Credit: Lifeblood to the Future
We've talked about our overview why we're bothering who we are, where we want to go, what our goals are we've tackled some debt now let's talk about our credit so as I mentioned earlier imagine going to the doctor you get a full body check up but they leave out your lungs that's a big part no x ray, no breathing check that is like doing a personal finance checkup and not looking at your credit report or your credit score. So this is an important part. One of you might not know what that is, so feel free to ask me those questions if I don't cover it and a lot of you might not even know why I should deal with it. So that's our second question why is your credit score so important? So forget about figuring out first what it is, how we raised it, how we lower it, but why is it even so important? And I purposely picked this picture of the city because whether you live in a city or if you live in or more suburban or rural area but finding a home is probably the most important thing your cred...
it score is for, so it starts by very simply getting new credit cards and we talked a lot about that last time but getting a new credit card that's definitely finding out your credit score renting an apartment and I had when I first moved to a city when I first got my first apartment for twenty years ago you didn't need your credit score wasn't as important for renting an apartment but now when I teach my college classes in my my sweet little twenty year old student seo yeah you need a credit score to get an apartment to buy a home obviously I mean I literally see how the interest rate that you get for your mortgage is directly tied to your credit score so having that is important you get a new cell phone credit score new job so if you are applying for a job many potential employers will check your credit it gets you to the next level what is that next level buying home getting alone asking for more money getting an apartment the credit score and your credit report gets you there and this is what it used to be four which was a mortgage if you have a mortgage refinancing or getting a small business loan so that's why it is so important do any of these things seem important to you? Credit cards, new apartment cell phone, new job mortgage refinance small business loan absolutely these air also important so this is why you need to stop right now and think about okay, what is my credit score? How they looked at a credit report so now you're asking well what is it what is your fi co score and your credit report and they are separate they're two different things so the credit report the way I start by saying this is what the lenders are looking at so if you have ever borrowed any money from a bank from a credit union from a student loan anybody credit card companies ever lunch you money this will show up on your credit report before we get into the nitty gritty fifty percent of credit reports have mistakes on them there's three main agencies next you didn't list that here I'm just realizing I left that out to the three main agencies that are on the credit reporter experian equifax and trans union if you're going to run a credit report to get him from all three they're not all the same it's crazy why it's not standardized it isn't so once you look at the report which literally lists every amount and lender that you've borrowed money from for the last seven to ten years then they come up with the score and the score there isaac company or fair isa credit organization the fico score it's an independent company private company they give you a score out of eight fifty and ideally anything over seven hunter seven fifty is considered excellent now say you have run your credit report you know your fico score and it's not that good it's low that's okay? It just means that if you're going to borrow money for alone, they're going to charge you a higher interest rate. There's a chance you won't get any credit, which will definitely talk about how to increase your credit, but let's start by finding out what it is. So you need to look at your credit report, which lists every dollar that you have every borrowed from any organization, credit card, bank, student loan and then at the same time find your credit score or your fico score, which is that of eight fifty. So, like I said, anything over seven hundred or seven fifty is considered excellent don't be despondent with a low credit score, it just means that obviously means that you will get tonight some credit cards, but it also means that if you do need to borrow money, somebody might let you monday, it'll just be in a much higher interest rate, so find out those numbers, and I know that there are a lot of people that are watching that our international and very often they might not have any credit because even though they've borrowed money or done stuff in other countries, they don't have any history here, so we'll talk about ways to get credit if you have no credit history. So think of yourself as a twenty year old college student that's out in the world and has never had a credit card or anything, you're very similar in that standpoint. So where do you start? So the first places annual credit report dot com have you ever seen those commercials with the guy singing, you know, so don't go to that site, unfortunately that's an independent company that will charge you money to get your credit report so well, that's not necessarily a bad thing, but that's, not the source. So this is the government agency that's authorized by federal law annual credit report dot com and so you can go on this and you can get the three agencies