It Pays to Know How Credit Scores Work

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When I graduated, my first project for myself was to understand my personal finances. Now this might seem a bit odd, given that I didn’t have any revenue. “Why wasn’t I looking for a job?”, you might ask. Initially, I WAS half-heartedly looking for a job. When I checked out “One Day, One Job”, a job search blog that one of my friends had recommended to me, I came across this article. I thought the author, Willy Franzen, had a good point. Looking for a job can feel tedious and frustrating. Then there’s the opportunity cost. Instead of spending all my time looking for jobs I didn’t feel ready to apply for, I could do something useful and valuable to me that would give me a sense of accomplishment and build my confidence, and that I could also mention to prospective employers to indicate my intelligence, sense of responsibility, and work ethic. After reading the article above, I found another article on the site by Ramit Sethi about little-known credit cards perks. Suddenly it occurred to me that not only would learning about personal finance be useful,  but it could also be really fun and interesting. I checked out Ramit’s blog, and quickly decided to buy his book, I Will Teach You To Be Rich. I found it to be one of the most engaging how-to or nonfiction books I had ever encountered, and I read it cover to cover.

One of the first things I learned when reading Ramit’s book is that there’s a lot more to credit scores than a lot of people think. (Having a good credit score is important because it helps qualify you for lower rates on loans, which saves you money.) Until I read the book, I just sort of thought that you got a good credit score by paying your bills on time. I’m still frequently shocked by how many of my friends don’t know much more about credit scores than that. The problem is, if you don’t know how credit scores work and you think that all you have to do to have a good credit score is to pay your bills on time, you might either be doing things that hurt your credit , or missing opportunities to increase your credit without knowing it.

Five Factors Impact Your Credit

Here are the five factors, in order of importance:
1. Payment History
2. Use of Available Credit
3. Duration of Credit
4. Recent Applications for Credit
5. Different Types of Credit

Now as you can see, payment history IS the most important factor.  I highly recommend setting up automated payments to your credit card to make sure you never miss a payment. The next factor, use of available credit, is nearly as important as payment history– but I didn’t know that until I read Ramit’s book! Even though I had had a credit card for 6 years and had never missed a payment, my credit score that summer was surprisingly low. This was because my only credit card had the same $1,000 limit on it that it had when I was 16 and I was using more than 50% of my credit allowance each month. I called up my bank and asked them to increase my credit limit. The representative informed my that I was pre-approved for a much larger amount. Yay! The lesson here is that it’s a good idea to periodically ask your credit card provider to increase your credit limit, so long as doing so won’t cause you to increase your spending to a comparable share of the new credit limit.

What happened next when I applied for my credit increase relates to the third factor. My bank informed me that my parents were co-card-holders on my account and that I needed their signature for the increase. I thought, hey, I’m an adult now– my sources of credit should be in my own name! The bank gave me three options: 1) apply the new increase to my existing shared card 2) cancel my existing card and get a new card in my name with the whole increase or 3) Keep my existing shared card, but get a new card with the balance of the increase. I opted for option 3 because I wanted as much of the increase as possible to be in my own name and I didn’t want to cancel my only previous (and long-standing!) line of credit. Why? Because llong-standing lines of credit help your credit score by demonstrating your long-term reliability. Lesson: try to avoid cancelling credit cards, especially those you’ve had for a while.

One of my motivations for increasing my credit limit and my credit score was to make myself eligible for a rewards credit card that had rejected me. When planning how I might get the rewards card I wanted, or any other new credit card for that matter, I had to consider the impact that new applications for credit might have on my credit score. The idea is that it hurts your credit score to make multiple requests for credit over a short period of time because it indicates that you need money and might have trouble repaying your debts. When the rewards card first rejected me, I might have thought to apply again in a couple of weeks (maybe they just made a mistake!), or to apply for several similar cards until one accepted me. This would have been a bad idea. The original rewards card wouldn’t have accepted me because there wouldn’t have been anything different about my credit, except a slight dip from recently applying for credit. With each additional card I might have applied for, that dip would have gotten larger and would have decreased my odds of getting a good card. Instead of haphazardly applying for cards until one accepted me, I did some research and decided exactly what card I wanted to get. I found out what credit score I would need to be eligible for the card, and devised a plan to meet my goal.
I increased my credit limit, waited a few months until my credit score adjusted, and then, when I was relatively confident that the card provider had no reason to reject me, I applied again, and— success!

