Five financial lessons I learned this year
If someone told me just over a year ago that I would be writing about money, I would have thought...
With challenger banking services such as Monzo and Revolut quickly making it onto the scene and causing a stir – not just with new services but also with controversial adverts, it’s easy to get lost in the media frenzy of the shiny new cards. But how much do millennials really know about credit cards?
This time last year, F&C Investment Trust compiled The Millennial Money Survey* — a study of more than 4,000 UK adults aged 18-35 — and found that a majority of respondents do in fact exercise good money habits. Some 60% said they would rather not attend an event than borrow money to attend, and 40% didn’t even have a credit card.
Ross Duncton, Managing Director, Head of Marketing & Direct, at BMO Global Asset Management, the company that manages F&C Investment Trust, said:
“UK millennials simply aspire to achieve what previous generations have enjoyed; and they do it with a fortitude that helps them survive in a post-credit-crunch world. While some have debt, it’s clear that the majority is far from a reckless generation. In reality, most are sensible spenders who want to take more control over their money, despite a lack of formal financial education and income.”
And, what a better place to start than actually understanding about something as common as a credit card. Let’s face it, they’re a necessary evil for your credit score and that dream of getting on the property ladder one day, so it’s best to get your facts right.
‘I love, love, love that you want to use your debit card. But to keep your credit score solid, you still need to keep a few credit cards and use them at least once every few months.’
— Suzy Orman, author and financial ‘guru’
If you’re opening your tenth card and you already have a low credit score then yes, of course, it’s not a good idea to open another credit card. You need to consider the timing of when you’re looking to open a card. If you’re opening a card so you can apply for a larger loan or a mortgage — don’t. New lines of credit will cause a slight and temporary dip in your credit score when the bank goes to check your credit.
However, if you’re looking to open your first card then no, it’s not going to hurt your credit score. The unfortunate fact is we need credit cards to build a credit score in the first place. Having zero credit cards and loans isn’t the same as a ‘perfect credit score.’ Think about it, the bank has no proof of payment history or if you’re responsible with your money. You could have no loans because the Bank of Mum and Dad is never far away. A credit card, especially your first one, is an important stepping stone to building a healthy credit score.
But why? Payment history is the most heavily-weighted element of your credit score and it’s because lenders want to see if you’re a good risk. Essentially, have you missed payments in the past or do you pay on time?
I think, maybe, possibly, I can see where someone would be coming from with the idea that if you spread payments you’ll be forced to pay interest and this will ‘make credit card companies like you’ because you’re throwing money at them. And while American Express might appreciate it, it’s not doing you any favours. You should always be aiming to pay off your credit card each month and never just make the minimum payment.
This is one I actually hear a lot from friends – this idea that having a balance on your cards is a good thing because it shows credit card use. But that doesn’t mean having a high balance. If anything, you’re just paying more in interest, why would you intentionally do that?
It’s true that credit card utilisation is factored into your credit score. For those that don’t know, card utilisation (or debt utilisation) is just a fancy way of saying the percentage of credit you’re actually using. The lower, the better. For example, if you have a credit card with a £5,000 limit and use £1,500 on average, you’re card utilisation is 30%. Lenders use this as another way to see if you’re responsible with your credit limit.
I think the whole idea of 30% balance stems from this idea that you need to show you’re responsible with your credit limit. However, if you do have a credit card with £5,000 limit and say you make £2,000 in purchases in a month for a holiday – how is paying £500 (keeping the 30% balance) versus paying the card off in full because you’ve been saving for your trip, showing that you’re more responsible with your credit cards?
No. Stop it. This is why we have our emergency fund – for emergencies. If you do use a credit card for whatever reason – whether it’s points or rewards – that’s when you dip into your emergency fund and pay it off in full. Do not get in an interest avalanche because of an emergency. We’ve talked about this.
I’m just going to come out and say it: I don’t think there’s a magic number. While it’s common (and good) advice to stick to just one card when you’re first starting to build your credit, you don’t have to confine yourself to one bit of plastic. If you’re able to be responsible with your spending and manage your payments, then multiple cards are okay. If you’re adding another credit card, look for one that gives your rewards or perks that suits your lifestyle and maximises your spending.