The first time I applied for a rental lease was a few months after I turned eighteen. My credit was pretty much non-existent and my credit score was very low. With a poor credit history, to even be considered to be on a lease, I needed a cosigner (so much for adulting and being independent).
I reviewed my credit score for the first time shortly after that. It was in the low 500 range. And I had no idea what that meant (it means very bad). That number represented my lack of credit history along with the large amount of new debt I had taken on as a student (especially a student at an out-of-state university with very little scholarships).
Even though I’m out of college, I’ve heard stories from my peers about running into trouble trying to get approved for a car loan or a rental lease due to something simple like poor credit history. Actually, one of my peers decided he didn’t want to pay the debt on his credit card a number of years ago, and that one stuck with him for several years. Yes. As hard as establishing credit history can be, I’ve also seen some of my peers struggle with poor money management.
I’ve learned to see my finances and credit score as a video game. I set goals and strive for achievements or to reach the high score. It helps me set my financial goals for the long term. Once I learned that 500 was a very, very low credit score, I became obsessed with ways to establish a much, much higher credit score.
But this is about more than just a number! This is about being able to make your credit cards work for you.
So stop making excuses for your poor money management or lack of credit history. Use this guide as a framework for targeting ways to understand and improve your credit, managing a budget, and eventually getting the most out of credit card benefits.
This post contains affiliate links to help keep this blog running.
To learn more about affiliate links, click here.
Review Your Credit Portfolio
Take the time to review what types of credit you have. Start by checking your free credit reports at http://www.annualcreditreport.com. The three major U.S. credit bureaus (Equifax, Experian, and TransUnion) collect credit histories and create a report. You can get one free report from each bureau every year.
I highly recommend taking advantage of your free report. Once while I was reviewing my credit report, I came across a fraudulent collection bill. I wrote to the collections company with my claim (that I did not owe debt) and within a couple of months the collection was completely removed from my credit history.
Don’t neglect building a great credit report. In the long term, your credit report will hurt or help you in various ways:
- An employer you’re interested in may pull your credit report, and make a hiring decision based on that;
- Having good credit helps you when applying for a loan or refinancing, and you may be able to negotiate a lower interest rate;
- When applying for a rental lease, having good credit shows lessors you are a responsible borrower and can be trusted to make timely payments.
Know Your Credit Score
There are a few ways to have an idea of what your credit score is. Depending on the type of score, credit scores can range anywhere in between 300 to 850. A score below 550 is bad; a score in between 700-749 is good; and a score above 750 is excellent.
Discover offers a free FICO credit score card, even if you’re not a member with them.
This is great because they also explain what factors in to your individual credit score. This way, you can target what you may need to focus on in order to improve your credit score. With a better credit score, lenders will be more likely to work with you in the future.
Other websites like Credit Sesame offer free, year-round credit score estimates. They also advise you of ways to improve your credit score!
Otherwise, I keep track of my credit score from my credit card account with Discover. Discover sends me a free credit report monthly with my statement, and I review this on their app or using their website.
In terms of improving your credit score, it’s important you pay your bills on time, reduce the amount of debt you owe, and establish a solid credit history while at the same time avoiding opening credit cards that will not highly benefit you in the long run.
Once you have an understanding of your credit score, it’s time to start keeping track of your expenses and income.
Keep Track of Your Expenses and Income
I am a huge, huge advocate of You Need a Budget. For far too long, I kept track of my budget using equations in Excel spreadsheets. That became tedious, so I tried experimenting with other ways to track a budget online. I used Mint for a short period of time, but really could not get accustomed with their interface. On a whim I experimented with YNAB’s free trial. From there, there was no turning back. YNAB is efficient, effective, and establishes four rules that just makes sense when it comes to getting in control of your financial situation.
- Give every dollar a job. Every dollar you earn will have a purpose, whether its job will be to buy groceries, pay off student loans or your mortgage, or go into your savings.
- Embrace your true expenses. Okay, you know that feeling when the time of year comes and you have to pay for your car registration? Or your annual membership to Amazon Prime or Costco? Or those quarterly insurance payments? With YNAB, you embrace your true expenses, understanding some of your money will be needed later. For something like an annual subscription, I add a fraction of the subscription cost into my budget every month. Voila! Less stress when that time comes because I’ve already allocated that cost.
- Roll with the punches. I love this rule. Okay, so say those expenses from going out add up to more than you anticipated when you originally designed your budget from that month. Or, maybe you had an unexpected doctor’s visit and the cost was more than what you have saved under medical expenses. Well, review your budget and find categories with extra funds. Use those extra funds to cover any overspending. Just roll with the punches.
