Recently, I had the chance to chat with Farnoosh Torabi. She’s a personal finance expert who has used her knowledge to help people with actionable financial advice. Her work is deeply rooted in her own experience as a recent graduate trying to get by.
At 22, Farnoosh was making less than $40,000 a year in New York City, and she was $30,000 in debt. Working as a financial reporter, she realized that young people didn’t have access to relevant, easy-to-understand financial advice. She jumped in to fill the void.
Now, Farnoosh hosts the top-rated So Money podcast and has made tons of television and media appearances. She is the author of three books:
- You’re So Money: Live Rich, Even When You’re Not
- Psych Yourself Rich: Get the Mindset and Discipline You Need to Build Your Financial Life
Credit Cards can be Your Friend
During our interview, Farnoosh and I discussed all things credit cards. It can be shockingly easy to misunderstand how credit cards operate, and that can lead to trouble. But if you’re armed with the right knowledge, you can use credit wisely and build up a strong credit score. Taking this action can save you thousands in interest payments if you ever take out a loan.
If you’re just establishing yourself, you might wonder why you should get involved with credit cards at all! There are so many horror stories out there about how easy it can be to live beyond your means and be in debt for decades. But Farnoosh believes that establishing credit for yourself is important, and behavior is what really drives your credit score.
“If you’re determined to being smart with your credit when you’re starting out, ultimately that will help you establish great credit,” she said. “It’s important because if you want to finance things like a home, grad school, or a business. All of this requires a credit check.”
That’s right — at some point in your life, you will probably need to take out a loan. And a good credit score nets you not just a higher chance of getting approved for the loan in the first place, but a better interest rate as well.
Turn That Bad Credit Score Around
But what if you already have a credit card…and a bad credit score? Is there any way out? Farnoosh says yes, but it’ll take some time.
“The most important factor in your credit score is your credit history,” she said, meaning that the longer you have a line of credit with a history of making on-time payments, the better your score will be. Credit history accounts for 35% of your FICO® score.
Remember, you want to establish a history of on-time payments. If you tend to forget when your bill is due, automate your payments so you don’t have to worry, and don’t try to get away with paying just the minimum amount if you can help it.
“One of the mistakes that I see young people make is paying the minimum every month,” she said. “This will keep you in debt for a very, very long time. If you can’t pay it in full every month, make three times or four times the monthly minimums. Gradually, as you are making healthy steps, you should see your score improve along the way.”
Another term you should become familiar with if you’re trying to increase your credit score is the credit utilization ratio. Credit utilization is the amount of credit you’re using, versus the amount of credit you have in your name. If you max out your cards, you have 100% utilization. This can cause a credit score to drop.
“If you’re going to be charging a lot you can ask your credit card company for a credit line increase,” Farnoosh advised. “The general tip is to keep utilization at 25% or lower. Also, consider paying the credit card off throughout the month, instead of just once a month.”
Keeping an eye on your credit score to see your progress is a smart move. According to a survey by Chase Slate, one-fifth of millennials have never checked their credit score. You can check it at MyFico.com for a fee, or get an educational score for free that will give you a good idea of where you stand at Credit Karma or Credit Sesame.
Your Credit Score vs. Your Credit Report
Your credit score is different from your credit report. You need to keep an eye on both.
You can get your credit report at annualcreditreport.com, which can help you quickly catch errors that can impact your score. “You can check one free copy from each of the three credit unions once per year and I like to stagger them,” Farnoosh said. “One in January, April, and September.”
If you suspect you’ve been the victim of identity theft, credit monitoring services can be helpful. If someone tries to open a line of credit in your name, you’ll be notified. These services aren’t free, but they can save you a lot of hassle if your wallet was recently stolen or your personal information was compromised.
Next-Level Credit Cards
If you’ve used credit cards for a few years and have a good credit score, it’s time to choose cards that will earn rewards for your everyday spending. How do you pick a card that suits you? “Start by analyzing your lifestyle,” Farnoosh said. “If you’re a parent, you might want a card that rewards you for groceries and gas, versus a traveler who wants rewards on hotels and airfare.”