Tuesday, March 21, 2017

How to Save Money and Build Credit

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Hello, beautiful! Today on the blog, I'm kicking off my new Adulting 101 series with a topic I've been wanting to cover for awhile now. For some, it's daunting; for others, simply boring. However, no matter what way you spin it, this topic is an important (not to mention unavoidable!) one.

What is it, you may ask? Personal finance, of course! I know, I know: finance is nobody's favorite topic, unless it happens to be your major or you're especially proud of yourself for sticking to your budget this month. But before you groan and click away, just hear me out!

Lately, I've been trying to learn as much as I can about personal finance so I can prepare for my future. As I've mentioned, I want to go to law school after college. Ryan and I are also (tentatively) planning a few trips for our future, so I'm trying to do whatever I can now to prepare for these big financial decisions in my life!

As a result, it's been important for me to start thinking about how I can save money in my day-to-day life. Beyond that, I've also been trying to take the first steps toward building a credit history, to make it easier for me to take out loans for grad school once I graduate. In fact, I just found out I was approved for my first ever credit card - so yay, one happy dance for me!

On paper, these goals seemed perfectly reasonable. I would open a second savings account, start putting away money for Europe and get a credit card to help me build credit for grad school. The problem was, even after some introductory reading, I quickly found myself more than a little confused as to how to do all of that!

Many millennials probably feel the same confusion that I do when it comes to finance. Most of us are responsible and motivated to take care of our finances, but we weren't given much information about it growing up.  I mean, there certainly weren't any classes on personal finance at the public high school I attended. If we were lucky, our parents might have taken us to open our first bank accounts and showed us how to cash a check, but even for those small things, many of us were on our own. On top of that, we're constantly given conflicting advice - for example, do we apply for a credit card or avoid them like the devil? Open a 401k now or five years down the line? What even is a 401k? Decisions, decisions!

As a busy college student, many of us are motivated to learn more about money, but don't necessarily have the time to sit down and pore through endless books and websites for hours on end. Thankfully, I've done all the research so you don't have to! Granted, I'm no expert - I don't claim to know everything, or even most things about finance - but today, I've rounded up the basics so you can start saving money and building credit ASAP. So, without further ado, here's everything you need to know:

Part I: Your Credit Score

If you've ever watched TV before, you've probably seen one of those cliche commercials for a service to check your credit score...and, if you're anything like me, you probably wondered for the first 17 or 18 years of your life what the heck a credit score was in the first place! 

In this section, I'll explain the basics of what a credit score actually is, what all those numbers mean and how they break down. Once we learn how a credit score breaks down, we then have the foundation we need to talk about building strong credit and raising your score!

What's a credit score?

First thing's first: what is a credit score? And why does it matter? 

Your credit score is a three-digit number generated from the information in your credit report. Your credit report contains a whole slew of financial information, from the credit cards you have open to the loans you're responsible for. 

Most credit scores range from around 300 to 800-900 points. Keeping a high credit score is absolutely essential to maintaining financial independence, as it affects whether or not you're likely to be approved for things like loans, credit cards, etc. In general, the higher your credit score, the better your financial prospects! 

If you're like most college students, you probably don't have much of a credit score to speak of right now. Unless you went out and opened a credit card the minute you turned eighteen (or your name happens to be the one on your parents' student loans), your credit history is probably zilch. However, if you already have a credit history, you can check your credit score using a number of free sites - Cafe Credit has a great list on its website!

Theoretically, it would make sense to say that the bank can't make assumptions about you if you have no credit history - not the case. Unfortunately, no credit history means no credit score at all, which is sometimes just as bad as a low credit score when you're looking to take out a hefty loan.

That's why we say that someone who's never had a credit card or taken out a loan before is building credit - which is exactly what you need to start doing now if you want to ensure the best financial future for yourself after graduation. Building strong credit early on will help show banks that you're responsible, improving your chances of approval for loans, credit cards and even mortgages later in life.

How it breaks down

Because that three-digit score determines so much about your financial life, many millennials wonder how they can establish or raise their credit score. When it comes to building or improving your credit, it helps to look at how your credit score is determined by the ratings agency.

In general, your credit score breaks down to a number of individual factors. Combined, these factors determine the three-digit score that summarizes your creditworthiness for banks and lenders.

For starters, around 35 percent of your credit score is based solely off of making your payments on time! In other words, the majority of your credit score results from whether or not you pay your bills by the assigned due date every month. So, naturally, it follows that the easiest way to raise your credit score is to ensure you're making your monthly payments in a timely manner, and that whenever you have a late payment, you pay off your balance as soon as possible!

