New to credit, what should I do?

[redwood_canyon]

So i just opened my first credit card. I was approved. And I was curious what is my credit score, so I checked online on credit Karma and it is bad. At least I think it is. Here are the stats:

My Credit age is 5 months since I just took out some student loans (one of which I hope to pay off in 2020 ahead of time)
I only have 3 existing accounts (all loans) it will be 4 with the credit card
And I have only had one hard inquiry on my account from setting up my new card.

My credit score right now is 562, and I am not sure if that is bad or good for me right now. I know it doesn't really matter as I am not buying a house anytime soon or taking out more loans as a second year college student, but its more of a pride thing. How can I best boast my score in the next 6 months to improve my credit score? And what score would you consider good?

About my card I applied for the Schwab Amex investors card, no annual dues, 6 mo 0% apr (not going to even need that), 1.5% back on every purchase, and 16.24% to 19.24% variable apr based on creditworthiness (again not important as I will do automatic bill pay from my checking account and will never let a balance go overdue). And my Credit limit right now is $3000 which is more than I would ever need currently, and quite surprising and scary given my low income. (I can really see how people can go down the credit hell hole so to speak.) I'm great with money as far as college students go and responsible enough to handle my finances. Just looking for input or advice on how to improve my credit.

[diapasoun]

562 is a low credit score, but unless you already have dings on your credit, that's likely due almost entirely to the fact that your credit history is very short. (Really good scores are over 700, 800+ is a truly excellent credit score.)

Imo the best thing you can do right now is just hold tight and be responsible with your credit -- time is on your side here. Pay your CC off every month in full and you've set yourself up for a good result.

If you want to feel more active about it, make yourself a little tracker and check off every month you pay the CC on time.

(For the student loans, what's your interest rate? Depending, you may be better served by saving up an emergency fund or putting your money into a Roth IRA.)

[redwood_canyon]

562 is a low credit score, but unless you already have dings on your credit, that's likely due almost entirely to the fact that your credit history is very short. (Really good scores are over 700, 800+ is a truly excellent credit score.)

Imo the best thing you can do right now is just hold tight and be responsible with your credit -- time is on your side here. Pay your CC off every month in full and you've set yourself up for a good result.

If you want to feel more active about it, make yourself a little tracker and check off every month you pay the CC on time.

(For the student loans, what's your interest rate? Depending, you may be better served by saving up an emergency fund or putting your money into a Roth IRA.)

For the student loans my interest rate is 6.8% for 5k and 9.8% for 2.5k (for this one the percentage is bad, but given the low loan amount and how new it is, it is not doing too much damage) . Overall I am in a place where those loans aren't doing too much damage, but its just annoying to see debt. I have a 1k emergency fund currently half in a high yield savings account 2.25% apy, as well as ~4k in investments. I plan on paying off the 9.8% loan first then the other loan since it is govt with no interest until I graduate. I will keep saving up and focus on saving to be able to pay the loans down asap when I graduate, and have enough for a few months living expenses. I have some goals set and will set up automated monthly savings and investments when I get stable income again in August.

[diapasoun]

redwood_canyon, you've got your head on straight. :)

Given what you just said, it absolutely makes sense to me to put some effort into paying down loans. You have an emergency fund and some investments, which sets you up nicely for some general financial stability, and since that 9.8% is above the average inflation-adjusted S&P return (7%), I'd absolutely work on that first. After that, it's close to a mathematical toss-up for paying off the 6.8% loan or investing long-term; do what gives you the most peace of mind (less debt or more money in the kitty to rely on later if you need to).

Regarding the impact of paying off a student loan on your credit score -- there's a short n' sweet article here that sheds some light on that. Again, though, the biggest thing for you will just be keeping on keeping on and letting time work to your advantage.

[Dicey]

Never let your balance get above about $300 if you can help it, and always pay it in full. In about a year, call and ask them to raise your limit. Keep your purchasing at 10% of the limit, never pay late and your credit will soar in no time.

Curious why you took out such a small loan for such a high interest rate?

[redwood_canyon]

diapasoun, Thank you so much!

As you stated it is definitely a toss up as to invest or pay off that second loan. As for the first I would like to pay it off asap probably next year in the first quarter. As for my plan after that I am not sure what I want to spend and save. For the rest of this year if I save/invest 75/25 I can certainly pay off the 9.8% loan and have a good emergency fund leftover. After that its really a toss up whether to save or invest more, and the big question is what my overall goals are. Saving more could help me with a down payment on a house early on in my 20s or a few months of rent/living expenses, and depending on what my job prospects are upon graduation it may change. However investing more will allow more compounding overtime, and my income post graduation could certainly cover the loans. At the very least having a high interest savings account keeps my savings above inflation and that is where I keep a bulk of my savings. But next year I will have to decide what saving and investment percentages I want to have. And if I choose to focus more on savings I might have to look into starting a CD ladder to maximize my savings returns by a little bit.

