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How to Establish and Improve Your Credit as a Graduate Student or PhD

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In this episode, Emily explores the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, she also reveal the biggest credit killer that she sees among the PhD community and how to overcome it. As ever, the content is tailored to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

Links Mentioned in the Episode

Intro

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 6, and I don’t have a guest today, but rather I’m exploring the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, I also reveal the biggest credit killer that I see among our community and how to overcome it. As ever, I have tailored the content in this episode to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

I’m eager to devote time to this important topic because many PhDs, especially those who grew up outside the US or are from underprivileged backgrounds, don’t have credit or have poor credit or are concerned about their credit. If you have good credit, it’s not something you have to pay much attention to. But if you have poor credit or no credit, it can really hold you back financially and limit your life choices.

The credit bureaus start tracking our financial actions as soon as we start taking any. For many of us, that starts when we’re minors or college students, long before we may have the financial acuity to safeguard and foster our credit. Very sadly, some children and adults are victims of financial fraud, which can destroy your credit through absolutely no fault of your own, and it can be very difficult and painful to rectify.

I expect listeners of this episode to run the gamut, from PhDs and graduate students with great credit to those with poor credit to those with no credit. You will all find great information in this episode, including what steps you should take to establish or improve your credit, if necessary, and some reassurance as to when you can put your credit out of your mind.

What Is Credit?

Asking the question “What is credit?” seems like a basic place to start this episode, but I actually had to search a little harder for a good definition than I was expecting. In fact, the best definition I found was for the term creditworthiness rather than credit, and it’s from Investopedia.

“Creditworthiness is… how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you. Creditworthiness is determined by several factors including your repayment history and credit score.”

Basically, credit is a tool that lenders use to evaluate how risky you are to lend to, which affects whether whether they will work with you at all and what interest rate you’ll be offered. This evaluation is based on your past use of credit.

All of your credit-related activity is tabulated in your credit report. Actually, you have multiple credit reports, each prepared by a different credit bureau. There are three main credit bureaus: Equifax, Experian, and Transunion. In theory, they are all working off of the same information.

The information that is included in each of your credit reports is 1) personally identifiable information, such as your name, social security number, and address; 2) lines of credit and payment history, which is all of the loans and credit that have been extended to you and your repayment history with each, going back approximately seven years; 3) credit inquiries, which is a record of each time your credit is viewed by a potential lender; and 4) public record and collections, which is a record of bankruptcies or bills that have gone to collections because you neglected to pay them.

Your credit reports are used to calculate credit scores. You actually have many credit scores calculated in different ways by different bodies for different purposes. The most popular credit score for mortgages and similar loans is the FICO credit score. A close second is the VantageScore. We’ll return in a few minutes to how those scores are calculated and what they mean.

The main points I want you to take from this section are that your credit scores are based on your credit reports, which are records of all of your credit-related activity.

Why Credit Matters

Why should you or anyone else care about your credit or your credit score in particular? You can see that your credit is based on how you’ve treated your debt and some other financial obligations in the past, and it was developed to help lenders asses whether they should lend to you under the assumption that you will behave in the future as you have in the past. So clearly your credit matters if you are trying to take out a loan, like a mortgage or car loan, or a line of credit, like a credit card.

Rather strangely, your credit score is also often referenced when someone wants to quickly judge how financially responsible you are. Landlords, utility companies, and insurance companies often access credit scores, and some employers and even governments do as well. It is a big leap to assume that how you’ve treated debts in the past is predictive of general financial responsibility in the future, and I think it’s quite unfair.

People who have no credit are often quite financially responsible because they have managed to run their lives without the use of debt, but that’s not reflected in their nonexistent credit score. Also, credit you may have had in your home country does not translate to the US; you have to start over. And for anyone with poor credit, the actions and/or circumstances that created that low credit score are not ones that will necessarily be repeated in the future. You can change your financial behavior on a dime, but it takes a long time for your credit score to catch up.

The Equal Credit Opportunity Act of 1974 ostensibly prohibits discrimination based on race alongside other factors, but in practice there is a credit gap. A recent study by Credit Sesame found that 54% of Black Americans had no credit score or a poor or fair credit score, while only 41% of Hispanic Americans, 37% of white Americans, and 18% of Asian Americans had the same. The credit gap stems from the Black-white wealth gap, homeownership gap, employment gap, and income gap, and perpetuates the wealth gap and homeownership gap.

The credit gap is caused by systemic problems, and systemic solutions are warranted. However, in this episode, I’m going to focus on what you can do as an individual to impact your own credit score.

What is a good credit score and how is it calculated?

The FICO credit score and VantageScore range from 300 to 850. According to a lovely Nerdwallet graphic linked in the show notes, a score of 720 to 850 is considered excellent, 690 to 719 is good, 630 to 689 is fair, and 300 to 629 is poor. For another reference point, a FICO credit score of 760 and above will get you the best interest rates on a mortgage.

https://www.nerdwallet.com/article/finance/what-is-a-good-credit-score

While the exact algorithm for calculating FICO credit scores is proprietary, we know that 35% of the FICO score is based on payment history, 30% on amounts owed, 10% on new credit inquiries, 15% on the length of your credit history, and 10% on the mix of credit. We’ll get into what actions you can take in each of these areas to improve your credit score momentarily.

How do I establish credit?

Before we get there, I want to speak to those of you who do not have any credit history in the US. I do think it’s worthwhile to establish credit history and a credit score if you are not yet financially independent. A good credit score is useful as a renter and a virtual necessary when taking out a mortgage.

As I explained earlier, credit is self-referential. To have credit, you must have had credit. So how do you get your foot in the door?

The simple and free way to do so is to take out a secured credit card. This is a special kind of credit card designed to help people establish credit. You turn over a deposit, which becomes your line of credit. You borrow against that line of credit and then pay it back. After about six months, you should have a credit score and be able to move on to more conventional debt products, if you want to. These credit cards are often marketed as student cards.

Alternatively, if you have a family member who is very responsible with credit, you could ask to be added as an authorized user on one of their credit cards. In this way, their good credit sort of rubs off on you. You don’t actually have to even have or use your authorized user card. Just make sure that the person you ask to do this pays off their credit card balance in full every statement period. As soon as your credit score is established and high enough, take out your own credit card to establish your independent credit history. As I learned from Sam Hogan, a mortgage originator with PrimeLending (Note: Sam now works at Movement Mortgage) and an advertiser with Personal Finance for PhDs, in one of the live Q&A calls we’ve held, your credit score may look good with only an authorized user card in your history, but you won’t qualify for a mortgage on that alone.

There are two other solid ways to establish credit, but they are not usually free, and therefore I suggest you only undertake one of them if it is very financially important to you to establish the highest possible credit score quickly. That’s not usually necessary, so these are sort of extreme steps.

Method #1 is to take out a loan with a bank, sometimes specifically called a credit builder loan. This is an installment loan, so it’s a good complement to the revolving line of credit you likely already have with a credit card. It’s not enough to take out the loan, but rather the point is to make the minimum payments consistently to demonstrate that you are capable of repaying debt responsibly. The cost here is the interest you’ll pay throughout the repayment period, so you should shop around for the best rate available to you. You could also consider doing this with a student loan if you are a student, but since the loan won’t go immediately into repayment, I’m not certain it will have as positive an effect on your score as a credit builder loan would. Plus, student loans are not dischargeable in bankruptcy, if it came to that, so that’s a strike against them in comparison with a bank loan.

Method #2 is to pay a service to report the payments you are already consistently making to the credit bureaus. For example, the service might report your rent payment, which would not normally be included in your credit report. The cost here is the fee for the service, so again, shop around. You won’t have to keep the service up indefinitely, only long enough to qualify for another debt product.

This last tactic of reporting rent payments to credit bureaus and having them be calculated into credit scores is, from what I can tell, the top method being pursued to address the credit gap. A few landlords are starting to report rent payments to the credit bureaus on behalf of their tenants for free. The newest versions of the FICO and VantageScore algorithms do take rent payments into consideration, but most lenders still rely on older versions of the algorithms.

How do I improve my credit?

Now that we’ve covered establishing credit, let’s go deep into how to improve credit. Please take note from the outset here that improving your credit score is a long game. You must practice good credit behavior consistently for years. Since the length of your credit history is taken into account, you really can’t attain a top credit score until you’ve been using credit for at least a handful of years.

I’m going to give you at least one suggestion from each category that goes into the FICO credit score. Don’t be shocked when one or two of the suggestions contradict each other!

