Surviving Grad School: Credit, why it matters, how to build it, and how to use it

Graduate school can be a financially volatile time. Grad students, often living on a low, fixed income, may find that they are required to shoulder unexpected expenses–new computers, travel for research, professional attire, not to mention the cost of relocating to a new area. Many graduate students arrive straight out of university, having never needed to manage a household’s finances. In this situation, credit seems like an appealing solution. If used conservatively, a few reasonable lines of  credit can help the struggling graduate student get the most out of their financial situation. If used carelessly, credit can saddle you with massive debt that will follow you for years after graduate school. As we’ve argued in our previous posts about surviving grad school, beyond student loans, earning an advanced degree shouldn’t put you into debt.

But there is another reason to maintain a few active lines of credit. Your credit score is how banks decide whether or not to give you a loan. If you want to buy a house or a car, most people will need to finance that purchase, and for that you need a decent credit score. Having a good credit score will result in lower interest rates and save you money. Many landlords, especially in big cities, require credit checks just to rent an apartment. Credit can also help you out in an emergency. If the transmission drops out of your truck or you have to make a last minute cross-country trip to visit a sick relative, credit will allow you to pay off that expense over a few months, rather than taking a major hit to your savings all at once.

Relying too heavily on credit, and failing to pay of the bills in a timely manner, will crush you with increasingly growing debt. Learning to manage credit is an important life skill, especially in countries like the United States, where credit is king.

What is a credit score?

Your credit score is how lending companies evaluate your ability to pay off loans. The better your score, the more responsible companies think you are with money, and the more likely they’ll extend you higher lines of credit with more perks. A bad credit score doesn’t mean you won’t be able to get any credit, it just puts you in a lower bracket, with higher fees, smaller credit lines, and few perks.

Your credit score is determined by 5 factors (in descending order of importance):

• Payment History: How good you are at paying your bills on time? Are you paying off the balance in full each month, or just making the minimum payment? Your credit score goes up if you pay you bill in full, on time, every month.
• Credit Utilization: This is the difference between how much credit you have and how much you use. Are you maxing you credit cards out every month or do you keep you charges to a minimum? Your credit score goes up if your utilization rate is low.
• Credit History: How old is your oldest account? What is the average length of your accounts? Your credit score goes up if you keep cards active longer, especially your oldest card.
• Recent Credit Lines: Have you opened a lot of new credit accounts recently? Your credit score goes down if you open a lot of new accounts in a short period of time.
• Type of Credit: Do you just have credit cards, or do you also have mortgages, car loans, student loans? Diversity is good, but your credit score goes down if you open new accounts to pay off old accounts.

Incidentally, having no credit is not really any better than having bad credit. It still makes you a wildcard in the eyes of lending agencies.

So how do you track and improve your credit score? I use Credit Karma*, a free service that helps monitor your credit score. I also like to use NerdWallet to look for good credit card deals and compare rates. In order to actually build credit quickly, you need to maintain a small number of active accounts, utilize less than 10% of you available credit, and, most importantly, pay your bills in full and on time, every month. This is actually not that easy to do in graduate school.

So, let’s assume you’re starting from zero. You have bad or no credit and are applying for your first credit card. Where do you go from here? Below are my general guidelines for how to build credit and manage your credit cards, and, because I like analogies, I present these in the form of your party composition for an MMORPG, with two defensive classes–the Healer and the Tank–and two offensive classes–the DPS and the Caster. Because I care.

The Healer

The healer is here to help build, or rebuild, your credit. Your healer is a pre-paid or secured credit (not debit card, debit cards do not count towards your credit score). The initial credit line will be very low, and you will have to provide a deposit to secure the card. When your credit is bad or non existent, these will often be the best card available to you.

That’s not to say that the healer is a bad card. Of all the card types on this list, the healer is the one that will have the greatest benefit. This is because a good healer is designed to help struggling people build credit. The best ones will file monthly reports with the major credit bureaus on your behalf. There are also good secure cards tailored specifically to recent immigrants–a major boon for international students.

A healer will usually come with many strings attached. Late payments will have stiff penalties, interest rates will be relatively high, and most cards will have an annual, if not monthly, fee. You’ll also be expected to provide a deposit to activate your account.

Don’t get too attached to your healer. Once you build a sufficient score to be eligible for better credit cards, it’s time to cancel that account and move on. Do remember you healer fondly, of all the credit cards you’ll carry, this is the one that helped you the most.

Two lists of good healers (current as of April 2013):

• NerdWallet’s Best Secured Credit Cards, Spring 2013
• NerdWallet’s Best Bad Credit Cards, Spring 2013

The alternative to a good healer is to have someone with a good credit score who trusts you co-sign for a card. The advantage to this is that the credit company will be lending against the high credit score, so you’ll have better card available to you. The downside is that these cards aren’t specifically designed to help build or repair credit like certain secured cards.

The Tank

The tank exists for one reason and one reason alone–to absorb massive short-term expenses that would otherwise crush your finances. Your tank is a defensive card. It has a decent credit line, low monthly payments, and no annual fees. Most important, your tank has a 0% APR for a significant amount of time (18 months if you’re lucky, but no less than 12).

As a graduate student, it is inevitable that at some point during your career you will have to shoulder short-term financial burdens related to your research. This can come in the form of travel to and from field sites or conferences, conference fees, training fees, or any number of incidental expenses for which you will, eventually, be reimbursed. The problem lies in how long it takes for your reimbursements to process. If you’re a clever, organized graduate student that is stretching your grants as far as possible, you may be paying for flights to your field site months ahead of time and registering for expensive international conferences up to a year in advance. Generally, you won’t be able to file for reimbursement until that travel is complete.

