Merging Into Life: Opening a Credit Card

[00:01:15]
Katherine Fan: I’m Katherine Fan, correspondent for credit cards at Business Insider, and that just means I cover all things credit cards. So, when you should get a credit card, if you can get a credit card, what you should do if you shouldn’t use a credit card, anything in that vein, I love talking about it all day, every day.

[00:01:33]
Amanda Greene: So, I’m really excited to dive into this with you. If we could just start at the basics. Can you explain what a credit score is and how that works?

[00:01:44]
Katherine Fan: So very simply put, a credit score is basically a number that the U.S. issuers use to aggregate everything that you are doing with money and assign you a somewhat arbitrary score.

[00:01:59]
Amanda Greene: And why do you need it? How does it affect us?

[00:02:02]
Katherine Fan: So, there’s a lot to be said about credit scores and some people say they’re not the best example of your financial picture, because let’s say you’re an 18-year-old and you earn $10 an hour and you only work 10 hours a week, but if you don’t have any debt you may end up having a higher credit score than someone who gets paid way more, but overdrafts their bank account every single paycheck. So, a credit score essentially allows an issuer, a bank, to quickly assess whether or not you are going to be a financial risk. And this is useful if you want to get a car loan, you want to get a mortgage, even if you want to get a credit card, your credit score is very crucial to determining the types of products you’ll qualify for, the interest rate you’ll receive and several other financially related metrics.

[00:02:52]
Amanda Greene: Do those things you just mentioned, a mortgage, a car payment, a credit card bill, do all of those payments, and I guess extensions of credit in a way, those all determine your credit score and affect your credit score making those payments?

[00:03:06]
Katherine Fan: Yes, absolutely. So, the No. 1 thing you should always know is pay back your debts as quickly as you can consistently, because those payments are tracked, and they typically get reported to one of the three major financial bureaus for consumers. So, if you’ve ever heard of Equifax, TransUnion, or anything like that, Experian, those are the agencies responsible for tracking, “OK, did Amanda pay her bill on time? Did Katherine pay off her credit card statement? If she did, was she late or did she leave an outstanding balance?” Those are all tracked, and they all contribute towards your credit score.

[00:03:44]
Amanda Greene: So you said we need to pay our bills on time to make sure that our credit score is not going down, I guess. What are some other basic principles when it comes to credit scores?

[00:03:53]
Katherine Fan: There are five main buckets of focus that go into your score. So, 35% is your payment history. Again, like we mentioned just now, pay off what you owe, pay it off when it’s due. That is a solid third of what comprises your credit score. Even if you have a massive debt, as long as you’re consistently paying it off, or paying down what you can toward it, that counts for something. As long as you make sure you’re always doing it when it’s due, not 30 days later, not 90 days later, not even a couple days later, that goes a long way toward boosting and maintaining a high credit score. The second one is how much you owe. So, this is 30%, so also a sizable chunk of what comprises your credit score. Obviously if I owe a $ 100, that’s very different from if I owe a $ 100,000, but there are different types of debt as well. Obviously if I have a mortgage, it’s probably going to be somewhere in the six figures, but if I have very high interest credit card debt, even if I only owe a $1,000 or $10,000, if I don’t pay that off consistently, I will end up owing a lot more very quickly. Then the third out of five is the length of your credit history. So, that counts for something that’s 15% of it. And then the last two are 10% apiece. They’re not the biggest deal, but it does factor in a little bit to your credit score.

So, the next one is new credit. If I just got a brand-new credit card, if I just got 10 brand new credit cards, that counts for something as well, because a bank is still going to be like, “Well, is she trustworthy though? Because she only had a $ 10,000 credit limit a few months ago, and now, all of a sudden, she’s got a $50, 000 credit limit.” So, they’ll be a little bit wary if your credit is brand new. And then, finally, your credit mix is the final 10% of that. So, that just means: Do I have a diverse range of debts or financial responsibilities that I’m consistent about? So that might mean a car loan, a home loan and my credit card and maybe student loans. So, it just looks at is all of my debt credit card debt? Because if it’s a 100% credit card debt, that does make me sound a little bit more risky. But if it’s I’m paying down my car responsibly, and I’m paying off student loans, I honestly look like a really good financial candidate.

