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4 Crucial Financial Lessons College Isn’t Teaching Millennials

4 Crucial Financial Lessons College Isn’t Teaching Millennials

Out of all the reasons that people go to college it seems that two tend to top the list: the love and pursuit of knowledge and a means of upward financial mobility. For institutions so concerned with knowledge and money, you’d think that most graduating students would know all there is to know about their own personal finances, venturing into the world well-equipped to become productive members of society, and get a solid grasp on this “adulting” business. Unfortunately, the numbers don’t seem to reflect as much.

As it sits only 17 states currently require students to take a course in personal finance sometime in K-12 and according to one study, 43 percent of students couldn’t name one difference between a credit and a debit card. With how important tax returns, credit scores, and all other sorts of financial data are to the average adult’s fiscal life, it seems absurd that so many come out of college knowing so little about them. Whether you’re intent on amassing a small fortune or content with living simply and frugally, there are certain financial lessons you shouldn’t leave college without knowing.

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1. No Matter What, You Have to Pay Your Taxes

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    For some people, the fact that you have to pay taxes is a no-brainer–personally, I’ve had to fill out tax returns since I was about 16 years old. However, many of the people I went to college with–particularly athletes and high-performing academics who’d never had the time to hold a job throughout either high school or university–hadn’t the slightest clue about 1040s or 1099s or any of the other tax forms that income-generating Americans should.

    The good news is this: taxes usually aren’t as complicated as people make them out to be. They can be, but at the end of the year, the average citizen will be filling out a 1040EZ which has line-by-line instructions (in fact most tax forms come with a set of instructions). Difficult or not, taxes are time consuming. The Motley Fool estimates that it takes 5 hours for the average 1040EZ filer, so make sure you set that time aside and get it done. Owing the government money is never a good thing. Another reason that tax awareness is as important today as it ever was is that more graduates are going into business for themselves, either as business owners or as part of the gig economy. Without knowledge of the tax code, how do you avoid running afoul of it and owing the government money? Unfortunately, not knowing the rules doesn’t make you exempt from them, so brush up on your tax knowledge. The more you know, the better prepared you’ll be.

    2. Your Credit Score is Probably More Important than You Realize

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      From car loans to home loans, finances are a huge part of everybody’s lives

      Credit scores were invented shortly after the Civil War to indicate how trustworthy a person is in terms of paying back debt, and everybody–unless they’ve never opened a bank account, applied for a loan, or owned a credit card–has one. Your credit score is going to range anywhere from 300 to 850, and the lower the number is, the less likely that somebody will trust you with their money. The higher your credit score, the better chance you’ll get a good deal on your mortgage, car loan, and basically any other major life purchase you might be thinking about. On the other hand, if your credit score is too low, you may be flat-out denied a loan.

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      A better credit score means you have more buying power, but more importantly that you’ll have to pay less interest on those big life-purchases (more on that in a moment). The weird thing here is that you have to use credit to build credit–a slippery slope if I ever saw one myself–and it’s easy to get carried away with all of that unchecked power. It’s good to keep in mind that you’ll build credit quicker by managing your debt more strictly; keeping your credit balance below 30 percent of your credit limit is recommended for building credit. It’s all about balance!

      3. Debt Compounds Quickly–So Pay It Off Just as Quickly

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        You wouldn’t just hand over money would? Only paying the your minimum amount on your installments can cost you big in the long run.

        This is one of those things that I wish I would have realized sooner. Due to rising costs of tuition ($19,548 per year on average for in-state tuition including room and board), many students are taking on massive amounts of debt with the hope that they’ll land a good enough job to pay it all off later. Unfortunately, many of these students take on that debt without fully realizing how debt and interest actually work. Whether it’s credit cards, student loans, or your car payments, it’s almost always worth it to pay off your principle sooner rather than later. Here’s a quick example to illustrate what I mean:

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        Let’s say your loan balance is $40,000 at last year’s current average interest rate of 4.29%. You’d have to pay at least $410.52 a month consistently to pay your loan off in 10 years, and you’d still be paying $9,261 extra in interest–meaning your $40,000 worth of debt is closer to $50,000 when it’s all said and done. If you commit to paying off an extra $100 a month, you’ll save approximately $2,200 overall and pay off the loan in 7.8 years. Bump that up to an extra $200 a month and you’re looking at being debt-free in 6.3 years and saving approximately $3,600 on interest charges. It’s worth noting that certain loans, specifically mortgages, may have penalties associated with paying them off early–however, the overarching lesson is this: if you can pay it off early, do it! You’ll thank yourself later on. Seriously.