Thanks for that link, I'll have to see what happens when I pay that loan off next year! :)

[redwood_canyon]

Dicey,

Thank you for the tips I will follow those. I have set up auto-pay to go straight from my checking account to the credit card. And was annoyed when I found out the fastest auto-pay setting is to pay the balance 15 days after the statement comes out (15 days before the balance is due), but still why cant it be the next day. Called Customer service and I could not get a good answer. Would you know why?

The small loan is a private loan that I needed to fill in my financial needs last semester. It was a discover loan which advertised a low interest dependent on credit, and my mom is the cosigner. (I am not sure the state of her credit, but it probably isn't too hot). Now that I have a job and income this should not be a problem in the future for an amount like that.

[simonsez]

You'll be fine, the hard part is over - you were approved!

With a 3k limit, I'd only use it once a month for a purchase <$50 (buy something that is a necessity) to keep your utilization really low for the first several months.  A little higher after that once established is fine but definitely keep the % low.

You already have it on auto-pay to wipe the balance, so that's good. 

On time payments with low utilization and you'll be golden, just takes time and then you'll have better benefits, limits, etc. all the while having a longer credit history.

[Dicey]

Dicey,

Thank you for the tips I will follow those. I have set up auto-pay to go straight from my checking account to the credit card. And was annoyed when I found out the fastest auto-pay setting is to pay the balance 15 days after the statement comes out (15 days before the balance is due), but still why cant it be the next day. Called Customer service and I could not get a good answer. Would you know why?

The small loan is a private loan that I needed to fill in my financial needs last semester. It was a discover loan which advertised a low interest dependent on credit, and my mom is the cosigner. (I am not sure the state of her credit, but it probably isn't too hot). Now that I have a job and income this should not be a problem in the future for an amount like that.

Lol, we have a credit card that won't pull until something like three days before the bill is due. The CC is from our primary bank, so it's not like they need much time to move the money, but it drives us nuts. As long as you pay the balance in full every month without fail, it does not matter. I don't why your bank does this, but I can assure that the system is rigged to maximize their chances of extracting more money from your pocket. Oh, and please know it is a myth that keeping a running balance will improve your credit score. Pay that motherfucker off every month or do not use it!

Because this is MMM and we're not afraid of using real numbers, I'll give you an example of something that happened just today. These are actual numbers, but I would appreciate if nobody quotes them, please. We bank with a major bank. Oh hell, it's Chase Bank. Why should I protect them?

We have:
1 rental property mortgage with them
1 savings account                 " "
2 checking accounts             " "
3 credit cards                         " "

We also flip houses from time to time, which means we often have huge cash reserves between projects.They are constantly trying to glom onto that money. We finally had to threaten to close all our accounts to get them to stop bugging us to become Private Clients and "invest" with them. Fuck, no! BTW, all of our investments are elsewhere. They have no idea what our net worth is. Anyway, today I checked our account balances on line. There was a $25.00 monthly service charge! When i clicked on it, the explanation was this: "In order to avoid a $25.00 monthy service fee, you must maintain an average balance of $75,000. Last month, your balances averaged $73,200. Therefore, we have levied a $25.00 fee. WTF?

We've had this bank for over five years and have never incurred a fee. We're at the end of a year long flip project, and we've spent most of the budget, so our bank balance is as low as it's ever been since opening our account. The house will go on the market in a couple of weeks. When escrow closes, we will be parking several hundred thousand back in the bank until we do our next project.

I marched into the bank and asked to speak to a manager. I was told I'd have to wait at least ten minutes. I did not react to this gracefully. I gave the teller a super short synopsis and my phone number. I added that I expected the fee to be waived by close of business today. Several hours later, I got a call from the new branch manager. Thank Dog it went to voicemail. He said he would waive the fee, but wants to talk to me about investment opportunities. Fuck, no!

My point in telling this tale is twofold. 1. Every bank everywhere always wants to get into your pocket. 2. This MMM stuff really works. You're doing brilliantly well for your age. Save as much as you can as early as you can. Don't be afraid to start investing right away. Don't keep too much money in cash or CD's, invest it instead. Study the jlcollinsnh stock series. Take out as few student loans as possible. Keep building your credit little by little, there's lots of stuff here about how to do that. Don't buy stupid shit. Don't pay bank fees. Live like a starving student as long as you can. Each of these steps will help carry you to your goals sooner than you ever thought possible. Even if you are never a huge wage earner. Even if you live in a HCOLA. I shared those numbers with you, because following these steps is how we got there, and you will, too.

