Fix Your Credit Score Before It’s Too Late!

Anwar: Everyone, thanks for joining us over here. This week’s edition is on credit score management, and I’m honored to have Ted Rossman from Bankrate to speak on this issue.

Ted Rossman: Great to be here. Thank you.

Anwar: NOYACK is all about creating wealth management and financial education tips for Gen Z and Millennials who are high earners but not rich yet due to lack of financial literacy. One of the issues they have is credit score management, and we have a few questions to dig into. The first question I have for you on this topic is: Many young people are just starting to navigate their financial lives. What are the fundamental concepts of credit scores that you think everyone in Gen Z and Millennials should understand?

Ted Rossman: First of all, credit is really important because it affects many aspects of your financial life, namely your ability to qualify for loans and lines of credit, and the interest rates you’ll pay. It’s not just loans; it’s also things like apartment leases, cell phone plans, utilities, and even some employers will check credit reports before extending a job offer. Your credit score is really important. What goes into it? Payment history is the number one factor. You want to make sure that you’ve paid your bills on time. FICO, the Fair Isaac Company, devised the most popular credit scoring formula, and 35% of that formula is your payment history. Late payments can stick with you for up to seven years. The impact is most pronounced within the first couple of years. Ultimately, your credit score is supposed to predict your likelihood of repaying a loan, so they look quite strictly at your payment history. Next is how much you owe; that comprises 30% of the formula. A key component of that is credit utilization: credit you’re using divided by credit available to you. Think about a credit card, for example. If you have a $5,000 limit and you’re using 20% of your available credit, that’s pretty good. Anything below 30% is generally quite good. Together those factors are 65%. The rest is the length of your credit history, which is 15% of the formula. Longer is better; they want to see that you’ve had a good track record. Speaking of that, the mix of credit is important; that’s a 10% factor. They want to see that you’ve managed different types: installment loans like auto loans and mortgages, and then revolving credit like a credit card where that limit flexes up and down with usage. Finally, 10% is recent inquiries. If you’ve applied for too much credit recently, that’s a risk factor indicating you might be in danger of falling behind.

Anwar: Awesome. Thank you so much for that. Speaking on my behalf, I think I’ve made a mistake by opening too much too quickly and then not opening much for a while. I saw a massive impact on my credit score, and it’s something I learned too late. Hopefully, this advice will be taken more seriously by people around my age and slightly older.

Ted Rossman: There’s definitely a happy medium there, not applying for too much but also not avoiding credit. I’m glad you brought that up. I have a younger brother who, for most of his 20s, avoided credit. He was scared of debt and didn’t want to get a credit card. This is emblematic of many Gen Zers and younger Millennials. They have student loans and worry about taking on more debt. Maybe they’ve seen what’s happened with their parents or older siblings. If you use a credit card responsibly, it can be a great credit-building tool. You could get a no-annual-fee credit card, pay it off every month, avoid interest, get rewards, and get the credit-building impacts. You’re not going to sign up for a mortgage or a car loan just to build credit, but you could sign up for a credit card to build credit, and that’s a stepping stone to other financial products. We don’t want people paying late or racking up too much debt, but avoiding credit can actually be a blemish as well.

Anwar: Totally agree with that. What are some misconceptions about credit scores that you frequently encounter among young adults, and how can they set the record straight?

Ted Rossman: One of the biggest misconceptions is that carrying a balance helps your credit score. That is definitely false. The best way to use a credit card is to pay on time and in full every month. This is when credit cards work for you. Half of cardholders pay in full every month, so they don’t owe interest, they get rewards, they get buyer protections, and all the credit-building benefits. Secured cards, where you put down a deposit that serves as your credit line, are often a good starting step for Gen Zers and younger Millennials. Student cards can also be easier to get. Some people get a store credit card as their first card, but you have to be especially careful with those because they have very high-interest rates. If you pay on time and in full, the interest rate doesn’t matter. Getting started early is beneficial. You could also consider getting on a parent’s credit card as an authorized user, and many of those benefits will translate to you. But the big myth is that carrying a balance helps you. You don’t want to carry a balance.

Anwar: For those new to credit, what practical steps would you recommend for building a strong credit history, and are there any specific tools or products particularly beneficial for Gen Z and Millennials?

Ted Rossman: It’s important to get started, even if you’re debt-averse. That may be a healthy attitude, but you’re going to need credit at some point. I mentioned everything from apartment leases to utility plans, future loans, and lines of credit. You want to get started early. Credit cards are a great way to do that, but there are other steps too. There’s a program called Experian Boost where you can opt-in to have the credit bureau look at your bank account. With your permission, they’ll look for on-time streaming service payments, cell phone plans, and even some rent payments. These are things that are sort of credit-adjacent and haven’t traditionally counted in credit scoring, but they show some of the same financial responsibility. There are new tools like Experian Boost for people with existing scores looking to bump them up, and Experian Go for people completely new to credit. They can actually jump-start you. Many people are credit-invisible, meaning they don’t have credit information on file, or they have a thin file with not enough information to calculate a reliable score. Many young adults are outside the credit system because they’re new to credit or the country. This is a pain point for immigrants because credit doesn’t translate from country to country. There are tools out there like Experian Boost and Experian Go. There are also companies like Kickoff, which extend a small credit line for a fee, and companies practicing cash-flow underwriting to issue credit cards to people with good fundamentals but outside the traditional credit system. Companies like Tomo, founded by an immigrant from South Korea, are making it their mission to approve more people. They’re not just looking at your credit score; they’re also considering your income and debt levels. A secured card, where you put down a deposit that serves as your credit line, is another option. It’s safe and helps you build credit, leading to better things.