once a year. So what I would suggest you do is you go on this every four months and run one credit report from each agency every four months, so every four months go to experience every four months trans union, a reform once equal fax from annual credit report feel its free. The on ly negative is they don't give you your fico score. They just give you the reports. So if you're in good shape in the sense that you don't have debt or you don't have a lot of debt and you pay your bills on time, this is probably all you need to do if you want to get your score, which I would suggest doing this one time absolutely is this is my favorite sight my fi co dot com so to get the credit report with the score and all the three reports one time fee of fifty five dollars it's worth it spend it once it's definitely worth it. What I would just be a little bit careful about is that it's it's not an easy site unnecessarily by the product and very often you might be be sold the product where you buy the monthly monitoring and I don't think you need to spend that money for that, so I think this is worth at one time if you're really trying to save money, you could also just by one company for twenty dollars I can't tell you which is better because they're really all three the same, but at least they should be somewhat in the same ballpark but this is an example seven twenty eight six, ninety seven oh three they will be different because for whatever reason it's not standardize and all three companies are different, so if you've never done it or it's been a really long time it's a one time fee just spend it run all three reports in all three scores definitely well worth it, so now that you have found your credit score and run your credit report what is it made off? Very I mean, it's a really, really like I don't know there are a lot of questions coming in about people wondering, like how their credit is being tallied up, because I know that I get a lot of questions around that, so if they're not sure what their credit report. Yeah, and I'm not not on that yet. There's a lot of questions coming in on budget. Okay, great. Yeah. All right, we'll get the budget. There's two main things that make up your credit score. The first is, do you pay your bills on time and all admitted this is true confessions. I've paid my bills late when I had my first daughter, and I am organized, I'm really good with my money, but when I had my first daughter just coming home with a new baby just threw everything out of whack, and next thing you know, I paid some bills late, and so I know that that directly affect my credit card. We'll talk a little bit about what to do in a minute. The next thing is what's called your credit availability ratio, so ideally, it should be less than thirty percent so here's the example you have three credit cards, you a balance of six thousand dollars total, but you're able to take out ten thousand dollars per card, so actually you're total credit available, he was thirty thousand dollars, so in this case, your credit ratio is twenty percent. So while you might be thinking, wow, this person owes six thousand dollars and actuality, they're able to borrow up to thirty thousand, so they have a lot of credit available to them, which means they're ratio is low and that's a good thing. I clearly want them to pay off the six thousand dollars, so your credit availability ratio will be hi if you have maxed out your cards. So if you don't have a lot of room available on your cards, your ratio is high, which will lower your fico score, so one way to get more credit is to call your credit card company and ask for a higher balance or ask for a higher limit. Don't borrow more, though, because if you max out the card that's gonna look that's going to increase your availability reach ship. So the idea is that you want to be able to borrow as much money as you can without owing the money in terms of not actually borrowing the money, but you want to be able to borrow it that shows you as credit worthy, gives you a high score, and the lenders want to lend money to you. So really understanding that so really just if you just sum it up, pay your bills on time and make sure you can borrow a lot but don't borrow it's those two things, so very often people ask me, well, should I close a lot of cards? And so what I say is you should only close a lot of cards if you truly have twenty cards available and maybe you want to close like three or four of them, but if you're closing three or four cards it's going to reduce the amount that you're able to borrow and therefore your credit score could go down so you don't necessarily want to close a lot of cards in the sense that you don't want to close all of the cards that you have available to you, you just want to close a few does that make sense? Say keep some open but not used what happens if he keeps moving but don't use them, so I'll just turn around and say to you, are you happy with your fico score? I actually am okay, then you don't have to worry about it, okay? If you're happy with your fico score fit ain't broke don't fix it, so however, if your score is too low, then you don't necessarily want to close the cards you just want to get higher limits on those but not far more money, so maybe not used them but have them yeah, yeah, I've got some old credit cards that I've never closed my fico scores high enough, I'm going to focus my energy and getting more money yeah, so don't spend a lot of time in this area if you don't need to but if your scores low or if you don't have a credit history or more importantly if you just don't know the number and again a lot of