35% of the FICO score is based on payment history. This is the key category. Make your payments on time and in full every time. For years.

30% of the FICO score is based on amounts owed. Pay down your debt. Pay off your debt. For a specific hack, keep your credit card utilization rate low. Your utilization ratio is the balance you owe across all your credit cards divided by the sum of your credit limits. You should keep this ratio below 30% or ideally below 10%. Please note that your utilization ratio can be viewed at any point in your statement period. So even if you pay off your credit cards in full every period, as you should, having a high utilization ratio at some point earlier in the period will still ding your score. You can keep your utilization ratio low without changing your spending by 1) requesting credit limit increases across all of your cards, 2) applying for new credit cards to increase your overall credit limit, and 3) paying off your cards multiple times each statement period instead of just at the end.

10% of the FICO score is based on new credit inquiries. Don’t apply for any new loans or lines of credit. I warned you that some suggestions would be contradictory!

15% of the FICO score is based on the length of your credit history. Basically, you just need to let time pass. It helps to keep your oldest credit card open indefinitely and to close newer accounts if you want to close any. If you haven’t opened a credit card yet, choose one without an annual fee to be that first card.

10% of the FICO score is based on the mix of credit. Specifically, this means having both revolving lines of credit, like credit cards and home equity lines of credit, and installment loans, like a mortgage, car loan, student loan, etc. If it was really important to you to improve your credit score and you didn’t have any installment loans, you could take one out, like the credit builder loan I mentioned earlier, but it will cost you.

Another great, general step to take is to check your credit reports for accuracy once per year through annualcreditreport.com, which is the government-sponsored website where you can order one credit report per year from each credit bureau. During the pandemic, that limit was increased to once per week. Keeping tabs on your credit reports is part of your basic good credit behavior.

Credit killers

Now I’d like to explore the main credit killer that I see PhDs and particularly graduate students falling into. And it’s not student loans! Believe it or not, as long as you’re current on your payments and your balance isn’t inordinately high, student loans are kinda good for your credit score. No, the big credit killer, and killer of your finances overall, is credit card debt.

According to the Council of Graduate Schools’ recent report, Financial Education: Developing High Impact Programs for Graduate and Undergraduate Students, 85% of graduate students have a credit card. Forty-five percent of those carry a balance on their cards, with 9% only making the minimum payment.

Everyone listening to this podcast episode knows that finances in graduate school are challenging at best. We can all understand how readily an emergency or unexpected expense could result in a carried balance on a credit card. But, I implore you, instead of accepting that your credit card balance will be with you until and through graduation, get aggressive about ridding your balance sheet of this most toxic kind of debt.

Ideally, you would pay your balance off by increasing your income and/or decreasing your expenses and throwing all available cash—outside of a starter emergency fund—at the debt. Depending on how high that balance is, you may not have to make these sacrifices for long.

If it is absolutely impossible for you to increase your income or decrease your expenses before you finish graduate school, you could at least mitigate the negative effects of your credit card debt. If your credit card debt resulted from the hard reality that your stipend is insufficient to pay for basic living expenses, please consider taking out a student loan to pay off the past debt and supplement your income going forward so you stay out of credit card debt. While it’s not great to be in student loan debt either, at least you can defer the payments until after you graduate. If your credit card debt resulted from an unexpected expense that is unlikely to recur, you might consider paying off your credit card debt with a personal loan from a bank or with a balance transfer credit card. That way, you can at least get a break on the interest you would have paid while you’re paying down the balance.

If you’d like to learn more about increasing your cash flow and paying down debt, please join the Personal Finance for PhDs Community at PFforPhDs.community. Inside the Community, you will find the recordings of two workshops I gave in August, titled How to Up-Level Your Cash Flow as an Early-Career PhD and Whether and How to Pay Off Debt as an Early-Career PhD. After working through the materials, you will have a plan for how to handle your credit card balance in the short and long term.

When your credit doesn’t matter

The final credit topic I’ll address in this episode is when your credit doesn’t matter and when it does. Once you have attained a great credit score of approximately 740 or above and you keep up your good credit habits, you don’t need to pay much attention to your credit. Keep paying your bills on time and in full, use your credit cards as you would debit cards, chip away at your debt, and check your credit reports for accuracy once per year. You don’t have to actively work on increasing your credit at that point—with one exception. If you are planning to take out a loan in about the next year, it would behoove you to get a little more protective about your credit. I’m particularly speaking about taking out a mortgage, but this would also help you with a car loan or similar. For example, you might stop opening credit cards months or a year in advance of applying for your new loan so that you don’t have any recent hard credit inquiries. You might pay off a smaller debt in its entirety. You might pay special attention to your utilization ratio. Above all, when you start working with a mortgage loan officer, listen to that person’s advice about what to do regarding your credit. They might instruct you to make absolutely no changes. I know that Sam Hogan, the mortgage originator I mentioned earlier, advises his clients all the time about their credit in the lead-up to taking out a mortgage. If you are looking to take out a mortgage in the near future and you want to work with someone who understands PhD income, please reach out to Sam over text or a call at 540-478-5803.

Conclusion

I hope this episode was instructive for you and clarified what steps, if any, you should take regarding your credit as a graduate student, postdoc, or PhD with a “Real Job!”

Outro

Listeners, thank you for joining me for this episode!

pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast. I’d love for you to check it out and get more involved!

If you’ve been enjoying the podcast, here are 4 ways you can help it grow:

  1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use.
  2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
  3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and effective budgeting. I also license pre-recorded workshops on taxes.
  4. Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

 See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps!

The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

This Grad Student Travels for Free by Churning Credit Cards

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In this episode, Emily interviews Julie Chang, a graduate student at Stanford University. Julie’s partner and parents live on the East Coast and she has family abroad, so during grad school she has pursued a specific credit card rewards strategy known as churning to help her travel hack. She has regularly flown domestically and internationally for several years almost exclusively using points and miles instead of cash. Julie details how she manages her churning strategy, including how she meets minimum spending requirements on her stipend, and how she has changed her strategy during the pandemic.

Links Mentioned in this Episode

grad student travel hacking

Teaser

00:00 Julie: Even if you don’t want to start off with churning right away, my best advice is to just get a credit card with a low minimum spend, and at least use that to start building your credit score and acquiring some points.

Introduction

00:18 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host Dr. Emily Roberts. This is season seven, episode eight, and today my guest is Julie Chang, a graduate student at Stanford university. Julie’s partner and parents live on the East coast and she has family abroad, so during grad school, she has pursued a specific credit card rewards strategy known as churning to help her travel hack. She has regularly flown domestically and internationally for several years, almost exclusively using points and miles instead of cash. Julie details, how she manages her churning strategy, including how she meets minimum spending requirements on her stipend and how she has changed her strategy during the pandemic.

01:06 Emily: Julie and I don’t go deeply into the topic of who can or should pursue credit card rewards or how to get started, so I’m going to point you to some free resources I’ve created on those topics. They’re all linked from the show notes for this episode, which you can find pfforphds.com/podcast. My article titled “Perfect Use of a Credit Card” explains how to avoid all the pitfalls that easily accompany credit card usage by putting in place some pretty stringent rules. You will have to be well-practiced and following strict rules in this area if you want to succeed with credit card rewards. My article titled “How to Establish Credit in the US” is for people who have recently arrived in the U S or who have lived in the US for many years, without taking out any debt. It explains how to get your first toe hold in the world of credit and how to build your credit score over time. Finally, in 2019, I published a podcast interview with Sun Wu Lee titled “How To Make Money Without Working: Credit Card rewards and 529s”. That episode is quite complimentary to this one, and I recommend listening to it. If you want to go deeper into the subject. Without further ado, here’s my interview with Julie Chang.

Will You Please Introduce Yourself Further

02:20 Emily: I have joining me on the podcast today, Julie Chang. She is a graduate student at Stanford currently, and we’re going to be talking about credit card hacking, credit card rewards strategies today. So, Julie, will you please introduce yourself a little bit further?

02:34 Julie: Sure. I’m a fifth year bioengineering PhD student at Stanford, and I’m currently studying how the mechanical properties of the extracellular matrix affect cell behavior and specifically in the context of cancer.