Now the last factor of the credit score relates to different sources of credit. I want to emphasize that this is the least important factor and that if you’re in your young, you may not have to worry about this yet. That said, having different sources of credit (provided you’ve mastered factors 1-4) can help your credit score. This does NOT mean that you should go out and get a car loan or some other type of loan for no reason just to diversify your credit sources. It’s just something to keep in mind. Why is having different sources of credit a good thing? Because having credit cards that you pay on time demonstrates that you’re able to responsibly manage credit card payment, but it doesn’t necessarily translate to your expected behavior with other types of loans. For example, if you’re applying for a mortgage, a lender might be less interested in your record of paying off a credit card every month for two years, than in your success paying off student loans over a period of five years.

Why I Love Informational Interviews

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One of the tools I found most helpful last summer when looking for a job and trying to figure out what I wanted to do with my life, and one I continue to use and advocate, is the informational interview. Maybe you’ve heard of informational interviews, maybe you haven’t. If you have, awesome– the next paragraph tells what an informational interview is, so you can just skip ahead.

For those of you that don’t know what an informational interview is, let’s start with what it’s NOT:  a job interview. Does that take the pressure off? It does for me. An informational interview is a phone call or meeting with a person of interest for the purpose of learning more about his or her project, job, career, or company. It’s a chance for you to hear a frank, inside perspective on a field without the pressure of either party trying to get anything from the other or convince the other of anything. One thing that’s great about informational interviews is that they are a relatively easy way to meet more senior people in your field. Why? Because everyone likes to talk about themselves and what they do, and it’s always flattering to have an eager listener.

Now that you know what an informational interview is, I’ll explain why they are valuable. Simply put, there are three main values you can get out of informational interviews:

1. Information
2. Exposure
3. Practice

1. Information This is obvious– I mean, it’s called an informational interview, for goodness’ sakes. You get to ask the questions. You get to hear someone’s story. You get to learn more about what work in a specific field, say, canine dentistry, is like, so that you can get a better idea of whether canine dentistry is a good fit for you. That’s the sort of textbook use of informational interviews, but be creative. Say you already know you want to pursue a career in canine dentistry and nothing your interviewer can say that would dissuade you. In that case, you can learn from your interviewee what you need to do to enter the field and be successful in it. What sort of credentials and skills would you need and how can you get them? What makes great canine dentists great?

Sometimes, there’s simply not a prescription to get to a particular career or job. In fact, some of the most interesting people I’ve interviewed have unusual jobs that they either created or that were created for them based on a unique need. Particularly in these cases, though I tend to emphasize this in most interviews, I try to learn more about the individual’s career development process. What led him or her to this job? How did what he or she learned in previous work experiences shape his or her perspective and career goals? How did he or she go about making career decisions?

Remember, an informational interview doesn’t have to be about a job or a career. It can instead be a discussion about an industry– its trends, practices, challenges, and future– or about a technology or project– what it is, what it does, and why it matters.

2. Exposure Networking is a buzz word these days. Networking matters because to build your career, you need to build your reputation, and to build your reputation, people need to know you exist. But unlike simply posting your thoughts in a 140 characters or less to a nebulous groups of friends, family, and spam accounts on Twitter, an informational interview offers you the opportunity to extend your network directly to someone relevant to you and your career goals. An informational interview, with a bit of preparation, empathy, and luck, can be the start of a professional relationship with recurring benefits for both parties. The person you interview can also help you expend your network still further by recommending others for you to contact.

3. Practice I don’t think job interviews are easy for anyone, and they’re particularly challenging for those of us that are, let’s say, a little less-than-gregarious. But interviewing is a skill, and like any skill, you get better with practice. Sometimes, in the interest of honing my interviewing skills, I ask my interviewee for feedback on the interview. In one case, this spawned a whole conversation on the impressions that posture, body language, and speech patterns make, which motivated me to train myself to end sentences with an affirmative tone, rather than end on a question tone or by trailing off.