- Age your money. A couple of years ago when I first started using YNAB, my coworkers were surprised that I was so calm if my paycheck were to come in a couple days later than anticipated. That’s because instead of living paycheck to paycheck (and believe me, I wasn’t getting paid much), I was spending money I had earned a month ago. For me, the concept of spending money at least 30 days old came naturally. YNAB prepared me to be ready for monthly expenses and even small setbacks.
Once you have a good handle on your expenses and income, you will finally be in the position to start tackling any debt you may have.
Control (and Understand) Your Debt
This should be a no-brainer. But trust me. I have seen the crazy amounts of high-interest debts people can carry.
I am in the middle of paying off my student loans. After graduating, I made my first payment. At that point I learned that most of my payments were going towards interest. This is because due to the type of loan I had, the interest accrued daily. And I had no idea until I made my first payment of $4,000 and saw that over 25% of my payment went towards interest. It was basically over $1,000 I could never use. And that was just the beginning!
Now that I know interest accrues daily, I make a huge effort to snowball my student loan payments. Every time I receive a paycheck, I make a payment towards my student loans.
I have two loans with different interest rates. My strategy is making huge payments towards the bigger loan with the higher interest rate, and simply pay the minimum on the loan with the smaller interest rate. Another good strategy would be refinancing your student loans, like with CommonBond.
I also keep track of interest that accrues over time through YNAB. Being aware of the amount of interest I pay really helps motivate me to be consistent with my payments. I went more into depth about my student loan payments in this article.
If you use a credit card, use your credit card as if it were a debit card. Pay that sucker off in full each cycle.
If you use YNAB to manage your money and spending: accept no reason to charge your card unless you will be able to pay the balance when the bill is due.
If you have credit card debt and low interest loans, prioritize paying off your high interest credit cards first.
There are very few reasons why you should be letting bills accrue 12-24% interest in order to snowball your 3-7% loan. Keep in mind: if you are or plan to be a public servant, you may qualify for the public servant forgiveness program.
If you pay each credit card in full every month, you are owning your credit cards and making them work for you.
Own Your Cards: Make Them Work for You
Once you are in control of your finances (from budgeting to understanding your debt), you can finally look into credit cards that will benefit you.
I would never recommend applying for a credit card unless you can identify a great, even long term, benefit for you. My day-to-day credit cards have no annual fee and offer 1-5% cash back. I use them on most of my regular purchases. So I’m earning money, no matter how small, on purchases I would be making anyway.
I let my cash back rewards stack up until I come across a month where my income is lower than usual, and apply the rewards to my statement. But with certain cards, you can also redeem the cash back in exchange for gift cards at big restaurants or retailers. It’s up to you how you spend these rewards!
While it’s important you don’t start signing up for every credit card offer you see, try to diversify the types of credit cards you have.
One of my favorite cards is my Discover It card. There is no annual fee, they have fantastic customer service, and the web and app interfaces are so easy to use. Discover It offers 1% cash back on every purchase, and 5% cash back on rotating quarterly categories. You can use my link to apply for your very own Discover card! If you do, you’ll get $50 cash back after your first purchase.
Because Discover isn’t accepted everywhere (but most places do accept Discover), I am considering getting the new Amazon Visa. They offer 5% cash back on Amazon purchases to Prime members (otherwise, 3% cash back); 2% cash back at restaurants, gas stations and drug stores; and 1% cash back on everything else.
The only reason I haven’t sprung for a travel credit card yet is because I am not sure my spending on that card will make the annual fees associated with those cards worth it.
If you frequently shop at a store that offers a store card, I would recommend applying for that store card. Normally there are benefits that you can take advantage of as a frequent shopper. For example, Macy’s gives their card members $10 of $30 purchase or $20 off $50 purchase coupons. So you can save while you shop, and at the same time build your credit history. If you are not a frequent shopper at the store, the long term benefits of being a store cardholder are not as great.
But it’s important you apply for these cards with the mindset that they will work for you. It does not make sense to be earning 1% cash back on a card if you are paying 13%-24% interest. Keep in mind the interest does not accrue if you pay your balance in full and on time with each statement.
Be aware of your income. Give each dollar you earn a job. This way you can finally own your financial situation. Navigating the world of personal finance can be confusing as a young adult, but don’t let that be an excuse. Start somewhere. Quit putting it off!
Now, let’s hear from you! What will your first step be? What are your favorite credit cards or best budgeting tips?