Credit Cards vs. Debit Cards

02:48 Emily: Yeah. Excellent. You have done what I used to view as the impossible, which is having a strategy for credit card rewards during graduate school. And I always thought there’s a little bit out of reach, so I’m really excited to learn more about credit card reward strategies in general, and then the strategy that you use in particular. Let’s just start off for listeners with what are the general advantages for using a credit card versus using a debit card? Because I know for me, I definitely started out just using debit cards. I was a little bit afraid of credit card. So what are the advantages?

03:22 Julie: Yeah, so I think there’s a couple of main advantages. The first is that you can earn rewards often in the form of points or miles, and then you can actually redeem this for either cash back or for miles to fund plane tickets. And on another point is that you can actually use credit cards to help build credit history. So in the future, when you’re buying a house, getting a mortgage, having a high credit score is super important.

03:50 Emily: And another benefit I’ll add to the two that you just mentioned is there’s a little bit more fraud protection available for credit cards. It’s quite easy to have a fraudulent charge reversed, erased on a credit card versus maybe more of a process or maybe even potentially impossible with certain charges on debit cards. Those are three, three great ones.

Pursuing Credit Card Rewards

04:08 Emily: Specifically on the rewards aspect of using credit cards, what are the different kinds of goals you might be able to pursue?

04:15 Julie: Right. Sometimes you can acquire airline points, so you can get a lot of Delta points, American airline points, and then you can use those to re redeem tickets, either domestically or internationally. On the other hand, you can also use points for cash back. Then you can actually use this to kind of pay yourself back when you purchase, say groceries or anything else. It kind of depends on the credit card.

04:43 Emily: Yeah. I know when I was in graduate school and I started learning about this area, I definitely only tried to pursue the static cashback, because I guess I sort of felt like the travel rewards were a little bit more, it’s a little bit higher level. It’s a little bit more complicated. It’s something you have to learn. There’s more of a learning curve on that. So I definitely stuck with the static stuff at first, which I think is a pretty common approach for people. But both of those are different kinds of strategies that will work. For you in particular why are we talking to this today? Why is this a strategy that you have learned a lot about and decided to pursue during your graduate degree?

05:19 Julie: For me, I’m doing my PhD program in California, but my family lives in New York, so then I would have to go back during breaks and my partner, he’s actually also a PhD student in Atlanta, so this requires a lot of traveling. Also a lot of my relatives are in Taiwan, so occasionally I make these international trips. Basically my perspective is using credit cards on things that I would purchase anyway and slowly build points to then redeem for these flight tickets. My goal was to not spend too much money on flights during grad school, but I don’t want money to be kind of a limiting factor in that I can’t see my partner or my family.

06:08 Emily: Okay. And was there…when did the shift happen? When did you set this as a goal? Was it just when you were starting graduate school, when you were looking at the geography of the situation and realizing the challenge, or did you go for while paying for flights in cash and then said, well, there must be a better way here.

06:23 Julie: I got into it just before graduate school since, I think to apply for credit cards, it’s a lot easier to apply for credit cards after you’re a certain age. It might be 21. So before then, I wasn’t really applying for credit cards anyway. And I think just when I turned 21 and then it was right before I went to graduate school, so it kind of worked out in that sense. And then I just kind of learned about it from searching online.

06:54 Emily: Yeah. And would you say that you’ve done more traveling than you would have been able to do just if you were paying straight cash? What’s been the effect on your finances, I guess?

07:06 Julie: Yeah. Essentially I typically don’t really need to factor flights into my budget, which is really, really awesome. And basically when I need to travel, I typically am able to, of course I still need to look at my budget overall, but there is a lot of flexibility. Another example is that my partner and I, we were able to go on a vacation to Greece, which typically the tickets might be a little bit more expensive and because we were able to pay for our flights in points, then maybe we have a little bit more flexibility in our budget for say housing or for food, during our vacation. So it definitely just reduces the impact of needing to spend a lot on a vacation.

07:50 Emily: Oh yeah. I mean, I can’t remember exactly what I was saving to spend on travel during graduate school, but I think it was at least a couple hundred dollars per month per person. And that was really mostly just for like obligation travel, like I have to go see my family, I want to go attend this wedding. So yeah, it’s really inspiring what you’ve been able to do. I’m really excited to dive into the mechanics of exactly how this happened.

The Basics of Credit Card Churning

08:13 Emily: What you have been doing as a strategy known as credit card churning. Can you explain what that is?

08:20 Julie: Yeah. Basically the bulk of the cash back from credit cards isn’t necessarily through the exact amount of money that you spend. It’s actually through these bonuses of signing up for new credit cards. For example, in some credit cards, you can get a certain number of points, usually it’s pretty high, maybe like 50,000 points, if you spend a certain amount of money in a few months. So a lot of cards you might have to spend $1,000 to $4,000 in about three months. And these points have 50,000 points. It could translate to say $500 if one is 1 cent, but if you can actually increase the value, say 1.50 cents per point, it becomes $750.

09:05 Emily: Yeah. I think maybe another way of phrasing what you just said is the amount of money that you need to spend to gain a given level of rewards is much less when you do that through signup bonuses, rather than through ongoing spending and ongoing cash back. There’s this lucrative period available right when you sign up for a new card. It’s the incentive that they’re giving you to do your business through that card versus some others. It’s this opportunity to capitalize on, right when you first switch onto a card. And so credit card churning is like very frequent switching onto new cards to gain those early on sign up bonuses. Is that right?

09:42 Julie: Yes, that’s correct.

Keeping Track of of Credit Cards

09:44 Emily: Okay, awesome. For you, as I said earlier, this is a little bit of an advanced level strategy. How do you keep track of all these cards that you either currently have, or maybe ones that you need to close, or maybe ones that you’re planning on opening? What is your mechanically…how do you keep track of all this?

10:04 Julie: Oh yeah. I basically do this through an old-fashioned spreadsheet. I color code everything. I typically put when I sign up for a credit card. And this is especially important if a credit card has an annual fee, because potentially you might want to cancel or downgrade the card when the annual fee comes up because it might not be worth keeping the card.

10:27 Emily: Yeah. So you keep track of when you sign up for a card, and then when one year, let’s say, is up for something that has an annual fee. Do you keep track of anything else? Maybe the minimum spend amount I would imagine, and the time period over what you have to do that?

10:40 Julie: Yeah. I keep track of all of that. I actually go into more detail in which I actually, every month I update all the point totals that I have and I also keep track of all of my redemption. So I think that might be a little bit extra in the amount of information I’m keeping track of, but for me it’s actually pretty fun to just tabulate everything.

11:01 Emily: Yeah. I could totally see how this would be fun because there’s kind of two halves of this, right? There’s like the accumulation of points and then there’s the planning of how am I going to actually use these points. And that is the really pleasurable par, I think, especially if one enjoys planning then getting to play around with different scenarios and so forth. Well, let’s come back to that in a few moments.

Meeting Minimum Spends

11:20 Emily: We just mentioned the minimum spending requirements like between one and $4,000 over a period of some months, that might seem like a lot of money on a graduate student’s stipend. So how do you actually make sure that you’re going to meet these minimum spends without, as you said earlier, outspending your budget, outspending your planned expenditures?

11:40 Julie: First I just want to be clear that everyone has to be very careful and tracking their finances. And you’re definitely in a very privileged position if you are able to do this. But for me, I look at many different factors. So one is timing. If I have a big purchase coming up, then I might as well use it in a minimum, spend another, more specific for graduate students is if you have conferences. So conferences can be pretty expensive. Sometimes you have to use your own credit card, so why not actually use it to help meet a minimum spend? Another thing that I’ve done is paying stuff in advance for other people, especially my family, where, for example, if we have a cell phone bill, I can pay that ahead of time. Another one that actually found out more recently is that you can actually pay estimated taxes with credit cards. And this is really interesting because with a credit card, there is a fee of, I think the lowest is 1.87%. But say, if you have a credit card that does 2% or even a special credit card, if the rotating category matches 5%, you can actually make money by paying the estimated taxes, which you actually have to do anyway. However, if you don’t have a card for that, if you’re actually trying to meet a minimum spend, perhaps it is worth it to pay that fee to kind of help you get that really high bonus for the credit card.

How Many Cards is Too Many

13:09 Emily: So for you, like let’s say in 2019, how many new cards did you sign up for?

13:19 Julie: I would say I haven’t signed up for too many cards just because I’ve been slowing down a little bit towards the end of my PhD, but I would guess maybe three to four cards, so nothing too crazy. I know there’s people that are super into it that might sign up for 10-20 cards per year.