people don't know they're fico score and credit report melissa gene says you bought a house this year and then got married my credit score was all some which let me get a great write on my house, okay? But now I'm in a lot of debt from the wedding and my credit score has taking a hit should I k well, she shouldn't care in the sense that she does have the house she's got hopefully the low interest rate because she bought a house this year when interest rates are low so hopefully she'll be able to pay off the debt in the next six twelve months on her squirrel bounce up so she should care if she's going to need to borrow money anytime soon so if she needs to refinance if she needs to get a small business loan if she's give more credit cards than yeah, she should care but I'd say that surely has the mortgage is not going to affect her current mortgage and hopefully she can really pay off the debt that's the good thing about your credit score is that if you pay off that debt it does go back up it's really the mistakes you make in your life that keeps your score low for a long time and really it's paying your bills late that could be a big thing so I would suggest like so for me when I paid my credit card bill lee I got on the phone with the credit card company again it's like before and I said hey I'm a good client I have paid my bills on time can you get rid of that late fi and get rid of this late mark on my credit on because I had never done that they did that immediately so if you pay a bill late if your first time call the company and say hey help me out I've been a client for a long time they should really work with you jamie wonders he's his school going to be different from her husband's should she check in for both of them I've been married for thirteen absolutely absolutely it's such a great question one of the when I go into the ira is in a few minutes or tomorrow excuse me what is ira stand for individual retirement account credit score it's on you unfortunately, if you have a credit card that's linked to somebody and you're truly joint if they run it up it will affect you but it's all your score and so it will be joined in the sense that you might have joint purchases together but it's your score so you better make sure you find out what yours is and your partner's is it's a little bit controversial but at a seminar I was at a few days ago this woman said if you're thinking about getting married or moving in with somebody from their credit port first I used to be you did other town because I won't talk about it but you know it's a great way those numbers don't lie it's kind of like what we talked about with mint dot com this is what the lenders air looking at I always say that to my client's your credit report that they might be mistakes and we'll definitely talk about how to fix those mistakes but those numbers don't lie what you see on the credit report is what the lenders air looking at so there if there's truly a mistake let's fix it but if it's not a mistake and it's just you know ah poor record history or credit history because of the mistakes you made but maybe of uninformed decisions or of spending history or accruing credit card debt or of taking your paying your bills late the crates going to show up in the credit report. So if you're involved with someone, you should definitely see theirs as well. Run yours. Many years ago, when I had a boyfriend, I was an additional card holder on his card, but we never took it off. But then years later, I was wondering, link well, why is my credit score what it is? And I looked at it, and once I got myself off of his credit, it was like a total total difference knowing that's, why doing a financial checkup that's? Why showing up for this course is so important because we are talking about a lot of different things in your life that may not be relevant today, but it's like you know you're you're just taking care of your stopping, you're treating yourself with respect and saying, ok, let me check these things out. Let me check my debt by spending my goals, my credit card history. So an actual, when we talk about budgets, one of the things I say is look at statements for the last few months, because then you could really see where your money is gone, and maybe you're subscribing to things that you don't care about anymore, he is saying it never occurred to pull credit reports more often than once a year on dh this person thought that multiple credit reports was actually detrimental to your credit yes that's a great great questions. So in this case with annual credit report dot com how it works is because this happened when the whole credit crisis happened in two thousand eight and congress, I think, essentially passed a law saying it's ridiculous that people shouldn't be able to get their credit score or the credit report excuse me, you know, without paying for it so that's when they came up with this. So the idea is that there's three credit agencies experience equal fax trend trans union if you run it on this once a year, you're fine, it doesn't show up necessarily as a searcher enquiry on your credit report. Now, if you run your credit report on this every three months, that will show up as a negative thing because what happens is every time you run a credit report, I mean there are hard and soft enquiries and there are some differences between them. But on the whole, if you run a credit report every time you run a credit report, it looks like you're trying to get new credit. So remember before I talked about credit cards and getting those your present cards and transferring every time you get a new credit card every