely have a very small credit limit and will undoubtedly have a sky-high interest rate. Use the card! Use it for everything that will accept plastic as payment and then pay your bill, in full, at the end each billing cycle. It’s very simple and many people dig themselves into financial ruin with credit cards because they view those little squares of plastic as free money. This is wrong; don’t be like the aforementioned people. Spend only the money that you have in your bank account. For example, if your credit limit is $1000, then you should ALWAYS have at least $1000 in your bank account. Follow this simple rule and after a few years your credit score will have improved significantly. Every nine months I usually recommend requesting a credit increase with the bank holding your card. Make it small, typically 10-15% each time. If approved this shows that you are more responsible and capable which helps your credit immensely. Be sure to follow the same principle of not spending money you don’t have.
Another nifty trick is to begin paying for your student loans while you’re still in college. Student loans hold a special place in the hearts of creditors and have a very serious value, so make sure you pay them. You can, however, get a head start and begin making payments on these loans while you are still in school. Not only does this boost your credit score but it also cuts down on the money that you actually have to pay back in the long-term due to interest. Call the company that holds your student loans and ask them about a small fixed payment you can make every month and they will work with you to set it up. Spend only what you can afford, and understand that at this point even a small amount of money will go a long way. If your parents are making payments for you or footing the entire bill then cheers to you. However, you should make sure that the payments and the loans are under your name so that the credit goes to you as well. If not, politely ask your folks to have your name added to the loan and forward the money that was being used to make the payments to your account so that you can begin making them yourself. They should be ok with this small gesture since they are already paying for your education.
Never miss a payment, never be late for a payment. Ever.
If you keep up with both these things, by the time you graduate you should have a credit score in the 700+ range which is very impressive. As you move into the real world you will qualify for that new car you need to replace your bicycle. You’ll be approved for that awesome apartment you can barely afford. You’ll be set up for a “Yes” when you enter the market to purchase a new house. It will likely even help you as you apply for a job. In addition, as your credit gets stronger and stronger, you will begin to have access to premium credit cards with substantial benefits. These benefits come in a myriad of different forms, such as: cash back on purchases, airline miles, hotel rewards, lower interest rates, etc. With that bulging credit score of yours and a steady job (presumably) you can qualify and be approved for any of these programs and select which one works best for you. Options, remember? Good stuff.
I personally was able to pay for a 3 week trip across Europe with miles that I had accrued on my credit card from spending money on normal, everyday things. There I was, in Italy, at a 3 Michelin Starred restaurant, eating truffles and drinking beautiful wine, and when the bill came I handed the waiter my card knowing that there would be no foreign transaction fees, and that I had just earned even more miles to pay for the trip I was so thoroughly enjoying.
All of this made possible because of strong credit.
I am 25, I have a steady job, and I live in a great house in an amazing city, my credit score is in the high 700’s. I don’t make a lot of money, but I live a pretty comfortable existence because I gave myself some credit and you can do the same.