The New York Times recently reported on a study from the Federal Reserve which found that the percentage of Americans under the age of 35 who are carrying credit card debt is the lowest it’s been since 1989.
This is fantastic news!
Except, there’s just one problem.
The NYT also noted how many millennials are avoiding credit cards altogether. This could seriously damage us if we’re not careful.
How This Can Hurt Us
It’s no secret that I’m team credit card.
I know how to use them responsibly and I’ve gotten many free flights and perks. Most recently I was able to book a roundtrip ticket to Puerto Rico for $79 and I had my fee for my Global Entry application completely covered thanks to a credit card.
They also help me consolidate my bills for easy money management. Additionally, credit cards have certain protections that debit cards don’t. When my wallet was stolen a few years ago, it took months to resolve the issue with my checking account whereas my credit cards accounts were changed and re-issued in two days.
But most of all, using credit cards responsibly is what has allowed me to build excellent credit. This is why I qualify for rewards programs like the Chase Sapphire Reserve. This is why my interest rates are so low. This is why I can call up my credit card company and have them double my credit limit with no issue to improve my credit score. Finally, when the time comes for a big purchase where I have to borrow money (like a mortgage), my credit score is what will help me get lower interest rates as well as a higher chance of approval.
The reality is, when used responsibly, credit cards are pretty awesome. The problem often times is that people are afraid they won’t use them responsibly.
Let’s also be fair, some people really can’t handle having a credit card. If that’s the case, then please stay away. But if you’re a pretty responsible person you should be fine. It’s just a matter of understanding how this all works.
The Basic Premise
So here it is laid out all nice simple for you – you’ve borrowed money that needs to be paid back. The longer you take to pay it back the more the interest will accumulate and the more will end up coming out of your pocket. This affects your credit score which then pretty much affects everything else in your financial life.
Got it? Okay.
So how do you maintain a healthy credit score? Or, better put, how do you not get into trouble? Read on, friends.
Understand what makes up your credit score.
Your credit score is made up of a few different components. According to FICO, the breakdown goes something like this:
Amounts Owed – How much money you owe versus how much available credit you have.
Payment History – How well you’ve used credit in the past. For example, have you paid all your bills in full?
Length of Credit History – Pretty self-explanatory.
Credit Mix – The kinds of available credit you have.
New Credit – How many new accounts you’ve opened.
As you can see, the amount of money you owe and your payment history have the biggest weight on your overall score. This means you should focus on keeping your debt to credit ratio low (common wisdom says don’t use more than 30% of available credit but I’d say keep it to 20%) and pay your bills on time and in full.
Pay on time and in full each and every month.
This is what I do because I was taught to be anal about my credit. I pay my balance in full each and every month. How do I know I’ll be able to pay it off? Because I know exactly what’s going on my cards.
I’m able to know this by finding strategies to manage my freelance income and using free tools like Personal Capital or Mint to keep track of my spending and create bill reminders.
Don’t spend money before you have it.
Credit cards are not free money. Quite the opposite, they’re actually expensive ass loans. That being said, if you want to maintain a healthy credit score it would not be very wise to spend unnecessary money before you have it. Simply put, crap happens.
Maybe your client won’t send a check in time. Maybe a deal fell through so you won’t be getting that commission bonus you were banking on.
Or…
Other unexpected expenses come up. Maybe your car breaks down. Maybe you have to go to the doctor. Maybe those damn traffic cameras caught you doing something stupid and now you have to pay a ticket. All of these cases can cost a pretty penny and take money away from paying your debt.
In all cases of the above cases, it would suck if you racked up your credit because you thought you had money coming in or you didn’t expect to have so much money going out.
What if you already have shaky credit?
“But Amanda,” you say, “I already racked up my credit. What do I do then?”
I’m glad you asked. Here a few ways you can start paying down that debt:
Stop putting stuff on credit
You clearly already have an issue so let’s not exacerbate it.
Find ways to make extra money
Side hustling will allow you to put more money toward paying down your debt. Whether you find a part time job, take on freelancing or decide to babysit, try to find ways to make extra money.
Pay more than the minimum balance
You’ll never get anywhere by only paying the minimum. Try doubling it. Better yet, make it triple.
Make the necessary sacrifices
Take a look at your expenses and see what you can cut. A little bit here and there can go a long way. Start brown bagging your lunch, give up cable TV and cut down on the Starbucks.
You can also negotiate down your bills with a service like Billcutterz. This alone can save you hundreds of dollars you can then put towards paying down your debts.
Make Bi-Weekly Payments
This is a great tip from Carrie over at Careful Cents. In fact, her explanation is so good I’ll just let her take it away:
“Submit half the payments to your lender every two weeks instead of the regular monthly payment. This will accomplish three things
1. Less interest will accumulate, because your payments will be applied more often.
2. You will pay an extra payment, because there are 52 weeks in a year, which equals 26 yearly payments (or one extra).
3. Doing this for the duration of the loan could shave off several months.
Make sure to discuss this with your lender before making bi-weekly payments, because you might be penalized for any extra payments or paying off the loan balance early.”