Credit 101

Fixing bad habits

When I was growing up, there wasn’t a lot of financial teaching opportunities. Credit, building it, and saving money was never really the main topics of dinner discussions. My understanding was to get a job and don’t spend outside of your paycheck. Got it! Sounds simple enough. Until you want to buy ANYTHING outside of your paycheck or salary.

The most important thing I learned was NEVER to get a credit card. What I would learn not six years later is credit cards are the way to travel, save money, and build your credit. Sounds silly, I know, but you must be responsible and follow a few simple rules.

I was 20 when my first car broke, I had to open my door and Flinstone my car in reverse and use Tiptronic to drive no more than 35 miles an hour. In desperate need of a new car, I had a mission with very little savings and a new car on my mind, off to the dealership for the worst car buying experience I would be a part of. Walking away with a car that day with a co-signer was the first step in building my credit. I didn’t have bad credit, I had no credit, and that is just as bad.

In 2020 I finally was approved for my first credit card. In 2019 I applied for a credit card Mitchell suggested and was instantly denied. I cried and expressed my frustration in the process, and how I wasn’t an independent woman because I wasn’t approved, it hit me hard. I learned that my original feeling was a little dramatic, and I really was an independent woman. Being in the “excellent” bracket and still didn’t get approved had me thinking, what kind of crazy hoops did I need to jump through to get a freaking credit card by myself?

Learning how to build credit

I met with a credit specialist, and she laughed at me nicely. She joked that she doesn’t often meet with someone in my credit “bracket” to give advice. She gave me a few pointers, and off I went. After it launched, I finally applied for the Apple Card and was immediately approved with an excellent credit limit! What on that, I got my first independent credit card at 29.

I’ve paid off the Jeep and will soon pay off my Audi and be on the search for a new SUV. Thanks to one child and three large dogs, mom needs a “mom car” now.

Let’s jump into easy ways to build credit and how to stay on track. First, I highly suggest you get honest with yourself and download the Credit Karma app and find out where you are at. Credit Karma breaks down your credit into simple sections to understand the impact on your credit and what you should focus on. I’ve included those sections and a few other tips to start building your credit.

Put everything on your credit card you can

AND pay it off every month. You don’t need to hold a balance, or whatever that craziness is. Credit bureaus want you to utilize less than 10% of your available credit. They don’t care if it’s 3%, 8%, or 10% that’s left at the end of the month. In simple terms, they just want to see that you can “borrow” money and pay it back.

When you make your necessary monthly purchases, groceries, gas, food, payments, etc., those should go on your credit card. Know your budget and what your monthly essentials cost. You are already buying things, and you might as well get points for what you are spending. Many people still pay with debit cards and cash, and you are literally throwing money away by doing that.

DO NOT OVERSPEND

Repeat after me… Do not spend outside of your means and what you make! Just because you have $10,000 of available credit doesn’t mean put something on your card that you cannot pay for. We have an outrageous amount of available credit and do not and will not utilize it. That is how you get into trouble and end up down the unfortunate path of filing for bankruptcy, bad credit, and missed monthly payments.

Emergencies happen, which is what your savings are for, and that’s a conversation of its own.

Low monthly holding balance

The goal is to stay under 10% of your available credit. If you have a credit limit of $10,000, you should not carry more than $1,000 of charges at any given time. Credit card companies often won’t just give you a higher limit, so ask for higher credit limits and don’t use it all. They will usually approve you for a higher limit when you pay on time and do not hold a high balance.

Payment History

Paying on time and not missing a payment is one of the highest impacts. Many people fall prey to the payment due date and forget it. It’s not so much of the missing payment every once in a blue moon. It’s repeatedly missing or late payments that you need to focus on when it goes to a bad mark on your credit. The easiest way to pay it on time is to put a calendar reminder in your phone a few days before, so you never miss a payment.

No red marks

PAY EVERYTHING on time and don’t miss a payment. The point of a credit card is not to spend outside of your means. Now I understand, again, if you need to put something on a credit card in times of need to get you by. Building your savings is an entirely different conversation but needs to be addressed. If you are currently using cash or your debit card, you miss out on accruing points and building your credit.

Age

I struggle with this one! It is a “medium” impact on your score, and it’s the one I am most frustrated over. Because I started so late in the game, my average age is only three years. Now… if you aren’t opening cards the way Mitchell and I do for travel hacking, your age won’t be affected quite the same. As of 2020, we’ve opened six credit cards. It takes the average age of your credit history, and when you have a closed loan account, it does go into the “closed” section and doesn’t count as an open credit for your average. Ask if someone who has a longer credit history if they can add you to their account as an authorized user. p.s. this person should also have good credit and be in good standing or it will negatively affect you. Pick wisely.

Number of accounts

Like many, I was under the impression that the number of accounts you had was bad. That the more you had, the worse your credit would be. Silly me, it was actually the more you had, the better it was. It’s about how you manage the accounts you have open and the credit limit you utilize. Credit bureaus actually suggest a minimum of five accounts between cards and loans.

Inquiries

A credit inquiry is when a company does a hard pull on your credit. When we were looking for my Audi they pulled my credit seven times to find the best rate. Every credit pull is worth a specific amount of points, so it dinged my credit little by little each time they pulled it. That can make or break your ability to get a good interest rate or your ability to get approved at all. Do not pull your credit or apply for cards/loans when you are trying to buy something like a home or car. YOU WILL NOT BE APPROVED if you are right on the fence. It will make or break you.

There is an unspoken competition going on in our house for who has the best credit, and Mitchell always wins, which is beyond frustrating. We joke about it, but I take this silly number seriously and always ask if there are new ways I can improve it.

Credit cards are not bad. Credit cards have given us the ability to save money, accrue points, access to lounges, get approved for our homes, cars, and 16+ credit cards.

It’s a journey and does take a few life changes. It took me around five years to build to the “excellent” level from no credit at all. Now it’s time to maintain and continue beating Mitchell 😉 that’s priority #1.

Priority #2 is helping Sloan understand healthy habits and boundaries around money so that she has a jump start on life and finances.

My current favorite card is the Chase Sapphire Preferred, Chase Freedom Flex, and the American Express Platinum card.

I have shared my referral link for Chase and American Express they do give you a better bonus than you would receive on your own.

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