Good Debt vs. Bad Debt

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Amanda Greene: So, let’s say you pay off your car. Should we be adding another loan or credit card into your credit mix, or just leaving things as they are?

[00:06:17]
Katherine Fan: I think your money should work for you, so only open that line of credit if you need it. Because typically there are financial ramifications of anything you do, even if it’s a credit card and you pay it off all the time, it’s one more space you have to keep track of. So again, only do it if you makes sense for you, and especially if you’re planning on getting a big loan soon, like you want to buy a house in the next year, most experts will tell you try to avoid anything that impacts your credit score at all. So, even if, let’s say, you did pay off that car loan and your score looks like it a dipped a little bit, don’t touch it for a few months, don’t open a new card, don’t do anything, because what you want is for the bank to see your consistent usage. That’s going to get you the best interest rate when you’re applying for a mortgage. So, if you’re ever looking for something where you do want to boost your credit score, the best thing you can do for yourself, pay off as much as you can, pay it consistently and don’t open too many other things at the same time.

[00:07:13]
Amanda Greene: When a person is just starting out, how do you get your first credit card?

[00:07:18]
Katherine Fan: So, I think I got my first credit card, I actually was an authorized user on someone else’s card, so that is still my oldest card, and it’s not even in my personal name, but that’s how a lot of us get started.

[00:07:31]
Amanda Greene: How did that help you build credit? Are you piggybacking off of someone else’s responsible use of a credit card by being an authorized user? Does that help you build credit?

[00:07:43]
Katherine Fan: That’s exactly what that means, Amanda. So, typically someone who’s an authorized user, maybe a child, maybe a partner of the main credit card holder. So, one way people are helping their children build credit now is by adding them as authorized users. So, an authorized user typically has several different forms of access, you can either give an authorized user complete access, let’s say it’s your spouse, and you want to use one credit card for household expenses, but you’re clearly going to be in different places at different times. That’s where you can give an authorized user complete access. They also have an online login. They can see how much money they’ve spent and maybe even see how much you’ve spent on the card. You can also offer limited access, which is probably what you want to give your kid, your teenager if you want to give them a certain allowance to spend every month for school meals or school clothes or whatever, but you don’t want them to just run away and have too much fun with it. And the credit score that you’re essentially going to share is going to be based off of that main credit card holder’s credit score. So, only do this, of course, if you have really good or excellent credit to share. But because I was able to build great credit early on when I added my younger brothers onto my own credit cards as my authorized users, they very quickly were able to get an excellent credit score.

[00:09:03]
Amanda Greene: And that’s not something that can negatively affect your credit, right? Having someone as the authorized user?

[00:09:10]
Katherine Fan: So, it depends. It’s very risky, because you are tying your financial well-being to someone else’s. That being said, let’s say again in the instance where a parent is putting a minor child on their credit card account to help them build credit, you don’t even have to give them the credit card. You can just open it and keep it somewhere safe, locked up in the safe for them. But this one can be risky, because again, if you have poor credit, someone else’s credit can be tanked from the get-go just by being paired with yours. So, be very careful with this option.

[00:09:40]
Amanda Greene: So let’s say this is not an option for you, you don’t have the opportunity to jump onto someone else’s account as an authorized user to build credit. How else could you get good credit if you’re starting with absolutely no credit?

[00:09:53]
Katherine Fan: So, one of the best ways to get started is just start building a relationship with a bank, and credit cards are the easiest way to begin building credit. Sometimes you can’t do that though, you won’t be approved for a credit card if you don’t already have a banking relationship. So making sure you open a bank account, making sure they recognize who you are, what you do with your money, showing a consistent history of responsible usage. Another way that your credit can be impacted by just daily life in general is a lot of times when you pay rent, if you miss payments, those will get reported, you will be marked as someone who is delinquent on their rent payment or skips out on rent, or anything like that. So, you can also check to see if your consistent payments are being reported to the credit bureaus.

[00:10:46]
Amanda Greene: What are some of the things that you think people don’t really know about credit?