        4. It’s Never Too Early to Save for Later

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          Sometimes money is too easy to spend–keep that wallet shut and save!

          Of course, the reason that we take so long to pay off our student loans and other debts is that we’re a culture focused on living in the now. We’re not great at recognizing our future needs over our current needs, and add to that economic strains and pressures and you see why young folks like Millennials put off saving for retirement, let alone drawing up a will or living trust. Beyond taxes and debt, this is probably going to be the least of most students’ concerns–but if there’s anything I’ve learned personally from paying off debt, it’s that it’s easy to underestimate how appreciative your future self will be for the actions of your past self. Any amount put away is better than nothing and will make your later years that much more comfortable.

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          Of course, there are more obscure things that college students might want to know about finances, and this list is by no means definitive–but the lack of rhetoric in high school and university concerning the financial aspects of everyday life is somewhat concerning. At least here you’ve learned the basics, and can take fiscal agency over your own life.

          Featured photo credit: Pixabay via pixabay.com

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          Andrew Heikkila

          Owner-Operator of Earthlings Entertainmnet

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          Last Updated on March 3, 2021

          Top 6 Hacks on How To Build Credit Fast

          Top 6 Hacks on How To Build Credit Fast

          When done right, credit can open doors and provide a lifestyle that you never imagined possible. Anything from flying around the world in first-class and staying at 5-star hotels entirely for free to starting and scaling businesses. It’s also an area where it can be easy to make mistakes and hard to recover from without the right information. In this article, I will break down how you can build credit fast so you can open doors in your life!

          When you start to think about improving your credit score, you have to answer three important questions first:

          1. What are you trying to achieve by having good credit?
          2. What really is your credit score?
          3. How is your credit score calculated?

          What Are Your Credit Goals?

          Having a high credit score is great, but ultimately, your credit score is a tool in your personal finance arsenal that you can use to open doors. The first question you should ask yourself is “what will a higher credit score do for me?”

          I work with many clients directly at Freedom Travel Systems to help them fully leverage the power of their credit so they can enjoy free luxury travel and start or grow their business. For my clients and many others, here are a few common goals many credit-savvy individuals have:

          • Free Travel – getting access to travel rewards cards so you can get tons of free travel and even get first-class flights, hotel suites, and luxury amenities all for free
          • Start/Grow a Business – getting access to business credit so you can start and grow a business with 0% or low-interest financing that does not impact your personal credit
          • More Approvals – getting approved for credit cards, auto loans, or mortgages so you improve your lifestyle or build your personal wealth
          • Better Rates – getting better interest rates on any loans you get will save you tens or hundreds of thousands of dollars over your lifetime

          What Is Your Credit Score?

          Your credit score is simply a 3-digit number that tells potential lenders how reliable of a borrower you are. Keep in mind that lenders, such as banks and credit issuers, stay in business by lending. Their goal is to find the people that have the highest probability of paying them back and they assess this primarily through your credit score.

          What’s important to know is that there are two major scoring models used to create your scores. These scores are your FICO Score and your Vantage Score. More than 90% of lenders rely on your FICO score, so when you are checking your score, you want to make sure you see the actual score that the lenders use. And no, checking your own score does not hurt your credit!

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          Then enters the 3 main credit bureaus, which are essentially agencies that collect credit information on you. These are Experian, Equifax, and TransUnion. These bureaus then apply a scoring model to the information they have on you and voila, you now have a credit score! Bureaus sometimes have different information on your report, which is why you will see 3 different scores.

          How Is Your Credit Score Calculated?

          Next, you need to understand how the credit score is calculated. This will provide a high-level overview, but there is more detail to each of these factors alone.

          There are 5 main factors in the calculation of your credit score:[1]

          1. Payment History (35%) – This refers to the amount and percentage of on-time payments you have.
          2. Utilization (30%) – This is how much revolving credit you use as a percentage of the total revolving credit issued to you. Note that installment loans like auto-loans or mortgages do not count towards this while credit cards do.
          3. Age of Credit (15%) – This refers to how long your credit history is, primarily your “average age.”
          4. Credit Mix (10%) – This is how many different types of credit you have. For example, there are credit cards, student loans, auto loans, mortgages, personal loans, and lines of credit.
          5. New Credit (10%) – This primarily refers to how many inquiries you have for new credit.

          Top 6 Hacks on How to Build Credit Fast

          Now that you’ve learned more about your credit score, here are the top 6 tips on how to build credit fast.