13:36 Emily: Yeah. Well, that’s 10-20, that’s a number of more minimum spends that you need to hit. Actually three to four sounds like fast, but like okay, reasonable pace for graduate students. I think that this strategy of keeping track of minimum spends and what your expenses might be that are coming up that might help you meet those minimum spends, it goes actually really well with the strategy I love to talk about, which is that of targeted savings accounts. Not specifically the saving in advance for doing things, which is also a good idea, but actually more the planning aspect that comes along with keeping account budgeting like that is that you can look out over the next six months or over the next year and say, yup, I know that this large expense is hitting in this month. I know this needs to be, be paid here. And I definitely found that there were some one, two month periods when I was in graduate school where I would have like a flight I needed to buy, well, I was buying them in cash, a flight I needed to buy, and my six month car insurance premium was coming up and there were some other maybe some housewares or electronics purchase we need to make. There were definitely months where they would hit kind of like that, and I was budgeting for those and using targeted savings and thought that was great, but hey, the next level up from that is yes, save in advance, but why not also put it on a credit card and meet a minimum spend that you’re gearing up for anyway.

When to Apply for a New Card

14:48 Emily: This is more of a personally motivated question, but how far in advance of, let’s say a major purchase that you know is coming up on a certain date, would you need to sign up for a card? How do you actually time this so you know that you have the card ready to go when you actually need to make the purchase.

15:04 Julie: Yeah. I mean, I would probably do at least a month just because you have to apply for the card. And in some cases, if you’re not approved right away, you might have to wait a week or so. And that doesn’t mean that they’ll reject you, it’s just something that is part of the process. Another is if you put a credit freeze on your credit score, so that’s actually something I’ve done to be extra careful, you might have to lift your credit freeze, and that also takes some time. So I would budget at least a month.

15:35 Emily: Yeah. I know there’s a little bit of a game there because you need to give some buffer time in advance, but you also need to have enough purchases within the period of time to get the bonus to go through.

Commercial

15:46 Emily: Emily here for a brief interlude. If you are a fan of this podcast, I invite you to check out the Personal Finance for PhDs Community at pfforphds.community. The community is for PhDs and people pursuing PhDs who want to take charge of their personal finances by opening and funding an IRA, starting to budget, aggressively paying off debt, financially navigating a life or career transition, maximizing the income from a side hustle, preparing an accurate tax return, and much more. Inside the community, you’ll have access to a library of financial education products, which I add to every month. There is also a discussion forum, monthly live calls with me, book club and progress journaling for financial goals. Basically, the community exists to help you reach your financial goals, whatever they are go to pfforphds.community to find out more. I can’t wait to help propel you to financial success. Now back to the interview.

Using Credit Card Churning to Fund Travel

16:50 Emily: So you mentioned the challenge that you were facing of living far from your family and your partner, and you also mentioned, okay, you’ve been able to, for instance, you were able to go to Greece with your partner. What were some of the other benefits that you’ve experienced by doing this? For instance, have you ballparked like how much money you have not spent on travel by doing this strategy? Or can you tell us a little bit more about the upside?

17:13 Julie: It’s definitely quite a bit of money that I’ve saved through travel. I don’t remember exactly how much, but for example, I would go from California to New York round trip before the pandemic, probably two to three times a year. Then in addition, I would also go to Atlanta or vice versa maybe a couple of times a year. So it’s definitely many flights that I’ve saved on. And pretty much I’ve been able to not pay cash for most of my flights during grad school.

17:44 Emily: Yeah. It’s just an incredible benefit to not have to have that aspect in your budget, of paying for travel when you know that you have to do it like this. It’s really amazing that money can come kind of from nowhere, if you have a great credit score, if you’re really on top of your budget, if you have a spreadsheet like you do and you’re keeping track of everything and being diligent. It’s just amazing how much money you can free up for your budget. So I hope this is sounding like good news to some people in the audience who are currently spending more than they would like to on travel.

Credit Card Churning Strategies

18:14 Emily: For you, like when you’re realizing you’ve come to the end of a one period of minimum spend and you start thinking, well, what’s going to be my next card, how do you search out these cards? How do you actually find that’s going to be the best fit for you?

18:27 Julie: There’s a lot of very active communities on the internet. Specifically on Reddit, there’s a subreddit called churning that has all of these. There’s a lot of specific websites such as Doctor of Credit. Actually, I keep pretty up to date and people will typically announce whether there might be a new card coming up. But for me as a graduate student, if I know I don’t have any big purchases coming up, it’s also a practice of self-restraint, where I know I shouldn’t apply for new credit card, and instead kind of look at my portfolio of credit cards and see perhaps certain cards have increased points per certain category and maximize that instead.

19:10 Emily: I see. And then you mentioned earlier cards with annual fees, specifically canceling a card with an annual fee before that second fee comes up. How do those overall play into your strategy? Is it something that people should consider or maybe should avoid? What are your thoughts about that?

19:26 Julie: I would say definitely for beginners, maybe focusing on cards without annual fees because they also have much lower minimum spends, so it would be pretty easy to hit minimum spend. But for me, the only card I have with an annual fee that I currently use is a Chase Sapphire Reserve. For me, I always have to do a calculation, whether it’s worth it for me to keep the card for the next year. There’s certain factors that I consider. One is looking at the benefits that the card offers and if I would actually use that, and another that I might consider is whether keeping the card will help me increase the value of the points that I’m spending. For example, with the Chase Sapphire Reserve, each point I can actually redeem for 1.50 cents instead of just 1 cent.

20:19 Emily: Yeah. I actually, so also for me, the Chase Sapphire Reserve was the first or maybe the second card with an annual fee that I ever signed up for. And I actually just canceled it a few months ago because I was like, I’m not traveling. I’m not traveling anytime soon. I don’t want to pay this fee because I do not see any redemption on the horizon. What I did specifically with that was I transferred the points to another Chase branded card that we had figuring at some point in the future, I’ll probably get the Reserve or the Preferred again, transfer the points back and be able to redeem them at at least that much value, if not more/better later on. So that was my particular solution to that, but I’m glad that you reevaluated and decided, okay, I’m going to keep this card for the time being. It does have some pretty nice perks to it for a high fee.

Churning During the Pandemic

21:04 Emily: Speaking of the pandemic and recent changes, what has been going on with you and this strategy in the last six months?

21:11 Julie: Yeah. So there has actually been a lot of changes to the point space since the pandemic and I think these effects are likely to stay for quite a while. So obviously I’m not redeeming my points for travel; however, for Chase, because they realize this they’re actually allowing you to redeem 1.50 cent per point for groceries. Before it used to be just travel, but now it’s actually for grocery purchases. So for me, if I put my grocery spend on the Chase Sapphire reserve, I’m able to redeem those points for the groceries. And also since I had a few canceled flights this earlier this year, then I’m not really looking to apply for cards that will give me more miles, but I might look for cars that give me a little bit more flexibility in how I can use those points.

22:01 Emily: Hmm. So when I thought about the pandemic and affecting my travel plans, both personally and professionally, I’m already in a period of not applying for cards right now because my husband and I are looking forward to buying a house in a few months. And so we don’t want to be messing around with our credit right now. If not, I think I would probably still be signing up for stuff because I, again, hypothetically, I think my attitude would be well, get the points, bank them now, spend them later at some point. Why is that not your approach? Why do you prefer the flexibility right now?

Julie (22:36): Well, so actually right now, I’m not really applying for cards and I’m just kind of using my current portfolio of cards to reach or to kind of build up the points, as you said. I might look towards applying for a card later this year, but I’m actually not in a rush to apply for new cards right now.

Planning Point Spending

22:59 Emily: Yeah. You said you updated your spreadsheet monthly with figuring out how many points you currently have and with what providers and so forth, how do you go about planning how you’re going to spend the points? What is that process like for figuring out, okay, these points transfer to this airline, you know, all of the complexity that goes along with that.

23:18 Julie: Yeah. That I would say is actually the hard part of figuring out how to use those points. There’s certain programs, like Chase, where it’s pretty easy to redeem the points because you can just do it through any airline by using Chase travel, but certain cards you can actually transfer it to specific airlines and convert it into miles, which is actually, even though it’s harder, it could be better because you could get better value for your points. For me, I like having points in several different companies, for example, also in American Express. I also have points specifically in Delta, so then whenever I, for example, if I want to travel to New York, I can look at what are the different points I have and figure out which program I want to redeem it in for the best value.

