A Crash Course in Credit

Why It Matters & What to Do About It

My feelings towards my credit score are similar to my relationship with my weekly screen time report. While I know the numbers are accurate and reflective of my own behavior, I fear what they say about me. Sound familiar? If so, I suggest you keep reading…

Instead of hiding from this reflection, I encourage you to face it head on. Why? Because a strong credit score can save you hundreds of thousands of dollars over the course of your lifetime.

Yes, that’s multiple Teslas in your garage or trips to Mykonos. Take your pick. In the following four sections, I’ll break it down for you:

1. Credit: Why It Matters
2. What It Is and Where to Find It
3. Credit Scores: The Good, the Bad and the Ugly
4. Ten Tips and Tricks

It might seem daunting, but I promise you’ll be speaking FICO in no time.

Credit: Why It Matters

A credit score impacts far more than your ability to get approved for a Chase Sapphire Reserve and its associated airport lounge access. Your credit score reflects your history of paying back anyone who has loaned you money — think of it as a reference check on your financial foundation. Lenders view your score as a proxy for how likely you are to pay them back, which, in turn, influences how much they will charge you to borrow from them.

But Meera, I don’t want to be in debt! I’m “responsible.” Do I even need credit?

Yes. You do. Your credit score has further-reaching implications than initially meet the eye. Landlords frequently check your credit score before deciding whether to rent to you. Some employers run credit checks to see how trustworthy you might be as an employee, while others reference credit reports before promoting you to an executive position.

Longer term, your credit score can also affect where you live, from your likelihood of a mortgage approval to your actual interest rate. Considering an auto loan? Your credit score, again, will determine whether you qualify for credit and what your interest rate will be. Even insurers, utilities and cell phone providers incorporate your creditworthiness into their decision to accept you as a counterparty. Hopefully I’ve made my case.

Finally, it’s worth noting that having access to credit can make or break your situation in an emergency. Because let’s face it, you should approach your finances as you would a first Hinge date: “hoping for the best and planning for the worst.”

What It Is & Where to Find It

Lenders (banks, credit unions, credit card companies, etc.) report your borrowing behavior to the Big Three credit reporting agencies (Equifax, Experian and TransUnion). Information on your borrowing behavior (e.g., did you pay the amount back in full and on time) is aggregated by these agencies to build credit reports.

Together, these reports are combined to spit out your FICO score, a number ranging from 300 to 850. Just like your Instagram follower count, the higher the better (kidding… kinda).

So, where does your FICO score come from?

It’s derived from a combination of the following variables:

1. Payment history (Have you historically paid on time?) 35%
2. Amounts owed (How much debt do you have, and how much of your available credit are you using?) 30%
3. Length of credit history (How long have you had your accounts open?) 15%
4. How many types of credit in use (How many lines of credit do you have?) 10%
5. Account inquiries (How frequently are you requesting new lines of credit?) 10%

Still sounding like a bit of a mystery? Take a peek behind the curtain. Seriously though — do not fall into the 34% of Americans who never have. You can check your credit score for free using Nerdwallet, Credit Karma or Mint… or just by checking in with your bank. It takes less than five minutes, and it’s one of the most important steps you can take to set yourself up for long-term financial flexibility.

Credit Scores: The Good, the Bad and the Ugly

I’m not here to shame you. That’s not what this series is about. That said, it’s important to understand where you fall (per Experian).

800–850: Dang, gurl. You fineee. Keep doing what you’re doing and you’ll have access to the best rates in the market.

740–800: Looking good. Rest assured that you’ll have access to easy credit, and feel better knowing that time is still on your side.

670–739: Maybe worth a refresh. You’re going to end up paying more than you need to. It’s worth cleaning up your credit to set yourself up for longer-term success.

580–669: We should talk. Prepare to be annoyed by what you’re about to be quoted. The good news? This is fixable, so let’s get to work.

300–579: SOS. Your personal fire alarm should be blaring. Your financial future deserves better (because right now, your options are going to be slim to none). Good thing you’ve joined us for your financial journey!

Ten Tips and Tricks

In order to access credit, you need credit. Even if you’re like me and fear ever being in debt, establishing a credit history is a MUST. Factors like your payment history, amounts owed, and the length of your credit history can all impact your score, both positively and negatively.

So how can you set yourself up for success?

1. Pay off your credit card debt (as soon as possible). Not only is debt expensive, but it can also crush your credit score. Do yourself a favor and rid yourself of all liabilities beyond your student, home and car loans.
2. Pay your bills on time. The name of the game is autopay. You should never (I repeat, NEVER) pay your credit card bill late. Not only will this lead to late fees and fines, but it will also weigh on your credit score. If you accidentally sleep through your payment alarm, it’s worth calling your credit card company to see if they’ll waive things this one time. Your likelihood of success might surprise you.
3. Keep your credit card balances low. We all remember those boozy brunches when every tipsy betch raced to throw in her credit card in hopes of racking up Reserve points. Do not be that girl. Utilizing too high of a percentage of your available credit can hurt you. A good rule of thumb is to target below 30% utilization of your available credit. Sound challenging given your credit limits? Consider paying down your debt twice a month to keep these ratios in check.
4. Do not close unused credit cards. When building credit, it’s all about the long game. You are rewarded for the length of your credit history, but this requires that you keep these accounts open. Just because your standard bank card from 2010 clashes with your classier points cards, don’t throw the baby out with the bath water.
5. Ask for higher credit limits. Your credit score is influenced by the amount of available credit you have, and you’d be surprised how easy it is to call your bank and ask them to increase your credit limits.
6. Take advantage of score-boosting programs. Experian Boost and UltraFICO are two free programs that allow consumers to boost a thin credit profile with other financial information. Never forget — we all have to start somewhere!
7. Become an authorized user. Did you know that listing yourself as an authorized user on someone else’s account can help you ride the coattails of their financial responsibility? I know. WILD. Depending on your relationship, it’s worth asking your parents if they might be open to adding you to some combination of their accounts. Fwiw, I got an “ABSOLUTELY NOT” from my mother when I asked, but hey, it was worth a shot…
8. Limit your “hard” inquiries. Credit agencies ding you based on how often you request access to new credit (like opening new credit cards or filing for loans). While it’s not the end of the world, it’s worth keeping this in mind as you thoughtfully assess when and where it makes sense to establish a credit history.
9. Mix it up. Having different types of credit history (i.e., not just credit cards) can help you. This may be more of a nice to have than a need to have, but it’s worth considering this as you dive deeper into adulthood and explore a wider range of financing alternatives.
10. Dispute any inaccuracies on your credit reports. Check them. Recheck them. And refute them if they’re inaccurate. You are your own best advocate. End of story.

If you’ve read this far, WOW. Looks like you’re truly committed to the cause! I applaud you and appreciate your commitment to this whole financial wellness thing. Trust me, unlike a juice cleanse, you won’t regret it.

Sending health and wealth your way, and see you next month! xx