More than likely, you grew up watching millennials struggle with mountains of debt that ranged from student loans to credit card bills with five digits. You also saw how this debt landslide impacted the ability for millennials to jump start their lives and careers after college. That’s enough to scare almost anyone from thinking about debt in a positive light, but the opposite is true – as long as it’s in moderation.
The fact is, debt makes the world turn and you’ll need to use it to your benefit at some point in your life. So, here are 5 lifehacks to make debt and credit work in your favor and not become a weight dragging you down.
1) Understand What Your Credit Score Is and What It Isn’t
Your credit score is a number that comes out of your credit report and it gives an approximate idea of how reliable you are with debt. Almost anytime you take on debt or enter into a contract where you agree to pay someone a fixed amount over time (like renting an apartment), your credit score will be taken into consideration. It tells the lender how much risk there is in loaning you money or letting you borrow something. Because of that, your credit score can also impact your interest rate. Low credit score? Prepare for a higher interest rate because it’s meant to offset the risk of loaning out money.
It's also important to note what a credit score is not. It’s not an indication of who you are as a person. In fact, it’d be foolish to give individuals numerical values that sum up who they are. That time you were delinquent on a credit card bill because you had to take care of a family member? Your credit score doesn’t care. Your credit score also isn’t a static number. In fact, it can change every month by going up or going down.
Here’s the big tip though: your credit score takes time to build up, like a long time. Which leads us to the next lifehack…
2) Start Building Good Credit Early
While everyone should be careful and cautious when it comes to debt, you’d be doing yourself a disservice if you don’t start building good credit early in life. Because your credit score takes a long time to slowly build up (consider it like building trust), you need to start soon rather than later.
A simple way of doing this is by getting a credit card with a low credit limit (the max amount you can charge to it) and using it for small and routine purchases like paying buying groceries or gas. You likely already budget for these expenses every month. Make sure you also pay off your credit card bill on time each month.
3) Find the Best Credit Card Perks for You
Nearly every credit card nowadays wants to attract customers and keep them happy, and they do this by offering a variety of perks whether they be airline miles, cash back bonuses, or rewards points to use for other things.
When selecting a credit card to use, make sure you’re looking for the best perks for you. As a college student, accumulating airline miles could help you travel for a semester aboard. Maybe instead you’d like a cash back perk, which means you get a certain percentage back on select purchases like gas stations or restaurants.
No matter what you decide, it’s important to shop around and make sure that your card works for you.
4) Know The Difference Between Hard and Soft Inquiries
Every credit report is made up of a few key sections, and one of those covers inquiries on your credit. It’s divided between “hard” and “soft” inquiries. If you go to a car dealership and decide to finance a new car, the dealership is going to make a “hard” inquiry. It basically means they accessed your credit report/score to begin the finance process. On the other hand, a “soft” inquiry is one where a company took a peek at your credit score to send you a pre-approval letter or you accessed your credit report yourself.
Why do these differences matter? Because “hard” inquiries will stay on your credit report. It’s like a record of how often you actively sought out credit to borrow and the more you have, the more your credit score may drop. Avoid this by ensuring you’re only seeking financing when you’re really ready to purchase or you’re only applying for a new credit card that you need.
5) Be Responsible but Don’t Be Afraid
There is a belief that all debt is bad. The reality is that bad debt only exists when it starts working against you. Every business runs off debt. If you grew up in a home, then the house was likely purchased with a mortgage. If your family drove a car then the car was likely financed or leased. Personal debt is not necessarily a bad thing, until it is and that usually comes because of not being responsible about it. Instead of being fearful of debt, learn how to use it as a tool for your success and to your advantage.