[redwood_canyon]

Dicey, Thanks for the help!

One would think more financial institutions would be (MMM) no, just FRIENDLY in general. You are bringing them more business than average Joe who is "good" and pays his fees on time, lol. And I don't think they realize that even though that fee is (only) 0.03% of your account, that a fee is a fee and it is annoying. And adds up pretty quick, a years worth of fees at $300! I am done with physical banks for the most part. Here is my set up:

Charles Schwab Brokerage. (my grandma was a lifelong customer and started an account for me last year with $1000 as a graduation gift. She has passed since.)
Charles Schwab Checking (0.4% APY, unlimited ATM rebates (worldwide) each month, no account minimum, no monthly fee, Visa Debit)
Goldman Sachs Marcus High yield savings (no account minimum, no fees, 2.25% APY, FDIC. recently set it up but I am happy so far)
BOA basic savings (a pain, $500 account minimum or fees, takes forever for transfers. ONLY keeping it for ease of cash deposits.)
AMEX Schwab Investors CC (1.5% cash back, in my brokerage acc.)

I think I have my system set at least for the meantime. And as you can probably tell I can't stand fees! :) It will be great to start automated transfers each month from my Checking to Savings and Brokerage. And then automated investments after the transfer to Brokerage. The fact that it will take minutes to set up, be free, and totally hands off with a simple check up once a month is by far the best reward. 

Thank you for all the tips. I bought some stupid shit when I could have only gone for the essentials for less than half the price. I kick myself seeing what the numbers would be currently without that spending, lesson learned! It's also very interesting watching my peers who have been working much longer and harder than me wasting their money away. I am so tempted to slap them with an MMM article. I have my ups and downs, but I try to stick to my younger self working odd jobs $10/hr mindset. ($1 is 6 minutes of my life, that I cannot get back) Laughable, since I make slightly less now. :)

What is your opinion on "Emergency Funds", and savings? Should I cap it at $1000, and focus on investing for now? That is my biggest back in forth, whether I want to start saving now for something like a down payment, or to focus on that when I am closer to that point. I know everything will work out since it is decently early to concern myself with these things. But, what would you have done at 19 knowing what you know now?

Thanks again for your very thorough well written responses.

[GizmoTX]

OP, as long as you are paying those student loan % rates, you are unlikely to come out ahead investing in a taxable account. Kill them as soon as you can.

Your credit score is what it is because of your age, your credit history age, & your loan balance. Time will take care of this, assuming that you ALWAYS: 1) Charge no more than 10% of your credit limit, 2) Pay at least your statement balance every month (full balance is better), and 3) Pay on time every month.

Good for you for registering with Credit Karma. If you haven't done so, now freeze your credit at Equifax, Experion, & Trans Union; this is the single best way to protect yourself from others opening accounts with your identity. You'll have to temporarily thaw your freeze at the appropriate agency whenever you do something that requires a credit check, but this is easy and now free. 

I am not a fan of autopay for variable amounts like CCs. On the surface, it sounds like the sure fire way of on time payments, BUT this assumes that you ALWAYS have the amount due already sitting in your checking account or you will easily rack up expensive insufficient funds charges. I like to put a recurring due date on my digital calendar & delete the current month entry when I schedule a payment. Autopay also encourages you to not look at your transactions -- this is a big mistake. I recommend that you use an app like YNAB (You Need A Budget) or Every Dollar Counts, and use their import function to transfer your CC transactions and check them off into their proper category. Then you can effortlessly see how you are spending at the push of a button, & catch any incorrect charges. A key benefit of these apps is that you should allocate every bit of your income at the front end, and you can easily reallocate your plan in case of emergency.

We're big fans of Schwab accounts and funds. We do automate fixed payments (like rent or utilities) with a second checking account, which is local for the free notary service and for depositing cash, but we never write checks out of it. Since this account is smaller, it's where we link PayPal, Zelle, or Venmo, to limit liability. We set all fixed payments up as recurring bill pay or ACH, and auto transfer or direct deposit the offsetting amount monthly, with a small buffer just in case.

My son opened his first CC at age 17; at age 25 his credit score is 800+. He does all of the above religiously and is debt free. He started his Roth IRA at 16 and has maxed it every year. Now that he's employed, he also maxes his 401K and HSA.

As for an emergency fund, $1000 is a starter amount. You want to eventually build it up to 6 months or so of your expense amount in the event you lose your source of income.