The next 30 percent of your credit score comes from what you owe. If you owe a lot of money on several credit cards or loans, chances are your credit score won't seem too hot. Alternatively, if you keep your debt at a minimum and always make your payments on time, your score should remain high.

15 percent of your credit score is determined by how long your accounts have been open. The longer your accounts have been open, the more points you add to your credit score. So, simply having a credit history - opening that first credit card or repaying that small loan - will improve your score.

10 percent of your score has to do with the various types of credit you possess. From loans to credit cards, the more diverse your credit, the better off you'll be in the long run. However, this does NOT mean you should rush to open thirty credit cards at once - diversifying is a marathon, not a sprint! Not only can opening several accounts at once damage your credit score, but taking on more credit than you can handle is a surefire way to acquire mountains of debt and dock tons of points from your score.

Finally, that last 10 percent of your credit score comes from new credit. Anytime you open a new account, your credit score takes a small hit for about a year - but as soon as that year passes, your credit score should bounce back in no time! That hit is precisely why you should never open multiple accounts at once, but spread your credit out over time.

People with the best credit scores perform the best in all of these categories. However, just because you have fewer points in one area - for example, you just opened a new credit card, or haven't established a lengthy credit history - doesn't mean you can't improve in another realm, such as making timely payments and diversifying your credit over time.

Part II: How to Build Credit

Now that you understand what your credit score means, you've probably gleaned a few important ways to keep your credit score high - making your payments on time, for example, or not opening ten credit cards at once. However, what do you do when your credit score isn't high or low, but simply doesn't exist?

If you're a college student who doesn't have a credit card and whose name isn't on your student loans (i.e. your parents took them out for you), you probably don't have much of a credit history to speak of. No credit history = no credit score = no bueno for trying to apply for credit cards and car loans later in life. So, it's important to start building strong credit now to prepare for your future! Here are three simple ways to get started ASAP:

Credit cards

Your parents might have told you that a credit card is a symbol of impending debt - but in reality, a credit card is one of the easiest ways to build credit as a beginner, as long as you use it responsibly. If you treat a credit card like plastic cash, of course you'll go into debt! But, if you make your payments on time and don't spend more than you can afford, your credit score will skyrocket as a reward.

As a college student, you have the benefit of choosing from a number of credit cards designed specifically for students. Companies like Discover, Capitol One and Citi Bank all offer student credit cards. These cards require you to prove your enrollment as a full-time student at a university, but offer lower credit limits and easier approval than other credit cards. 

Look for one with a $0 annual fee and a low starting interest rate - for example, my Discover student credit card offers a 0% interest rate for the first six months, then sets an interest rate based on the timeliness of your payments! 

Once you've applied for and been approved for your first credit card, it's essential to use your credit card at least once every month, and keep track of how much you're spending. While you don't want to spend too much, your credit report will show whether or not you used your credit card in a given month, so you want to make sure you're using your card fairly consistently. Find a balance between saving money and using your card so you can build credit without going broke!

When you've had your card for at least a year and have been making your payments on time, some companies will allow you to call and ask for a credit limit increase, essentially awarding you more credit as a reward for being "good." This reward will show on your credit report, and can be used to boost your credit score! 

Finally, and perhaps most importantly, you should NEVER cancel a credit card! Cancelling a credit card can cause your credit score to plummet. Instead of cancelling, opt not to use your card that month. No purchases = no payments, no interest and no debt.


Credit-builder loans are designed especially for people just like you -beginners trying to build credit for the first time! These loans can help you build your credit score without requiring good credit to apply, and you'll generally find them at small financial institutions like your local community bank.

With a credit-builder loan, there's just one catch: you won't receive the money you borrowed until the loan is paid off in full. Assuming you make your payments on time, you'll receive the money as promised, and your credit score will get a nice boost.

If not, the bank will be forced to send a negative report of you to the credit bureau, and your credit score may take a hit. That's why, just as with any credit card or other form of credit, it's absolutely critical to make your payments on time!

Other kinds of loans that can be used to build credit include secure installment loans. These loans are given by your primary financial institution and backed by a deposit you already hold at that bank. Until the loan is paid off, that amount of money will be frozen - but once you pay it off, it's yours once again!

There's also online lenders like Self Lender, a site specifically designed to help you build your credit. Self Lender offers a special Credit Builder Account that allows you to repay a small loan over the course of a year. At the end of that 12-month term, you've paid off your loan and proven to the credit bureaus that you have a history of timely payments! So, as long as you pay off your loan on time, it's a win-win for everyone.

Lines of credit

Finally, lines of credit (LOCs) are another way to build your credit score when you don't have any credit history to speak of. Though I chose the credit card route, Ryan uses one to build his credit score, and he constantly raves about it.