While job interviews and informational interviews have some key differences that you shouldn’t overlook (I’ll discuss this more in a later post), informational interviews provide you with an opportunity to become more comfortable speaking about your field and your interests to individuals that you might, at one time, have found intimidating. Prior to graduation, I remember feeling so overwhelmed by the idea of finding a job and so clueless about what sort of job I might want that I couldn’t even bring myself to apply for positions. I eased myself into the job search process by conducting informational interviews, and actually got my first job interview when I cold-called a company requesting an informational interview.

Look out for my upcoming post on HOW to conduct an informational interview.

Why I started this blog (and why you should read it)

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As humans, we grow and learn by facing adversity. Sometimes life throws challenges at us. Sometimes it doesn’t. (Or at least, sometimes your personal life-problem-pitcher takes a break to rest his or her throwing arm for a while.) I want to be proactive about choosing and shaping the challenges that will in turn, shape me. I want to challenge myself, rather than simply react to what life throws at me. In this blog (which is, in itself, a way for me to challenge myself), I will document my efforts to intentionally learn from tasks and projects I assign myself, mistakes that I make in the process, and those random problems and opportunities that come my way.
I know that I don’t operate in a vacuum, and neither do you, reader. Directing my blog posts to you and responding to your feedback will help me maintain accountability and momentum. By sharing my experiences and learning, I hope to help inspire and motivate you to pursue your own projects.

That’s the short explanation for why I started this blog.

This is the long version.

About a year ago, I finished college. Those four years were the most uncomfortable years of my life to date, and I was ready to leave them behind. I had the good fortune of quickly finding a job in my field at a great company. Sure, I struggled a bit initially, but a year later, I have found myself… comfortable.

Comfortable worries me. As uncomfortable as I found my experience at Stanford to be, it was also a period of intense growth and learning– when I graduated, I meant to take a brief vacation from uncomfortable, not an indefinite hiatus.

Throughout high school and college, I sought out challenges. I tried to do things the hard way. In high school, I juggled multiple extracurriculars, including Varsity soccer, mock trial, visual art, and even a Shakepeare play that I produced and directed myself. In college, I broke out of my comfort zone and pursued an engineering major and explored alternative lifestyles and group psychology in a cooperative consensus-run residence.

A funny thing happened, though, when I graduated. All of a sudden, I started worrying about security: financial security; job security; and stability in my living situation. It became my mission to prove to myself that I could be an “adult” and take care of myself. Initially, this led to a lot of learning. Then at some point, once I had moved into my new place, settled into my new job, and set up my finances, I hit a sort of stasis. I figured I had it pretty good. I felt proud of myself and I  didn’t want to take the risk of shaking things up to achieve something better.

As someone who has always valued learning above (almost) all else, this new inclination to just safely sit back and wait for the next big transition felt alien to me. It wasn’t consistent with the person I believed myself to be. About that time, I also realized two things: on the one hand, no one was going to push me to do exciting things I wanted to do; on the other hand, no one was stopping me. That left me. If someone WAS stopping me from going after something, that someone was ME. If I needed motivation to pursue something, that motivation, that drive– had to come from ME.

Following that realization, I decided to make a practice of actively pursuing new learning opportunities so that I may nurture my courage, curiosity, and tenacity, and continue to grow into the person I want to become.

That’s the general idea. The specifics aren’t entirely clear yet, but this blog is step one. I intend to focus on the following key areas of exploration that I will share with this blog:

  1. Investigating the intersection of business, policy, and environment through the lens of the energy industry.
  2. Developing strategies to build my career, including networking, team-building, and time management.
  3. Honing skills by pursuing interesting projects.
  4. Learning more about how financial institutions work and how they affect the decisions of individuals and corporations.

Over time I expect my mission for this blog will evolve to reflect both my own needs and the interests of my readers. Evaluating what works and what doesn’t about this blog and responding to changing needs is important to me, and to that end, I heartily welcome your feedback.