Millennial's Guide To Your Credit Score
As a youngster, I've always heard about how difficult it was to manage your credit score and how only the wealthy have a high 800 score. Credit scores were actually pretty irrelevant to me until I bought my first car. Yikes. What's worse than having a bad credit score? Not having ANY credit score. But I managed to do it- bought my first car on my own with the highest interest rate allowed by NYS. I was paying an absurd amount in interest for a 5+ year old car at that time. After 6 months of having that loan, I refinanced and got a better interest rate (still not the best but I'll take it.)
Up to this point, I believed that the people were right! It is hard to manage your credit. When will I be able to have an APR lower than 10%?
I eventually got approved for my first credit card for a line of $5,000. Now I'm concerned about all the rumors people tell me about how credit cards are bad and how I shouldn't begin using them because it just leads to a never ending pit of debt you'll never dig yourself out of. With good knowledge, budgeting skills and some will-power, I never found myself caught in a huge amount of credit card debt.
Think of it this way - I used to use either cash or my debit card for every purchase, which is virtually the same thing. I wouldn't spend any more that would lead my account to be below a certain balance. Using cash/debit cards to make purchases is not utilizing the maximum potential of your purchasing power. Technically, you are using old money that has less value.
It took one of my customers telling me about how he switches credit cards every 1-2 years to gain relevant points for restaurants, traveling, and money back. I came to a realization - Why the heck am I spending my own money for and not gaining anything?!
I use my credit cards the same way I used my debit card. I only spend a certain amount that I can afford to spend at that time, as if it was taken out from my checking account. And I gain points that I can use to purchase airfare, hotels, and for cash back. It's a win-win! Especially the way that I travel -THIS is the main reason of how I get cheap flights and travel so much. Get paid to spend money! I can't stress it enough.
After 2 years of the beginning of my credit journey, I had an upper 750 credit score at the age of 20. Now I'm thinking how does most of the US population get themselves into credit card debt they can't get themselves out of? Probably due to lack of budgeting skills and careless spending. But hey - I'm not judging. It's not my credit score.
Our generation is pretty oblivious to the power of a credit score. You need this for obvious loans, like a mortgage and a car loan. But did you know your insurance rate could also have to do with your credit score? Not a hard hit - but enough to get a feel of the kind of financial character you are - if you are going to pay your bills on time or not.
So when is the best time to get another loan or credit card?
Credit scores fluctuate as you consume in the market. The highest balance I have on my credit cards is usually when I know I'm not looking to have my score pulled soon. But if I'm looking to apply for another credit card, I'll pay off all of my current cards and current bills due. I don't know exactly what entails in my credit score, but I know I have my best score, when everything is paid off.
What helped me with this is Credit Karma. Although it is not as up-to-the-minute as major credit bureaus are (ei: Experian). Credit Karma only updates every so often, not real time. It measures how much you use your credit cards comparatively to how much credit line you have. Rule of thumb is to stay below 10% of your total credit line. Hence why I think it's best to pay off your balance a week before you apply for another credit line. When I had student debt, I paid my monthly unsubsidized portion (this is the one that accrues interest while you're still in school) before I applied for a credit line.
I'm gonna tell you that you don't have to pay off your credit card debt. Yes, after all this blabbing about credit scores and how they're important. Unless you need to get a loan (ei: mortgage, credit card, etc.) where your credit is being pulled hard, there is no point in stressing out about paying your credit card balance. I recently paid off all of my credit cards - over $4000 - in one swoop. My credit score only increased by 2-5 points! And for what? For me to continue to use my credit cards anyways for future purchases.
You don't get an award for paying off your credit card. I actually found that when I didn't pay off the entire balance every month, the bank was willing to increase my credit limit on that card. To the bankers, you're using the credit line, which means more money in their pocket, which means "Hey, let's give them more money to spend!!"
Even with over $50,000 in available credit line, I will never use even half of that amount to purchase things. It just really helps with your ratio. The larger the ratio between how much credit line you have vs. the amount you actually use, the better your score.
And every card has different perks that may be more suitable for your friend, but not you. I prefer my Sapphire card because I am a savvy traveler. I would not suggest this card to someone who does not travel often. I think a great source to find a good match for credit cards is Nerd Wallet.
The only thing you really have to watch out for is paying interest. To me, paying less than $50 in interest for all of my credit cards, is definitely worth having the upper-hand in my purchasing power and increasing my credit score.
Disclaimer: I am not a professional! This is based off of my own experiences and knowledge.