Basically, an LOC is a cross between a loan and a credit card. With an LOC, the borrower requests a certain amount of credit, similar to a credit limit on the credit card; however, they are not required to spend the entire thing - only as much as they need or want.

The loan can be accessed incrementally, via either check or electronic transfer. Like a credit card, you only pay interest on the amount you have spent, not on your entire credit limit. Then, once the borrower repays what he or she has spent, the credit then becomes available again in a never-ending cycle!

Sometimes, banks offer something called a demand LOC. With this type of LOC, the lender can call the full amount of the loan due at any given time. So, the borrower can either make small, monthly payments or wait to pay off the LOC until the lender calls it due.

Most lines of credit require something called a prime credit score, a number in the 680-800 range. So, they might not be suitable for all students who are just starting out in building their credit scores! Rather, an LOC might be used as a stepping stone toward getting better credit once you've already established a credit score.

Part III: Saving Money

Perhaps the most important topic in personal finance, saving money is just as important - if not more important - as making it. If you don't have money in the bank, you won't have anything to pay off those new credit card bills with. Debt becomes inevitable. 

In this section, I'm not talking about getting a part time job or how to slash costs from your budget. When it comes to making and saving money, you have to figure out what works for your life. Instead, I'll be giving you less obvious strategies for budgeting, keeping track of your spending, hustling and more! 

Starting a monthly budget

The easiest way to assess where you're spending money and figure out ways to slash that spending is to stick to a monthly budget. Nowadays, there are many ways you can create a budget for yourself. Whether you go the old-fashioned route with a notebook or Microsoft Excel, or download one of many novel new financial apps, establishing a budget will help you save money in the long run.

Personally, I use the Mint app to keep track of where my money goes. Mint is a secure app made by the same people who made TurboTax. It allows you to directly link your checking and savings accounts and monitor your spending, plus create a budget based on categorical limits and assess how well you're following it. Plus, it's completely free to use! 

Once you download Mint, my recommendation would be to start with a trial month. By that I mean, go through one month spending like you normally would without a budget. Mint will categorize your spending for you - then, at the end of the month, you can assess where your spending needs a little work! 

See where you can cut costs, then create a budget based around what you're already spending. If you create a budget that's already fine-tuned to your distinct needs, you'll be more apt to follow it instead of going over your limits.

In case you're the kind of person who needs more structure than that, I'm also big fan of this rule followed by my fave leading woman, Sen. Elizabeth Warren! She's a proponent of the 50/30/20 rule, where 50% of your money is spent on necessities, 30% on personal wants and 20% on savings. If you're new to personal finance, this rule is one of the easiest ways to simplify your budget.

Finally, I also want to share with you this tip from one of my favorite personal finance blogs (that's right, y'all - I read finance blogs sometimes...but only when they're pretty and pink), From Pennies to Pounds! Francesca advocates for something called a net zero budget. In other words, she argues that you should allocate every last dollar you make toward something that can benefit you, whether it's saving or spending! Check out more in her post about it here.

Keep close track of your spending

Ideally, you should always know exactly where every last dollar of your money goes. It's the wisdom behind every rule in budgeting, whether you're a 50/30/20 kinda girl or more of a zero sum gal yourself. 

There's lots of reasons why you should keep close track of your spending. For starters, you want to monitor your spending activity to make sure that no suspicious characters have stolen your card number. You also want to make sure you're not spending more money than you're taking in, whether it's on one too many Chipotle burrito bowls or so-called "quick runs to Target" (trust me, we've all been there before). 

As I mentioned previously, the Mint app is a great way to collect all of that information in one place. You can link all of your bank accounts, both checking and savings, to one app, and it will automatically categorize your spending for you. With one glance, you'll be able to tell how much money is flowing in, how much is flowing out and where it's going, all in one convenient place!

When it comes to making sure your identity is protected, enabling alerts with your mobile banking app is a great way to keep track of any suspicious spending. Whenever your bank notices a risky transaction, it will give you a push notification on your phone, so you'll never be in the dark about what's going on with your money.

Looking at your bank statements every month is also super important. Even if you just give it a quick-once over, you need to make sure every purchase checks out. If something on your bank statement doesn't look familiar to you, that's an instant red alert that your card number may have been compromised.

Personally, I would advise ditching the paper bank statements and going completely digital. Don't get me wrong, I love paper - but cutting out the clutter of having to file away my bank statements every month really helped me get organized with my finances. So, instead of putting my statements in my file box, I now have a separate folder in my Gmail inbox dedicated solely to financial stuff!

