A strong credit score, along with impressive credit history, is not just something that earns you bragging rights. It can literally mean more dollars in your bank account. Having a good credit score helps you get a better interest rate when you want to get a loan for a car, or a home, or just about anything. But, even then, a great credit score can only get you so far if you have almost no credit history. Lenders want to see that you’ve been able to responsibly manage loans for many years. If you don’t have that nice combination of a good score and a good portfolio, it can cost you. You’re seen as more of a risk to lenders, so before they hand you over a loan (if they even decide to do so), they’re going to ask you to agree to a higher interest rate, which means you pay more for your money. Nobody wants that.
We aren’t just born with credit, obviously. It’d be nice if we were! But we have to build it, protect it, and we have to start somewhere. So, where do you start? My poor husband naively just applied to and got rejected for seven credit cards, eager to get some plastic in his hand and build his credit. Little did he know that the application binge dinged his credit. Nobody told him it would. Nobody tells any of us much about how credit works, which can lead to some unsuspecting individuals like my husband harming their credit through the very actions they thought would help it. In order to gain some clarity on how to properly build and maintain great credit, we turned to award-winning financial educator Sharita Humphrey. She was once staring down a credit score in the 300s, and managed to work it up to the 800s, through several strategic moves. One big one was using Self Financial (which we’ll get into in detail later).
Watch your utilization
“We are so score focused, that we’re not understanding Fico is about all of the profile and one of them is utilization,” Humphrey says. People are often under-educated or misinformed about proper utilization because there’s so much information swirling around. “It gets people into trouble very quickly. Thirty percent is the standard on utilization, but you have to educate people on how to leverage it,” she says. “Utilization and money management go hand in hand. The times you’re overextending yourself on your credit, you’re setting yourself up for the financial hamster wheel. It’s hard to get off when you go over 50 percent or max out your credit card. If you’re not knowledgeable on utilization, and not managing your money, it can start a downward spiral to financial destruction.”
Avoid shiny object syndrome
Humphrey mentions those solicitations you might get in the mail that seem pretty enticing, like “Spend $3,000 in the first 90 days and get $500 cashback!” Or, what about the times you already have a card, and they keep increasing your limit? Humphrey says many people just think, “Well, the money is there, so I’ll use it!” Not a good idea. “A lot of people, when asked, say ‘I had no idea how I got onto this hamster wheel! I was just paying off the minimum balance,’” she says. Whether it’s utilizing that new high limit offered, or taking a company up on an offer for a new card, hoping to earn cash back or points after spending a certain amount, she says people often don’t have a plan on how they’ll pay that off. They don’t think about how those new habits fit in with their real budgets.
Study first, sign up later
Humphrey cannot emphasize the importance of understanding credit cards – and credit in general – before signing up for anything. “Self’s website is big on credit education and financial literacy. You can learn about what card to start with, or what your next card should be,” she says. Self Financial can also help you get your first card, without a hard inquiry on your credit report (which can harm it). They do this by first having users set up an account for a Self Credit Builder Account. This is an installment loan, on which users make regular payments while earning money because the account earns interest. They establish good payment history through the account, which is reported to all the credit bureaus, and then, they can qualify for the Self Visa Card. Essentially, the Credit Builder Account lets someone build credit history while saving money – rather than just spending it.
Speaking of finding the right card…
We asked Humphrey the question on many people’s minds: how many credit cards is too many? “That depends on who you’re talking to. I’m one of those people who, I feel like three to four credit cards is pretty much where you want to be,” she says. “But I see the average household has six to eight credit cards.” She brought up the 100 credit card challenge going around on social media right now. It’s what it sounds like: people are trying to see if they can get 100 credit cards. Don’t do this. “Everybody likes challenges,” she says. “It saddened me that so many people were trying to get to this crazy number of credit cards. You don’t need to follow the masses. Just make sure that you’re doing things that are going to be in alignment with your credit goals.”
What should you look for in your cards?
Since Humphrey mentioned three or four cards as a good amount to aim for, we asked her what to look for in each one.
“Look for low APRs and look for ones that do cash back,” she says. She also suggests leveraging your cash back – “pay yourself first” as she puts it – by either using it to pay down your debt or putting it in your savings. “If you’re a traveler, get a good travel card. As the outside begins to open back up, people will want to get back out there. Make sure it [the card] matches your needs and desires,” she says. “If you have no credit or are rebuilding credit, make sure you have the Self [Financial] credit card in your wallet. It helps you get into the habit of managing money.”
Getting a little help from friends
We asked Humphrey what some possible moves are for someone who is really struggling to qualify for cards on their own. She talked about having someone you know and trust – like a family member or spouse – add you as an authorized user to their account. But, as a word to the wise for those who have the account, she says “If you’re going to add an authorized user, make sure the authorized user has positive money behaviors. If not, you’re ultimately responsible for what that person spends on the card. If it’s not your spouse or someone close to you that you want to help, you don’t have to give them the card. You can help them build a positive profile, without giving them the credit card.” Meaning, you can add them as a user, but not issue them a physical card, so their credit profile will benefit from your positive spending habits, and they won’t actually be able to use the card.
Good vs bad debt
You may have heard of good versus bad debt. Maybe the term surprised you because, we ultimately associate the word “debt” with negative things, like lacking or owing. The word debt can come with shame and associations of not being able to afford something. However, that’s not what debt is always about. When you can borrow money that you turn into more money, you are moving into the direction of good debt. Naturally, you’ll want to consult an expert in the specific area (like a restaurateur if taking out money to open a restaurant), but that’s the overall nature of good debt: it will help you earn more than you borrowed.
What is good debt?
“Getting an education with student loans” is something Humphrey considers good debt. Admittedly, not everyone sees that as good debt and there are concerns about whether or not someone will turn that education into a profit. “I know the economy is in trillions of dollars of debt with student loans,” she says, “but that is one that is good. It gave you something. But it’s a catch 22. You need to monitor what you’re getting. Same with homeownership. Everyone wants to own something. Homeownership is good debt as you can ultimately gain equity. Choose things you can leverage or benefit from.”
What is bad debt?
Auto loans, says Humphrey, can be bad debt. “The standard [repayment period] is up to 72 months on a depreciating asset. People are looking at what they can afford monthly and not understanding the terms of what they’re paying for because you often pay two to three times what the vehicle is worth,” she says. “I’m an advocate of getting into something where you can pay it off in under 48 months, 36 months if possible. Bad debt is also taking on too much credit. If you take on too much, you’re apt to spend more. You treat it like an emergency fund, instead of having savings in place. You look at credit cards as your safety net.”
It’s a lifestyle, not a diet
That’s a mental shift many who have successfully lost weight made: the understanding that fixing things isn’t about short-term, drastic measures, but rather a new lifestyle that’s there to stay. The same should be said for fixing or building credit. “The reason I am here is that I know what it’s like to lose everything. I hit rock bottom with everything. You can rebuild,” Humphrey says. “Nobody expected COVID to happen. If your finances took a dip, you can get back into it. Budget. Commit to saving. Commit to utilizing tools like Self Financial if your credit took a dip or you don’t have any.” Humphrey didn’t use any credit repair services to go from her score in the 300s to her current score in the 800s. She just used financial education. But she says you need to know it will take time, because getting into a bad spot didn’t happen overnight, either. “It didn’t take me six months to get into the financial destruction path. I knew it wouldn’t be a quick fix. To get an excellent credit score that stays, you need a shift in mindset.”