[00:10:50]
Katherine Fan: The questions you asked just now are actually really helpful to keep in mind, because people are really different. Some people are super responsible, they can barely get themselves to splurge a little bit on a meal out. Those kinds of people can relax a little bit. On the other hand, I think many of us are prone to the temptation of, “Oh my goodness, I have a credit card. What can I do with it? The possibilities are endless.” Especially if they give you a really nice credit limit. If they give you tens of thousands of dollars at once, it can feel like the heavens just opened up and dumped money on you, but that’s not the case. So, I think it’s super responsible for people to remember that rules are just rules for a reason. You have to understand what you are most likely to do. You need to know your own worst habits and also best traits. So, just because you have a lower credit score than someone else doesn’t mean that you’re any less worthy or successful in your career or good at managing money. It just shows you, “Hey, this is something that you could work on improving, and there are many different ways to getting there.”

[00:11:50]
Amanda Greene: I find it a little confusing and overwhelming that I feel like every time I check out at a store, they’re like, “You’re pre-qualified for a credit card. Would you like to take one out and save x percent?” And I feel like there is just constant offers for credit cards. How do you choose the right one?

[00:12:07]
Katherine Fan: Specifically to credit cards from stores, I will say be really careful of them, because they have some of the highest interest rates across all credit cards in the entire country. Typically, a regular bank credit card may cap out at about 30% APR. Store credit cards consistently go 30, 32, 35, 40%, so always be really careful with those.

[00:12:30]
Amanda Greene: That’s terrifying.

[00:12:31]
Katherine Fan: It is terrifying. And it’s also really hard to remember that you applied for one when you are super excited you just got such a gorgeous outfit, or such a fun deal, it’s really hard to remember. And a lot of times they’re not linked to your typical bank, so if you don’t have auto payments set up, you can get in so much debt so quickly.

[00:12:50]
Amanda Greene: But how do you make the choice of which one or ones to take out? I have a friend who has one that she gets the gift card rewards, and another who specifically does an airline to earn airline miles. Do you have any advice about if you do want to take out one or two cards, how to choose one?

[00:13:08]
Katherine Fan: Absolutely. So, quick plug, I cover all of our credit card guides at Business Insider, but the whole thing that I reiterate over and over in these guides is understand your own financial preferences, lifestyle behaviors, and your foibles as well. So, know if you are pretty prone to just spending recklessly, you probably want a card that will cut you off at a certain point. Maybe you don’t want a very high credit limit, maybe don’t even apply for a credit card. But if you are a pretty responsible person and you would like to get a little bit back in exchange for the money you would spend anyway, I typically suggest, if you want to keep it simple, just get one credit card that you can use for everything. It won’t always get you the very best discount of everything, but it will consistently reward you for every dollar you spend. There are some flat-rate cash-back cards that get you a consistent 2% back on every dollar you spend. If you’re willing to put in a little bit more work, some credit cards give you 5% back on categories that change every quarter, so every three months. So, it’s a little bit of a game. If that’s something you enjoy doing some of those cards may be a good fit. Or, if you really like traveling, I highly recommend travel rewards credit cards, because not only do you get points back for traveling, but the benefits can make or break your trip.

[00:14:35]
Amanda Greene: What is the rule of thumb between usage and credit available? Should you only be using 25% of what’s available to you to keep your credit right?

[00:14:46]
Katherine Fan: Yes, there is a rule of thumb, but the honest answer is as little as possible. I would say you’re probably in a very good range if you can use 10% of your available credit. So again, that’s called your utilization ratio. So, if you keep that one to 10, that’s very, very good. But I would say, for most people, let’s say you only have a few thousand dollars credit limit, it’s totally fine to be anywhere in the 10 to 30% at any given time. Again, remember, the most important part is that only spend what you can pay off in full every single month. So, if that’s what you’re doing, it doesn’t really matter that much if you’re overreaching that utilization ratio in between. It’s ideal to maintain that 30% or less benchmark, but it’s totally okay if especially you’re buying new furniture or you have a new tuition expense or something, if it goes up for a while. Again, that consistency makes all the difference. So, if it’s only this one time this month that you went to 60 or 80 or 90%, you’re OK. If you find yourself consistently going over, even when you pay off everything in full every single month, it might be a good time to ask your bank if you can get a credit limit increase.

[00:15:59]
Amanda Greene: So, let’s say you get that credit card, what are the basic rules of engagement to take with you and apply?