          1. Don’t Close Your Cards

          Many of us are taught that getting a new credit card is bad and having too many will hurt your score. In fact, the opposite is true. You want to have many positive accounts reporting to your credit report. Logically, this makes sense because having more accounts with more on-time payments shows that you are a more reliable borrower. You just don’t want to open too many accounts too quickly since that can hurt your “new credit” factor.

          Instead of closing a card, what you should do is simply keep the card open and put a small subscription service on it monthly. Why? Because each time you have an on-time payment, it helps build your payment history, the largest factor of credit.

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          If you close a card, you are missing on potential on-time payments, age of credit, credit mix, and also lowering the total credit lent to you so your utilization percentage may go up. If you have an annual fee on a card you don’t like, see if there is a “no-fee” version of the card and downgrade it to that card rather than close it.

          2. Use Autopay to Never Miss a Payment

          This one is easy to do and easy not to do. Go into your credit card account and set up auto-pay. You can choose to either pay the full amount, the statement balance, or the minimum payment. Personally, I like to set up autopay to pay the minimum payment so that I never get a late payment. Then, I go in and manually pay the statement balance each month by the payment due date.

          This helps me personally see my spending and have a manual review of my charges while ensuring, not have to pay interest, and still get the benefit of making sure that I never miss a payment if something goes wrong. Think about it, if you were to have a medical or family emergency, the last thing you want to experience on the back end of that is a late payment and a drop in your credit score. So, set up autopay.

          A pro tip is to update your payment due dates across all bills and accounts to be the same so that you can “time batch” the process and have one time a month where you sit down and handle your payments. You can do this by simply contacting the credit card company or doing it online.

          3. Get a Credit Limit Increase to Lower Your Utilization

          One of the factors that get most people into trouble is using too much of their allotted total credit. Their utilization, which is the percentage of revolving credit they use, goes up, and their score tanks. You should aim for less than 30%, and in an ideal world, less than 10%.

          To help drive this down, call your credit issuer and ask for a credit limit increase. This will help increase the total amount of credit extended to you and drop your utilization. Oftentimes, they will only give it to you when your utilization is fairly decent (less than 50%), so work to pay it down as best as possible before doing this. You should ask if the credit limit increase will give you an inquiry as some banks do a hard inquiry while some do not. If they do a hard inquiry, it is often better to just get a new card altogether or pass.

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          4. Add Authorized Users to Increase Your Age, Add History, and Decrease Utilization

          This is one of the best hacks out there as it helps with the 3 biggest factors of improving your credit: payment history, utilization, and age. This concept is also called “credit piggybacking” where someone with great credit history on a card adds an authorized user (AU) to the card. When the AU gets added, the credit history and information from that card are added to the AU’s report!

          This is extremely helpful for people with young credit because it can drastically increase your age of accounts. It can also help many people with limited payment history or high utilization.

          Please be aware that anything good or bad on that account you are added to will show up on your report. So, you want to avoid any cards with negative marks or high utilization. That being said, it is a one-way street, so nothing that you do with your credit can impact the primary account holder.

          This is so valuable that there are companies that sell AU accounts. I always suggest starting with your family and/or personal network first as there are likely people in your network that can help!

          5. Space Out Your Application Strategy

          New credit is the smallest factor of credit, but it still matters! If you are looking to build up your credit, you should space out your applications. If you apply for too much credit in a short period, it looks very needy in the eyes of the lenders. For this reason, it is safest to apply for cards slowly over time unless you have really studied more in-depth how this works. A good rule of thumb is once every few months.

          If you are in the credit game for the hopes of getting tons of credit card points for free travel, which is what I personally take full advantage of, you will want to familiarize yourself with the different bank rules and card promotions to put together the right application strategy. Applying blindly will waste inquiries and leave tons of benefits on the table!

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          6. Review Your Report for Negatives

          If you have any negative or “derogatory” marks on your credit report, this will hurt you drastically. They do impact you less as they age, however, you should review your credit report to ensure that everything on your report is 100% accurate and actually yours. Wrong information ends up on credit reports all the time and you will want to take personal responsibility for making sure it is accurate.

          The “burden of proof” is on the credit bureau to confirm that any information on your report is in fact accurate. If you find inaccuracies, you can dispute that with them, or you could consider getting a credible credit repair company to help you.

          Final Thoughts

          There you have it, the top 6 tips on how to build credit fast so you can get closer to reaching your goals. Now that you’ve learned more about how credit score works and how you can improve yours, you’ll hopefully be able to make better financial decisions and achieve your financial goals quicker.

          More Tips on How to Build Credit Fast

          Featured photo credit: CardMapr via unsplash.com

          Reference

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