24:10 Emily: I’m also thinking that some of this, the planning of the redemption might be specific to your local city. You obviously live in a major city with several different airports and airlines to choose from. I’m also reflecting, I recently moved from Seattle to the Los Angeles area. So in Seattle it’s all about Alaska. Like Alaska is by far the winner airline right there, so I was always trying to sort of figure out how to get Alaska airline points versus other things. Now that I live in a different kind of city I’m thinking, well, my strategy might need to be different. Do you know of any resources where people can find out more about the airlines that service their local airports or maybe their destination where they commonly go, they want to figure out how to do that?

24:51 Julie: I think the best way to figure that out is just looking through the specific airline website and figuring out which destinations your city travels to. But otherwise also just looking online to see what other people tend to do in your city.

25:08 Emily: Yeah. And I guess if you live in a major city, like the San Francisco Bay area, Seattle, Los Angeles, there’s going to be plenty of conversation around how to do this in cities like that. Well, is there anything else you want to add to tell the audience more about your strategy or what you’ve been able to do with it?

25:26 Julie: I think as a graduate student, even if you don’t want to start off with churning right away, my best advice is to just get a credit card with a low minimum spend and at least use that to start building your credit score and acquiring some points.

Best Financial Advice for Early Career PhDs

25:43 Emily: So Julie, as we wrap up this interview, what is your best financial advice for another early career PhD?

25:50 Julie: My best financial advice would be to start early. Many financial related actions serve their greatest benefits when done early, so the effects can be compounded over time. And I think this not only applies to investments compounding over time, but also any positive practices that you do such as saving money on food by not eating out too much or using credit cards to your advantage.

26:14 Emily: Yeah, absolutely agree. Starting early, I mean, a lot of graduate students might feel like they don’t have a lot of options right now, especially living on a lower stipend, but anything you can do any habits that you can form any even habits of mind that you can work on, it’s all going to benefit you throughout your time in graduate school, after that going into your career, and really, I like to think of it as, if you build up these habits and practices and thought patterns right now during graduate school, once you get that higher salary later, you’re going to be able to like hit the ground running blast through financial goals, when you get to that point, if you’ve done the sort of mental preparation beforehand, even if you don’t see a lot of actual financial progress earlier on.

26:57 Emily: Thank you so much that advice, and thank you so much for joining me today, telling the audience about your strategy. I’m really excited post buying a house to be back on the credit card rewards game so this is really inspiring to me.

27:11 Julie: Thank you.

Outtro

27:13 Emily: Listeners, thank you for joining me for this episode. PFforPhDs.com/podcast is the hub for the personal finance for PhDs podcast. There you can find links to all the episode show notes, and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, please consider joining my mailing list for my behind the scenes commentary about each episode. Register at PFforPhDs.com/subscribe. See you in the next episode, and remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is stages of awakening by Poddington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing and show notes creation by Lourdes Bobbio.

How to Improve Your Finances While Social Distancing

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Now that we’re a few weeks into our new normal of social distancing / isolation / quarantine, you may find yourself with the time, ability, and willingness to work on your personal finances*. Below are my top suggestions of activities you can engage in while social distancing that are highly likely to improve your finances in the short or long term, helping you to save money, pay off debt, and invest more money.

*If this sounds preposterous to you, this article isn’t for you right now! Keep taking care of yourself, your loved ones, and your community. If you want to know how I’m getting on without my regular childcare, listen to this podcast episode.

This is post contains affiliate links. Thank you for supporting PF for PhDs!

social distancing finances

Read a Personal Finance Book

Reading (or listening to) a book is the most time-efficient way to consume high-quality, curated personal finance content. I started my personal finance journey with a few cornerstone books (some of which appear on the list below) before moving on to blogs and podcasts. Reading a book is a great way to get a firm foundation—if you choose the right book.

In normal times, I would suggest that you check your local or university library first for the books you are interested in before considering purchasing. Personally, I know my local library branches are closed, but ebooks are still an option.

The list below includes some of my personal favorites and suggestions I received in response to a Twitter prompt. The knowledge you’ll glean from any one of these books is worth incalculably more than you would pay for them if you do decide to purchase!

Catch Up on a Podcast

For fascinating interviews with financially successful people and in-depth discussions of particular financial strategies, I turn to podcasts. (Podcasts are the one thing I have more of in my current life than I do in my regular life!)

Personally, I am a Completionist, so I prefer to listen through the full archives of most podcasts that I decide to subscribe to. Now that you have the time, here are a few of my favorite personal finance podcasts and other popular ones in the space. Listen to a couple of the recent episodes; maybe you’ll decide to commit to the archive!

File Your Tax Return

I am a major tax return procrastinator. My husband and I usually start working on our tax return in April and submit it barely under the deadline. Confession: This year, with the filing deadline extension to 7/15, we haven’t even started yet.

I do think that preparing your tax return is a good social distancing activity if you have the capacity. You can put an evening or two’s worth of uninterrupted time blocks to work with your tax software or even manually prepare your return (that’s our preferred method).

If you are expecting a refund, file ASAP to receive your refund ASAP. It’s your money! It should be working for you, either by paying expenses if you’ve experienced an income drop or going into savings, debt repayment, or investing if you income has stayed steady.

My tax workshop, How to Complete Your PhD Tax Return (and Understand It, Too!), comprises videos, worksheet(s), and live Q&A calls. Please consider joining through the appropriate link:

Network

One of the upsides of physical social distancing for some people is the chance to connect remotely with a different set of people than usual. (I am highly envious of this! I had high hopes to reconnect with old friends during this time… My children’s insistence on derailing all adult conversations has dashed those hopes.)

Instead of limiting your Facetime/Zoom calls to your family and friends, consider reaching out to people in your professional network.

In a general sense you should be networking like this all the time, but the motivation intensifies if you are coming up on an expected transition point in your PhD career or you think your job/position is at risk and you might need to look for another soon.

An excellent, low-risk group to network with right now is people who graduated from (or otherwise left) your PhD program in recent years. You can reach out over email to see what they’re up to and schedule a call if that is mutually agreeable.

If you reach out to someone and don’t receive a response, don’t take it personally! People are dealing with a lot right now. Just cast a wide net, and appreciate the people who are able to give you some of their time right now.

Oh, and always ask at the end of an interesting conversation if the other person can recommend one or more people for you to connect with next!

Explore Career Options

As a spin off of networking, right now is also an incredible time to work on exploring your career options. Yes, the academic job market looks abysmal right now, but—upside?—it’s been trending that way for decades, so there are lots and lots of PhDs established in non-academic careers that might be of interest to you.

A great first place to go for resources is your university’s career center. (Check on this even as an alum—you may have access to resources from all the universities/colleges you’ve graduated from.) The robustness of their resources for PhDs in particular might be strong or weak, but some of their resources for undergrads will still be helpful.

The career center may have assessment tools, instructional resources for job seekers, recordings of past live events, and opportunities to meet one-on-one with staff. If you know they have a resource that is not currently available online, submit a request that it is made available.

Two platforms for PhD job seekers in particular are Beyond the Professoriate (Aurora) and Versatile PhD. If your institution has a subscription, access the platform through its login mechanism, but if not you can sign up as an individual. Beyond the Professoriate has an upcoming online career conference as well.

To combine networking with exploring career options, set up informational interviews with people in careers you’d like to learn more about. From my experience on both sides of informational interviews, they can be quite enjoyable and beneficial for both parties!

Invest in a Frugal Strategy

Most of us are practicing forced frugality these days in a few areas of our budget. I’d wager that your discretionary spending was down in March from where it was February and that April will be lower than March. There are lots of possible uses for that freed-up cash flow, but consider one more: investing in a frugal strategy.

One of the major, legitimate complaints about frugal practices is that they take some capital to get started with. I’ve heard “Frugality is only for the rich,” for example. This is not the case for every frugal strategy, but it is for some. Well, now that you have some capital, what frugal strategies can you ‘invest’ in that you know will pay off with decreased spending over the long term?

I’ll give you one tiny example: Last December, I ‘fessed up—to myself—that my family (which includes two tiny children, one of whom is still in a high chair) was consuming paper towels at a positively alarming rate. We were buying the huge packs from Costco for $20 each half a dozen times per year. This didn’t sit well with me from a financial or an environmental perspective, so I purchased these microfiber cloths (12 for $12—now I wish I had doubled it!). They work far better than paper towels, our paper towel consumption rate dropped like a rock (we’ve probably made up for that initial investment twice over by now), and they haven’t substantially added to our laundry load. (Again, two tiny children—we already do a ton of laundry, including cloth diapers.) These towels were absolutely a frugal investment. Bonus: Not having the pressure right now of needing to buy this particular paper product before we run out when it is in short supply is a load off my mind!