Anwar: Considering everything is much more expensive for Gen Z and Millennials now than it was 15-20 years ago, how can young adults manage healthy credit in the long run, especially when navigating various challenges and liabilities like student loan debt or starting off their careers? How can they manage their credit score with these liabilities hindering their financial expansion?

Ted Rossman: We’ve talked about strategies for establishing credit. Now let’s pivot to maintenance. Maybe you have a credit score, but you want to keep it on the upswing. Look at annualcreditreport.com periodically. Despite the name, you can now get weekly reports for free from the three major bureaus: Experian, Equifax, and TransUnion. Checking every few months is good. Look for errors because the FTC says about one in five Americans have errors on their credit reports, which can drag you down. Stay on top of your existing accounts, pay on time, and avoid using too much credit. Even if you pay your credit card in full and on time, using a lot of your available credit can hurt your score. Make an extra payment in the middle of the month to knock down the balance before the statement comes out, or ask for a higher credit limit. These are more advanced strategies for once you’ve established initial credit. If you’ve used your credit card responsibly, ask for a higher limit without overspending. Rent is the biggest monthly expense for many young adults, so look for ways to incorporate that into your credit score. Companies like Bilt offer a credit card that gives rewards on rent and can report rent payments to credit bureaus. Other services like RentTrack and Rental Kharma can also help, but may require paying rent through their platform. Periodically stay on top of your spending and credit usage. Establish good habits first, and save the fancier reward strategies and higher annual fee credit cards for later. Get the fundamentals right first.

Anwar: If someone who is a Gen Z or Millennial high earner, typically $100,000 or more, missed a payment or has a high credit utilization, what are the best steps they can take to recover and improve their score?

Ted Rossman: Late payments don’t typically affect your credit until they’re 30 or more days late. You might be charged a late fee by the lender if you’re a day late, but it doesn’t usually affect your credit unless you’re 30 or more days late. Catch it before any fees or penalties kick in, but if someone slipped up and is past that 30-day threshold, get current as soon as possible. If you’re really struggling, speak up sooner rather than later. You can ask the lender for a break, rearrange your due date, or avoid penalizing your credit right away. Work with reputable nonprofit credit counseling firms like Money Management International or GreenPath. Try to avoid these problems before they happen. If you’ve paid late, ask nicely or write a Goodwill letter to request forgiveness and removal from your credit report. Technically, lenders aren’t supposed to do this, but sometimes they will. The credit repair industry can be controversial, with for-profit firms helping you dispute information. Ethically, you’re not supposed to dispute true late payments. If it’s an error, dispute it, but don’t dispute honestly late payments. Focus on filling your report with good information. Counterbalance a late payment with as much positive info as possible. Get on a parent’s card as an authorized user or sign up for a new credit card if you can qualify. Signing up for Experian Boost can help by pulling in cell phone, streaming, and utility payments. eCredable Lift can also pull in utility payments. Take steps to ensure the negative event doesn’t happen again, like signing up for auto payments.

Anwar: One last question: Many Gen Z and Millennials sign up for credit cards, especially rewards cards like the AMEX Platinum or Capital One Venture X. How can they manage a credit score while having many credit cards?

Ted Rossman: You can have a lot of credit cards and have good credit, but you need to do it over time. Some people have 30 credit cards and great credit, but they didn’t sign up for 30 cards all at once. Spread it out over many years. Establish good habits first, avoid fees, and layer in more cards over time. The AMEX Platinum has a $695 annual fee, but it can be worth it if you’re using the benefits. Think through your habits, especially with higher annual fee cards. Pay in full to avoid interest. The average credit card charges 20.5% interest, so it doesn’t make sense to get cash back or airline miles if you’re paying high interest. Get the fundamentals right first. After that, layer in higher-end rewards cards if it makes sense for your budget and spending habits. Different cards emphasize different things, so think about where you spend your money, what you want from the rewards, and how much work you’re willing to put in. Travel rewards can be more lucrative than cash back but require more work and flexibility. Ensure you’re not paying interest.

Anwar: Thank you so much, Ted. That’s really good insight. That’s all the questions I have for you regarding this topic. I think our readers, 135,000 of them, will find it insightful. Thank you for your time, Ted.

Ted Rossman: No problem. Thanks for having me.