You could cover those expenses out of pocket, knowing that you will eventually get it back, but that can have a significant impact on your savings. Most graduate student live paycheck-to-paycheck so shouldering that burden, even for a few months, is untenable (as a student, travel to a major international conference represented 15% of my annual income) .

But your tank can take it. The advantage of the tank is that you can use it to absorb that debt for a short period of time without taking a hit to you personal finances. Generally, you should always pay off your balance in full every month, but the tank is an exception. The 0% APR means that you won’t accrue any additional interest, and the fact that you only carry a balance for expenses that you know, without a doubt, will be reimbursed prevents you from accumulating long-term debt. As long as you meet the minimum payment every month, you can keep a balance on the tank until your reimbursements are processed.

A well-managed tank can be a tremendous asset, but a poorly managed tank is a major liability. Fail to make the minimum monthly payment and you’ll be kicked into a very high interest bracket. Fail to pay off your balance before the introductory 0% APR offer expires and you end up paying much more than you bargained for. Carrying a balance on the tank also means that you may be exceed the 10% credit utilization guideline. This may decrease your credit score in the short term but that is a small price to pay for protecting your savings.

Your tank is only as good as the 0% APR. Once that introductory rate has expired consider it retired. Unlike the healer, though, there’s no need to get rid of it. If the tank was the second card you obtained after the healer, it’s to your advantage to keep the account open, since part of your credit score is determined based on the age of your accounts. You don’t want to terminate your oldest accounts unless there are heavy fees attached. If your tank has no annual fee, there’s no harm in keeping the account open. Depending on its other attributes, the tank can easily transition into another role.

A list of  good tanks (current as of April 2013):

• NerdWallet’s Best 0% and Low Interest Credit Cards, Spring 2013

The DPS 

This is your damage dealer, the one who can take the biggest chunk out of your opponent. In this case, your opponent is debt, and the bonus damage you deal to it comes in the form of points, flyer miles, and cash rewards. Now that you’ve built up you credit and have a reliable tank to take on the big expenses, it’s time to start looking for rewards programs to help get you an extra chunk of change.

There are some really good rewards programs out there. Some will give you 6% cash back on groceries or 3% on gasoline, but, generally speaking, graduate students aren’t big enough spenders to see huge returns on these programs. The big benefit from your DPS come from the initial signing bonus. The signing bonus can be as high as $150 cash, enough miles to fly you to your next conference, or other perks. It’s not really a good idea to base your decision exclusively on the rewards program, however a good DPS plan can be used to get some bonuses when signing up for a new tank when the old one is retired.

There are solid reasons for carrying a DPS just for the rewards. If you have a long commute, or make frequent trips to distant research sites, a good gas rewards card can provide a small amount of extra cash. If your credit is creeping up from “good” to “excellent” you can look for ways to combine your tank and DPS, reaping rewards points from reimbursed expenses.

Since your DPS exists primarily for the rewards program, it’s not necessary to close it after the introductory offers expire. As long as you keep seeing a tangible benefit, there’s no reason not to keep using it. Even annual fees may be offset by those benefits. For example,  the American Express Blue Cash Preferred costs $75 per year, but rewards you with $150 cash after signing, 6% cash back on groceries, and 3% cash back on gas, which means that if you buy more than $1250 a year in groceries (or $24 per week), the card pays for itself. Use it to cover gas, too, and you’ve got a free tank of gas or a fun night out every couple of months.

The Caster

Now that you’ve got your main team rounded out, it’s time to add a specialist or two. Your caster is the card that is not generally useful, but is incredibly valuable for specific types of transactions. Live at a rural marine lab and find yourself making a lot of purchases from Amazon? An Amazon rewards card might be useful. Doing a lot of overseas travel? You might want something without foreign transaction fees. Is there only one airline flying out of your regional airport? They might have partner with a very nice rewards card.

Your caster might also come with other perks, like access to airport lounges, free rental car insurance, extended warranties on electronics, or purchase protection. A good caster won’t be the most powerful or flexible member of you team, but it will give you a nice bonus where you use it most.

The Team

It’s important to keep your team in good shape. Failure to pay attention to your finances can result in ever increasing debt. Like any good RPG, you might have a few teammates in reserve. A good emergency card (usually your old tank) can serve you well if major disaster strikes. If there’s no annual fee or inactivity fee, there’s no harm in keeping old accounts open and unused, just in case. They’ll even help your credit score by adding to the average age of your accounts.

If that was all too much, here’s your abbreviated strategy guide:

1. Pay your balance on time and in full very month for all cards but the tank. 
2. Always pay the minimum balance on time and in full every month for your tank. Pay of the balance in full as soon as your reimbursement arrives.
3. Avoid using more than 10% of your available credit when possible.
4. Don’t apply for multiple cards at once.
5. Keep an eye out for useful rewards programs, but do your research before applying.
6. If you find yourself using a specific services, check for good casters to help you out.

---

*Please note, the only links I provide in this article are from services I actually use. Financial information is hard enough without spammy sponsored links to less-than-reputable companies.

I am not a financial advisor, though I did consult a few for this post. This advice is based on my own experience, and the experiences of colleagues, as graduate students. Your mileage may vary, though I hope some of it proves useful to you.