The Credit Conundrum
by Brandon Schleter
Think back to your first days on campus when you started college. Do you remember being bombarded by credit card applications during orientation and in your campus mailbox? Did your parents encourage you to open your first card so you could start learning to budget and spend responsibly? Did the idea of your own card simultaneous thrill you and scare you to death?
If you got your first credit card and used it wisely from the get-go, you can stop reading. You are the rarity. But, if you’re like the rest of us, you probably did one of two things. You either resisted getting a card at all because you’d seen your Gen X parents or older siblings get into trouble with credit card debt (or otherwise heard of the evils of credit card companies), or you got a card and spent like it was free money and there was no tomorrow.
Now, you’ve walked across that stage, landed that first great job, and….been turned down for a rental application, or car loan?! This isn’t how it’s supposed to work!
The truth is that no credit can be equally as detrimental as bad credit. Corporate apartment complexes are often hesitant to rent to someone with lacking or lackluster credit, and auto loans or leases can run close to 20 percent in either scenario. The good news is, both can be remedied, especially while you’re still in your early or mid 20s. So if you were that student who used your card on spring break when you weren’t supposed to (we all did, right?), or the one who used a debit card for absolutely everything – no worries. You can still salvage yourself with a steady budget and wise use of credit. Credit cards are not inherently evil. You just have to be smart and careful.
First, if you still don’t have a credit card, get one. Open a low-limit card, use it for set expenditures like gas and groceries, and pay it off every month. Finding one with a decent rewards program helped me stretch that just-out-of-college budget too. And beware – the old advice to open a card and simply not use it may actually work against you in the same way that having no credit can. You’re not showing potential lenders that you can use credit responsibly.
If you have a credit card but need to raise your credit score, try asking for an increase in your credit limit, and then keep your credit usage to 20 percent or less. That is, if your credit limit is $1,000, hold the balance to no more than $200.
If you have bad or no credit, whatever credit card you qualify for will likely come with a high interest rate, so it’s important not to carry a balance. I like to make good use of credit card smartphone apps, check my balances often, and pay them off before the due date. Using the card will show credit companies that there is data to base a credit score off of, and that you are financially sound enough not to use as much credit as possible – and get yourself into trouble.
As you continue to build your credit and learn more about credit and how it affects you, know the difference between hard and soft inquiries. Hard inquiries happen when an institution checks your credit for a lending matter. This happens when you apply for anything from a low-limit credit card to a home mortgage. These inquiries, especially too many too close together, can make you appear desperate for money and in turn lower your credit score. Soft inquiries happen when credit companies send you unsolicited offers or you check your own credit. These don’t affect your score.
Keep in mind too that the days of ordering your credit report through the mail or even waiting a year to check your free report are fast becoming antiquated. Does anyone remember the Free Credit Report band from those old TV commercials from about 10 years ago that tried to scare you with images of living in your parents’ basement, driving beaters and working dead-end jobs? No..? Well, modern online tools and apps such as CreditKarma can help you keep track of your credit easily and without hassle. That way, next time you try to get a new apartment or car, you won’t run into any surprises.
If you read this far, thanks! – Hopefully you found this information helpful, and you’ll pass it along to your friends and other newly hired coworkers. Never keep good information to yourself.