Ask yourself: Are there any frugal strategies I’ve wanted to try but haven’t yet because of the up-front investment of capital? Can I use my newfound cash flow right now to establish one of the strategies? And if it wasn’t money but rather time was your limiting factor before: What frugal strategy did you never have time to initiate, but you can put in the time now to make it a habit?

Here are a few ideas for similar frugal/environmental investments, gleaned from this Twitter thread:

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Clear Out Your Closets, Etc.

My mother, a retired empty nester, has undertaken as her social distancing project clearing out the basement storage area of the home my parents have lived in for 30 years. It’s a massive project, and it is made more difficult by the closure of some of the places you might normally go to resell, donate, recycle, or trash your old possessions.

I do think a spring cleaning/clearing out is a good activity for right now. This might positively affect your finances if you are willing to hold on to the valuable items long enough to resell them. (You might be able to resell currently, but I suspect the demand will be relatively low.) If nothing else, it will benefit your mental health and will reduce the amount of work you’ll need to do leading up to your next move.

Close Old Financial Accounts (and Open New Ones?)

Spring cleaning can apply to your finances as well as your home!

You may very well have old banking or credit accounts that you no longer use or have need for. If you can close the old bank accounts without going anywhere in person, do so! Some people like to keep old credit card accounts open because length of credit history and utilization ratio play into your credit score. However, if you have a high credit score already, you should consider closing the accounts you don’t need; maybe just keep the single oldest account open. The suggestion to close old accounts goes quintuple for any accounts that charge you a fee.

In the same vein, now is a great time to join (aspects of) your financial accounts with your spouse or partner if you have decided to keep joint money. My husband and I decided to join as much as we could after we got married, and the months-long process involved researching and opening new accounts, waiting for money to transfer, and closing old accounts. Again, it’s a great social distancing activity as long as you don’t have to go anywhere in person. (Another reason online-only banks are my preferred institutions!)

If you’ve never looked into it before, you could put your free time into figuring out how to generate extra income from credit card or banking rewards. Please keep in mind that offers might be somewhat different during social distancing than they were before (or will be again). Before you open any new accounts, triple-check that you can meet the minimum spending requirements or transfer amounts given your (presumed) lower level of current spending.

Further Listening: How to Make Money without Working: Credit Card Rewards and 529s

Plumb Your Values/Dream

If you’ve been able and willing to slow down and reflect, this pandemic might have granted you new insight into what you want for your life. I don’t think you should be making any life-altering decisions in this stressful period, but lean into your different perspective and deepen your introspection.

What is truly important to you? What are the aspects of your life that make you feel fulfilled? What can you change about how you manage your finances to better support those aspects?

Further Reading: Determining Your Values and Financial Goals While in Graduate School

Get Coaching, Take a Course, or Join a Community

One way you can invest in yourself right now is to establish a relationship with a coach, join a community, or take a course focused on an area of personal or professional development. Spending money on this kind of endeavor makes it much more likely that you will actually take the necessary steps to ensure your financial success.

If your chosen area is finances, consider how you and I could work together. I offer one-on-one financial coaching, and I am also going to open up the doors to my program, The Wealthy PhD, in May 2020. Through both avenues, you will have individualized access to actionable knowledge, inspiration, and accountability. If you feel confident in your income security, this is the perfect time to firm up your financial plans and even take advantage of the unique opportunities this period affords.

If finances aren’t your preferred area of focus right now, I also recommend checking out the services offered by my colleagues:

  • Dr. Jen Polk coaches PhDs on their careers
  • Dr. Katy Peplin’s community Thrive PhD supports graduate students around the mechanics of graduate school and their mental health
  • Dr. Katie Linder offers podcasts with actionable tips, coaching and courses for academics on productivity and related topics
  • Dr. Echo Rivera offers courses and coaching on effective presentation design & presenting with data for academics, scientists, and researchers (grad students through PhDs)

If you do commit to working on your professional or personal development in one of these other areas, I’m confident that there will be an indirect positive effect on your net worth! Perhaps at that point you’ll be ready to directly work on your finances with me.

How have you improved your finances while social distancing?

How to Make Money without Working: Credit Card Rewards and 529s

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In this episode, Emily interviews Seonwoo Lee, a PhD student in electrical engineering at Georgia Tech. Seonwoo has mastered two methods to earn extra money without “working.” Emily and Seonwoo discuss in detail their experiences with garnering credit card rewards and give both beginner and advanced tips. Seonwoo also explains a 529 hack he discovered to reduce his state tax bill that is applicable in as many as 30 states. They also briefly touch on several other methods to make money without working that are readily accessible for early-career PhDs.

Links mentioned in episode

make money without working

0:00 Introduction

1:14 Please Introduce Yourself

Seonwoo Lee is a PhD student in electrical engineering at Georgia Tech. He did his undergraduate at Cornell. He pursued a number of ways to make money without actually having a second job.

1:48 Why have you tried to make money without working?

Seonwoo says that if you do it right, you can make more money per hour than working a traditional job. He says it gives you more flexibility, since you can do as much or as little as you want.

There is some effort involved in pursuing these strategies, but it’s not as much time you would put into working if you had a second job. Additionally, some people are prevented from officially working in other capacities, either by the terms of their contract or by their student visa. The strategies they’ll talk about are probably available to any PhD student or postdoc.

3:07 What are the two topics that we’ll go into detail discussing? What are some other strategies?

Seonwoo will discuss credit card rewards as well as banking sign up bonuses. Second, he’ll talk about the 529 trick to save money on your state taxes.

Emily mentions other ways to make money without working.

  1. Emily has sold items when she’s moved as part of a downsizing process. She has sold items on craigslist.
  2. Another option is Ebates *. Here, you make purchases through the Ebates platform and you are selling your information in exchange for money.
  3. Emily presents short term investing in taxable accounts as an option to make money without working. She and her husband paid off student loans through mid-term investing.
  4. Other options are receipt apps like Ibotta, where you upload your receipts and you sell your information to get cash back.
  5. Also, there is the strategy of “car wrapping,” which is wrapping your car in an advertisement and you receive money based on how much you drive. Emily recommends listening to the How to Money podcast for more information on car wrapping.

* This is a referral link. If you sign up and spend $25 through Ebates, you’ll receive a $10 bonus to your account and I’ll receive a referral fee. Thank you for supporting Personal Finance for PhDs!

7:19 How do the credit card rewards and sign up bonuses work?

Seonwoo begins with the caveat that if you can’t manage credit cards responsibly, you should not pursue credit card rewards in any form. If you pay any interest at all when you do this, you are likely not going to reap the benefits of rewards. Emily adds that you already need a good or excellent credit score to pursue these strategies. If you carry a balance on your credit card, this strategy is not for you. Emily says make sure you are using your credit card like a debit card, and if you are you can consider this strategy.

Further reading: Perfect Use of a Credit Card

Seonwoo says that plenty of credit cards offer sign up bonuses. These require you to spend between $500 and $4,000 within the first three months of signing. The bonuses will vary from credit card points to straight cash. The offers will range from $100 to $500 in cash or 30,000 to 100,000 points. Seonwoo says there are ways to meet these minimum spending requirements without spending more than you normally would.

Emily talks about fitting these credit cards into your normal spending. She signed up for a credit card with a minimum spending requirement of $3,000 over three months. She had to put everything she was purchasing on that one card. She picked a time of year when she had to pay for car insurance and flights. She timed signing up for the credit card with when she knew she had above average expenses. Reaching the minimum spend requirements is a hurdle for people with lower income.

Seonwoo says you can see if you can pay your rent with a credit card. He says the fee may be 3%. If that is the only thing stopping you from pursuing a sign up bonus, do the math to see if the rewards are worth it. You can see if you can put tuition or fee charges on the credit card. You can see if you can pay your bills months ahead of time. He says you can buy grocery gift cards to get the charge on the credit card, but then you can spend that gift card over a longer period of time.

Emily says that someone new to this can try it with existing spending, then they can try manipulating their spending.

13:00 Is cash back or points more valuable to a graduate student?

Seonwoo says that cash back is much easier to start with and understand. There are only so many cash sign up bonuses. If you like to optimize things, credit card rewards will be more valuable if you use the rewards for travel.