And, speaking of going digital, I may have mentioned that I'm a huge fan of apps for keeping track of your financial info. That being said, I'd like to give a shout out to my absolute FAVORITE money app out there: Venmo!

Venmo is a college essential nowadays. With Venmo, you can easily send your friends money and receive money they owe you in return, all through this secure system. It's also fun to use and lets you see who's transferring money to who - it's almost like Twitter for finances!

When a friend owes me money, I'm often hesitant to call them out - but when you don't follow up over and over again, those dollars start to add up. Luckily, Venmo makes it easy to request money from a friend and for your friends to pay you back at the touch of the button. So, you have no excuse not to collect what's rightfully yours anymore!

And, lastly, my last tip for managing your money and keeping track of your spending is to avoid automatic payments whenever possible! What I mean is if you're like me and you're not a person who has a ton of money in their checking account, like most college students, then avoid subscriptions that automatically renew.

Why, you may ask? Automatic renewal makes it easy to lose track of what payments you owe when. Not to mention, when you set up automatic payments, you run the risk of overdrafting, or accidentally withdrawing more money than is in your checking account. For example, if your Amazon Prime subscription renews automatically every year, costs $50 and you only have $30 in your checking account at the time it goes through, you might accidentally charge too much to your debit card and face some hefty overdraft fees from whatever bank you use.

Don't get me wrong - I love Amazon Prime as much as the next girl - but whenever you have the option to renew your subscriptions manually, please do so! On top of protecting you from overdraft fees, this will also save you more money in the long run because it forces you to reevaluate your purchases and whether or not they were truly worth the investment.

Start an "emergency" savings account...

...or, alternatively, an account to help you work toward a goal, such as grad school, a car or travel. Whatever the purpose of your savings account, make it a separate account from your primary savings or checking account - and, most importantly, DO NOT SPEND IT!! Until it is time to make that big purchase, go on that exciting trip or pay your way through that devastating financial emergency, your savings account should remain untouched. 

One way to ensure you don't touch that savings account is to avoid linking it to a debit card or checking account. If you're physically unable to transfer money into your checking account or "accidentally" spend it on a shopping binge at Target, your savings will remain unscathed no matter what poor financial choices you make in your life. That way, even if you spend every last cent in your checking account, you can still go to grad school, pay for that trip home or take care of your bills when shit hits the fan (so to speak).

As for building up your savings, it's important to allocate a certain amount of money to that account every month. If you're not depositing money consistently, it's safe to say your savings won't grow all that much, with the exception of maybe a couple cents in interest every year.

Setting up an automatic transfer from every paycheck into that savings account can really help you grow your savings, without spending money you don't already have. However, there's also more fun ways to achieve this goal, too! If you've been on Pinterest lately (or really ever), you might have seen some 52-week savings challenges. These challenges are not only a great way to build up your emergency or goal-oriented savings account, but it's also kind of fun to challenge yourself to see how much you can save!

Another "fun" way to save money that I'm currently using is something I'll call a "bad habit tax." For me, that bad habit is complaining. Because I struggle with my anxiety and depression every day, I have trouble looking on the bright side of life. So, this month, every time I complain, I'm charging myself $0.50 (I'm keeping tally in my notebook). At the end of the month, all of the money I lost by complaining will get transferred into my savings account so I can use it for travel later on!

Get a side hustle or moneymaking hobby

This tip is my absolute favorite, because it's one you'll actually enjoy doing! If you're doing it right, you'll love it so much you won't even notice your hobby has become your side hustle.

Especially in the age of the Internet, it's much easier than you think to start a business, and even easier to make money doing something you love. For example, if you love knitting or crafting, you might open an Etsy shop and sell your creations worldwide. If you love to write, you might consider checking out freelance opportunities local to you. Or, if you love skiing or baking or makeup or whatever it is, you can start a blog or YouTube channel, work to grow it and eventually monetize.

Unfortunately, there is a bit of a catch when it comes to making your own income through a side hustle. When you make money through freelancing, blogging or any other kind of self-employment, you're subject to self-employment tax. If you're making less than $400 in a calendar year, then you don't need to file these taxes. However, if you're making more, it's absolutely essential to file your taxes diligently to avoid a penalty later on.

When it comes to self-employment tax, the good news is almost any expense you put toward growing your business is deductible. So, be sure to keep good track of every dollar you spend on your side hustle! Personally, I keep a Google Sheets spreadsheet with all of my income and expenses. That way, when tax season rolls around, I'll know what went toward what!

Granted, I'm no tax expert. Thankfully, if you're still confused, Melyssa Griffin has an amazingly clear explanation on her blog. Though her article centers on taxes for bloggers, this information truly applies to anyone who self-employs in any side hustle, from Etsy to freelancing!

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