[00:16:05]
Katherine Fan: Ooh, I like to automatically set up auto pay on my credit card so that at the bare minimum, the minimum amount required, gets auto drafted out of my bank account the day my statement closes. So, typically you have a few weeks between when your statement closes and when you actually need to pay that dollar amount. I pay it the moment it closes, and that just helps me remember at a bare minimum, even if for some weird reason I totally forget to pay off the rest of my card, I won’t show a missed payment. It will at least show that I paid the $25, $100 dollars that was required for the minimum payment to show that I tried. The second one is I set up a bunch of calendar alerts for myself. I remind myself when my credit card renews every year. Not a big deal if you have a lot of no annual fee credit cards, it is a big deal if you have a card that charges $95 a year, all the way up to $550, $695 a year, it’s super important to make sure you know when that next annual fee is coming up so it doesn’t catch you completely off guard.

[00:17:13]
Amanda Greene: Let’s wrap things up with a round of rapid fire questions. How many credit cards should a person have?

[00:17:18]
Katherine Fan: Ooh, as many as you can responsibly manage.

[00:17:21]
Amanda Greene: If you have to miss a bill payment, which one should you choose to miss for the month?

[00:17:27]
Katherine Fan: You should always pay at least the minimum if possible on all of them. So, even if you cannot pay all of them off, put a little bit on each one of them. And if you absolutely, absolutely have to miss one, call your bank and explain what happened. At least have a record that you tried.

[00:17:41]
Amanda Greene: OK. That’s such an adulting thing to have to call places and talk about things. It’s true. What is the most important credit card perk to you?

[00:17:51]
Katherine Fan: I really value travel benefits. We fly to Asia pretty often, so that saves us thousands of dollars every trip.

[00:17:58]
Amanda Greene: Wow. What is the most a person should pay for a credit card?

[00:18:02]
Katherine Fan: You should pay what you personally are comfortable with. Make sure that the card that you’re getting offers enough benefits to offset what you’re paying and quite a bit more.

[00:18:11]
Amanda Greene: What’s the most expensive credit card you’ve ever heard of?

[00:18:14]
Katherine Fan: There’s a very well-known card that is invite only, it has a $ 5,000 initiation fee, and you have to pay thousands of dollars every year just to keep it, and it only earns 1 point per dollar, so it’s totally one of those bragging rights cards.

[00:18:28]
Amanda Greene: Is that the metal one? Is it pretty heavy?

[00:18:31]
Katherine Fan: It is pretty heavy.

[00:18:31]
Amanda Greene: But there are a bunch of metal cards. So, I waitressed in college, and I remember this one family would come in with a very heavy metal card, and I thought, “This feels very fancy.” But again, I’m 19, I have no idea what I’m holding in my hand, but I’m like, “I think you guys might be really-“

[00:18:48]
Katherine Fan: You might be fancy. No, there are a lot of metal cards now, because people love that vibe.

[00:18:55]
Amanda Greene: Thank you so much for coming on with us and sharing everything that you know and shedding some light on a topic that can be a little overwhelming. And the more we talk about things, the better we can do with managing it all. So, thank you for coming on and sharing.

[00:19:08]
Katherine Fan: Thank you so much for having me.

[00:19:11]
Amanda Greene: So friends, a credit card can be a powerful tool to show that you’re financially responsible. It tells a story about you. Whether you’re using a credit card to build credit, earn rewards, or manage expenses, the key is knowing your terms, making payments on time and using your card wisely.

[00:19:29]
Amanda’s Daughter: Mommy, can I buy this candy, I have a dollar?

[00:19:33]
Amanda Greene: You have a dollar with you?

[00:19:34]
Amanda’s Daughter: Yeah.

[00:19:35]
Amanda Greene: Sure. You can buy it with your cash.

[00:19:37]
Amanda’s Daughter: Oh, yay.

[00:19:38]
Amanda Greene: Happy responsible spending. You’ve been listening to Merging Into Life where we navigate life’s milestones, one episode at a time, brought to you by AAA Northeast with assistance from Jar Audio. I’m your host, Amanda Green. We would love to hear what you think. Your feedback really matters to us. So, if you have any ideas for an episode or you just want to say “hi,” please leave a review wherever you listen, or email us at podcast@aaanortheast.com. The views and opinions expressed in this podcast do not constitute financial advice and are not necessarily the views of AAA Northeast, AAA and or its affiliates.