Emily says that there are cards with a regular cash back rate, like 1-2% back on spending. She says that is a good way to start. Then the next level would be switching to actively pursuing credit card rewards. To make rewards lucrative, you have to be able to redeem them. She explains that in Durham, North Carolina, she couldn’t be loyal to any one airline. But in Seattle, Washington, she makes use of the Alaska Airlines credit card and its reward system.

16:18 What are the pros and cons of the annual fee situation?

Seonwoo says a lot of cards that have sign up bonuses waive the annual fee in the first year. Seonwoo’s strategy is that he signs up for the card, meets the minimum spend requirement, and by month 11 he has decided he won’t pay the annual fee and he will close the card. He says some cards are worth the annual fee, but he wouldn’t recommend keeping the annual fee card to people with lower income.

Seonwoo says that if you cancel within 30 days of being charged the fee, you can often get a refund. Ideally, set up a spreadsheet and reminders to track your credit cards.

18:54 How much money have you made using this strategy?

In his best year for strictly cash, Seonwoo has made about $2,200 to $2,500 from sign up bonuses. He says he has more credit cards and points than he knows what to do with. Most of his rewards have been in credit card points.

Emily says when she was in graduate school and pursuing cash sign up bonuses, she and her husband together made about $1,000. This can alleviate budgetary stress.

20:38 Anything else you want to add on this topic?

Seonwoo brings up how this affects your credit score. In general, when you apply for a credit card, there is a small hit because you have an inquiry on your report. He emphasizes that the point of your credit score is to help you get low interest rate loans or good rewards credit cards. If you’re not applying for a loan in the near future, you can use the credit score for new credit cards. He applied for cards until he started getting denied. He waited a few months, then tried again and got approved. He says people stress out a bit too much about their credit score. He says people should recognize the point of the credit score.

Emily points out that there are positive affects of having several credit cards. She also mentions some cases where you need to keep your credit score high, like when you apply for a new residence or take out a mortgage.

Further reading: How to Establish Credit in the US

24:24 How do banking sign up bonuses work?

Seonwoo says that the main difference is that instead of requiring you to spend money, banking sign up bonuses require you to already have money. You sign up for a new checking account, get a couple of direct deposits in there and keep it open for at least six months, and sometimes make some transactions. You can get between $100 or $350 for signing up for that account. Some have fees, but the bank may waive the fee for students or on other terms.

Emily mentions minimum balances, and Seonwoo clarifies that high balances requirements are usually for savings accounts. Checking accounts have minimum balance between $1500 and $3000, and the percent return is 10% to 20% in six months. This is a good option for your emergency fund.

Seonwoo recommends the blog Doctor of Credit, who has several blogs on these topics.

28:54 What is a 529? What are the benefits of it?

Seonwoo explains that there are two types of 529 plans. One is a prepaid tuition plan, which he is not talking about. The other type is an investment plan. At both the state and federal level, it is not taxed when you withdraw it for education expenses. Emily compares this to an IRA, where you are not taxed on the growth of the money if you use it for retirement. Seonwoo calls it a Roth IRA for education.

Seonwoo says 30 states and the District of Columbia offer a state income tax deduction for contributing to your 529 plan. Most states require that you have a plan with that state, but they don’t require a net contribution for the year. He says you can contribute the money to get a deduction, then pull it out to pay for your expenses.

Emily says cost of living expenses can be considered qualified education expenses for the 529 plan. She explains that you can put money into a 529, then take it out to pay rent, and then you get a state tax deduction or credit. Seonwoo says even if your living expenses are $0, you can still do this. The amount is set by the university’s financial aid office room and board estimate of the cost of attendance.

Seonwoo explains his specific example at Georgia Tech. The financial aid office lists the cost of attendance estimate for room and board as more than $10,000. In Georgia, a single taxpayer can deduct up to $2,000 of a 529 contribution. His marginal tax rate is 6%, so a deduction of $2,000 saves him $120 per year in state taxes. So, he contributes $2,000 to the 529 plan and leaves it in there for 10 days, then he takes it out. This is all it takes to get the tax deduction.

36:37 Where can we go for more resources?

Seonwoo says he learned about this by going through his state tax return to look for deductions. On his blog, he has a college tag and he has a post about the 529. The site Saving for College is a good resource for 529 plans.

Emily says this is a strategy that you need to investigate for your own state. Seonwoo mentions that there are other education credits and deductions available, but you can’t double count expenses. This 529 trick makes use of the living expenses, because this is unique to this tax benefit.

Seonwoo recommends printing to PDF the page from the financial aid office that documents the cost of attendance. This is documentation to keep if you’re audited.

40:50 Final Comments

This episode is about ways to alleviate budgetary stress by leveraging your assets and optimizing your usage of financial accounts.

41:17 Conclusion

How to Establish Credit in the US

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One of the most common issues international grad students face when they start grad school in the United States is how to establish credit. The US credit system draws its data only from debts incurred in the US, so whatever credit you had in your home country won’t transfer. Although your options for establishing credit are limited when you first arrive in the US, if you take the right steps, you will build credit quickly.

It’s important to note that in the US your credit is all about debt. The chief reason you want to have good credit is so that you will receive favorable lending terms on any future debt you want to take out. (A secondary reason is that potential landlords and employers sometimes check your credit score to verify your trustworthiness or check for conflicts of interest.) To have good credit, you have to have previously demonstrated that you can manage your debt well. Counterintuitively, having a lot of money to your name or paying your non-debt bills (rent, utilities) on time does not positively affect your credit score. Therefore, to establish your credit for the first time, you have to take out a form of debt, even if that is totally unnecessary for your finances.

What is a credit report and credit score?

A credit report is a list of all the financially-related accounts you have used in the past seven years. There are many different institutions that track this data, but the three main ones are Equifax, Experian, and TransUnion. Your credit report will include data on these accounts, such as how long they have been open, how much outstanding debt you have, and whether you have made any late payments.

A credit score is a number from 300 to 850 that summarizes how ‘credit-worthy’ you are. Another way to say that is how risky it would be for an institution to lend to you. Similarly to the credit report, each credit bureau will calculate its own credit score for you, but they will all be similar as they draw from the same data. A credit score above 750 is considered quite good.

FICO credit score range
Image by CafeCredit under CC 2.0

Lenders will look at your FICO credit score, but your attention should be on the accuracy of your credit reports. You can order one free credit report from each bureau once per year through annualcreditreport.com. Once per year (ideally on a 4-month rotation), you should order your credit report from each bureau and check its accuracy. Report any mistakes back to the bureau, and of course if you catch any identity theft, take steps to ameliorate that.

Further reading: “I Want a Credit Card, But I’m Scared”, Don’t Buy the Pro- and Anti-Credit Card Hype

How is my credit score calculated?

While the exact formula each credit bureau uses to calculate your credit score is proprietary, the components are widely recognized at a general level: payment history (35%), amounts owed (30%), length of credit history (15%), account mix (10%), and new credit (10%).

FICO credit score breakdown
source

The way to optimize your credit score is to:

  • make every single payment on time
  • pay down your outstanding debt
  • keep your debt utilization ratio (the percentage of your credit limit that you actually use – both for individual credit cards and all your accounts together) below 30%
  • keep your oldest accounts open (e.g., your first regular credit card)
  • let time pass (to lengthen your credit history!)

In rare situations, taking out a new, un-needed installment loan for the purpose of increasing your credit score might be a reasonable strategy, but you should conduct heavy-duty research that option before taking such a step (i.e., don’t let a bank representative/salesperson talk you into it).

While applying for new debt will have a small, short-term negative effect on your credit score, you should probably only consciously avoid taking out new debt for this reason in the months leading up to applying for a large loan such as a mortgage.

Further reading: Building Credit as an International Student

How can I establish credit for the first time in the US?

Step 1: Sign up for a secured credit card.

A secured credit card operates similarly to a regular credit card, but the lender holds an asset of equal value to the line of credit extended to you. You give the lender an amount of money (e.g., $500), and that amount is the limit of what you can borrow at a time. Use the secured credit card for purchases, then pay it off on time and in full the way you would a regular credit card (or be charged interest, which only harms you). After several months of using the secured credit card properly, you should have a high enough credit score to qualify for a regular credit card.

Be selective about which secured credit card you sign up for. Community banks and credit unions usually offer better products and customer service than national chain banks. Also examine the annual fee on the card and the interest rate (if there is any possibility of you not paying off the card in full every cycle) to minimize your out-of-pocket costs.

Further reading: What Is a Secured Credit Card? How Is It Different from an Unsecured Card?

Step 2: Close your secured credit card and open a regular credit card.

You can ask your lender to upgrade your secured credit card to a regular credit card, or apply for a new regular credit card and, once approved, close your secured credit card. When you upgrade or close your secured credit card account, your deposit will be refunded (assuming you had no balance due).

Continue to use your credit card perfectly, paying off the balance in full before the due date every month. Keep your utilization ratio low. You will probably have a low credit limit on this first card, so if necessary you can pay off the balance multiple times per month.

You should plan to keep your first credit card open for at least seven years, so choose one without an annual fee, even if it doesn’t offer the most lucrative rewards program.

Further reading: How International Student and Immigrant Workers Can Get a Credit Card

Step 3: Take out an installment loan (e.g., auto loan) or open additional credit cards.

This last step is optional, but helpful for building credit faster. After using your credit card perfectly for several months or a year, your credit score should be increasing gradually. At this point, you are eligible for debt with better lending terms than before.

If you want to buy a car, it should be possible to get an auto loan if you can’t pay for the car outright. If you do take out an auto loan and make payments on time, it will continue to improve your credit score. Similarly, if you open more credit card accounts, your credit score will temporarily dip, but your utilization ratio should also become lower to raise your credit in the long term.

But keep in mind why you are trying to build credit in the first place, and don’t harm yourself (e.g., by paying interest on an unnecessary loan or getting in over your head with credit cards) just for the sake of improving your credit score.

How do I build credit over time?

The best ways to build your credit after you first establish credit in the US are to:

1) Continue to pay all your bills on time and in full.

2) Allow time to pass, which will more firmly establish your track record as a responsible borrower and lengthen your credit history.

3) Pay down outstanding installment loans (though not necessarily off completely) and keep your credit utilization ratio low. (It is a myth that you have to carry a balance from month to month on your credit card for it to improve your credit score; in fact, this strategy will depress it.)

International students are not the only graduate students without credit; some domestic students who have avoided student loans and credit cards face the same issue. Just keep in mind your ultimate goal that motivates your desire to establish credit (e.g., qualify for a lease, borrow money for a car at a good interest rate), and don’t take unnecessarily extreme steps with your borrowing simply to achieve a high score. Making on-time payments, holding on to minimal amounts of debt, and time are the best boosters to your credit score.

Perfect Use of a Credit Card

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Graduate students have a pretty good handle on financial literacy topics like credit cards. In fact, 85% of graduate students have a credit card (Council of Graduate Schools’ Financial Education). But it’s one thing to understand how credit cards work and another to actually practice perfect credit card usage.

When I signed up for my first credit card after college, I thought of it as a form of an emergency fund. While I never ended up carrying a balance, on a couple occasions I used it to push paying for an expense from one month to the next. I thought I was being responsible by choosing a credit card with a relatively low interest rate (only 10%!) in case I did ever carry a balance.

With a lot more financial savvy and years of experience under my belt now, I can appreciate both the benefits and dangers of credit cards. If you follow the rules of perfect usage, credit cards can serve you well and benefit your life in small ways. But if you deviate from perfect usage, credit cards can bite – and it could be a tiny nip or a scarring chomp. The downside potential is definitely larger than the upside potential, so you must toe the line carefully!

Further reading: Don’t Buy into the Pro- or Anti-Credit Card Hype

Here’s how to use a credit card perfectly so it never bites you.

Have a credit card

It is a good idea to have a credit card as (when used perfectly) it will benefit your credit report and score. If you have never had any debt, opening a credit card will generate a credit report and score for you. (Make sure your first credit card is one you can keep open indefinitely, as it will establish the beginning of your credit history.) If you already have a credit score due to installment debt, such as student loans or a car loan, adding a revolving debt like a credit card will increase your score.

Further reading: Reader Request: Credit Scores and Credit Reports; “I Want a Credit Card, But I’m Scared”

The main reason to have a high credit score is to obtain favorable terms when you take out new debt, such as a mortgage. (The time to be concerned about maximizing your credit score is when you’re approaching taking out new debt, but other than that it’s not a big concern.) Some landlords also check credit scores, so a good score can be beneficial to a renter.

Further reading: 7 Ways to Improve Your Credit Score

If you have ever failed to make payments on a debt or have carried a credit card balance, don’t use a credit card. Give yourself time (at least a year) to ingrain good financial habits using only a debit card before returning to credit.

Never pay interest or fees

Your credit card should never cost you any money. Perfect use of a credit card means that you never carry a balance or pay any kind of fee (with one possible exception).

Pay off the entire balance by the due date

To avoid ever paying interest on your credit card, you must pay off the balance in full by the due date.

42% of graduate students with credit cards carry a balance on their credit cards, and 9% only make the minimum payment (Council of Graduate Schools’ Financial Education)! These students are paying a ridiculously high interest rate (15% on average) on this debt, which in many cases could be avoided entirely by better money management practices. With credit card debt, compound interest works against you with amazing ferocity.

Make it an unbreakable rule to always pay off your entire credit card balance before the due date; it’s a slippery slope from allowing a balance to carry over in one month to being saddled with thousands or tens of thousands of dollars in credit card debt that just keeps growing. The average American household with credit card debt has a balance of $16,425. Having this rule in place will force you to get creative about ways to cut your spending or earn extra money before the deadline.

A great way to make sure that you never miss a payment and incur a late fee or interest charges is to set up your card to auto-pay the entire balance before the due date. Just make sure that you always have enough money in your checking account to cover your credit card bill or you risk getting slapped with a fee by your bank instead.

Don’t Spend Ahead of Your Income

To use your credit card(s) perfectly, though, you have to go a step further. It’s not quite enough to pay off your credit cards when they are due. If you get sloppy with this practice, your spending can actually get ahead of your earning by 1-2 months, which can really put you in a bind if an emergency occurs.

To use a credit card perfectly, treat it like a debit card: only spend money that you already have in the bank, not money you expect to receive before the bill is due. That means that you will earn money, then get paid, then spend the money. To keep your credit card bill in sync with your budget, pay it off in full at the end of every month/budgeting period. You could even pay it off a couple times each month to keep your utilization ratio low.

Further reading: Living on Time with Your Credit Cards

Gain Benefits and Rewards… But Don’t Go Crazy

All the points above are about avoiding the downsides of credit cards, but now we get to the fun part – the upsides!

Credit cards are safer than debit cards for fraud protection, and they also often confer benefits in the small print like rental car insurance.

Further reading: Credit Card vs. Debit Card: Which Is Safer Online?; Renting a Car? Know Whether Your Card Adds Insurance

But the really big draw is the rewards. When you have a good credit score, you will be eligible for all kinds of rewards credit cards. These rewards come in the form of a signup bonus (usually after meeting a minimum spending requirement), ongoing rewards based on your spending, or both. Credit card rewards are actually one of the top ways my husband and I ‘saved’ money while we were in grad school, even though we rarely spent enough to meet minimum spending requirements.

Signing up for credit cards for the bonuses and strategically using certain cards for certain purchases to rack up points is a great way to score some free money or free travel. But you can’t get so caught up in the bonuses that you overspend or deviate from perfect use.

Credit card companies use rewards to prey on your psychology. The rewards make spending feel even better than it normally does, so you’re more likely to spend lots of money on their particular card. In that way, the company gets the transaction fees from the merchant plus a greater chance that you will overspend, not be able to pay off your balance, and end up paying interest.

Further reading: Think about It: Why Would the Credit Card Company Give You Cash Back?

If you want to go after credit card rewards, great. Just put in place strict boundaries such as a budget to constrain your spending, the habit of paying off your card every month, and autopay. If you juggle multiple cards at once, consider signing up for account aggregating software like Mint or You Need a Budget to help you keep track.

I said earlier that you should never pay a fee for a credit card. The one exception is a fee for a rewards credit card when you are dead certain that you will gain more in rewards than you are paying in an annual fee. If you’re at all unsure about the ROI of the fee, don’t get the card. A credit card with a fee should also not be the first credit card you open (or probably your first rewards card, either) as you should feel free to close it whenever paying the fee no longer makes sense. If that is your oldest credit card, your credit might take a small hit upon its closure.

If you’re going to use a credit card, use it perfectly. Credit card fees and interest are too detrimental to your financial health to play around with! Just treat your credit card like a debit card and you’ll be fine.