two months, three months, six months it shows up is an inquiry that brings down your score every if you just keep applying for new cell phones if you change apartments every six months if they run credit your consulate refinancing it's going to look like you're constantly implying for new credit which is a negative thing so doing it once a year twice a year is fine that's moderation doing it every two three months that's not a good thing and that will lower your score so that is exactly her point which I agree with this the only reason I said is that they do let you do all three reports once a year so why not space it out just so you get that information every few months but I would not run a brand new search three four times a year like that galleon mentioned soft and hard polls what is the difference so ah hard pole is truly you keep applying for new credit cards because you're constantly transferring balances so that's like the hard dead of the credit card or maybe you're just refinancing mortgages or you're having to do credit consolidation so that's like the really hard debt but if you're doing inquiry's such as credit scores or getting a new apartment that might be a softer inquiry which doesn't affect your score as much but we'll still affected it's a pretty complicated complicated formula that makes up your credit score the heart is really what's going to make up the nitty gritty numbers um just a quick question andi I think you might have covered this but I'm wondering how your student loans sort of affect your credits for um I would say that the student loan is again it's the best that you can have and I think it's a great investment I mean you want to be able to pay it off so it's like anything but the idea was student loans is that it's going to count the lowest part of your credit score so when they're figuring out the fico score it of eight fifty it's going to be the smallest portion with that being said if you are not paying your student loans and you're in default that's going to hurt you but if you have six hundred dollars a month and you're paying that off and you're able to pay it it's not going to fight you could still have a very high credit score with a high student loan payment as long as you're paying it on time no matter what the payment iss and the reason why student loan debt is also a great debt tohave let's say you encounter some financial hardship like you are starting a business and you don't have income coming in for six months you can put it on deferment you can change the student loan payment to gradual that's not gonna affect your credit score it's gonna help you out until you got some income coming in so that's why you can't call the credit card company and say I'm starting a business can you work with me for six months? They're going to say no I can't the student loan company yet we'll help you obviously again the interest will accrue but they will work with you and how far back actually does the credit go? Does it go a sfar bacca's you've had credit no it's unfortunately unfortunately unfortunately goes back seven to ten years I thought it was seven years I'm hearing it's more like ten so it's a short window but it's not in such a short window off yeah okay, so what makes up your credit score? We talked about paying your bills on time the credit that's available to available to you we're going to talk a lot about our habits, our spending habits with credit cards and debit cards in the next section. But one thing that I think is really really important to note is using a debit card does not build your credit and I found this out the hard way I was working with this wonderful client who had finally saved enough money to buy home and she is they're buying a home in upstate new york in the catskills in new york and she'd saved one hundred thousand dollars for down payment when she worked her butt off to save that money she had no debt whatsoever no student loan debt she went to go get a mortgage they said sorry you've got no history we cannot give you a mortgage she's like no, no, I have one hundred thousand dollars in the bank I have a job, I've got a w two I've got income, I have no debt, I've no student loan debt there like you have no history the problem was she had on ly ever used her debit heart she had never used a credit card, so she had no credit history so again, if she had done this financial checkup and run a credit report before the fact she would have realized while I don't have a credit report, I don't have a credit history and so she you know in any way what she did is a different story, but the point was she had on ly used a debit card, so I used to say that I thought debit cards were created by the credit card industry to the big industry is a it's really it's a marketing ploy to marketing tool because they don't build your history and I think you still spend unconsciously and you spend more than you think you've got and then at the end of the month you've got less money in your checking account, so the debit card is a great, great convenient tool, but I don't think it helps you build your future so we do use cash or credit that's a little bit my philosophy think about, you know, we're talking about saving money and she saved one hundred thousand dollars. What do you think about instead of going into debt to get a mortgage? Um, would you to forego that step and maybe take a little extra time to turn that hundred thousand and two, five hundred thousand let's say that that's the price of the property, um, what's your thought on that? I mean, so in her case what she's I mean, that would be a great option, I think was pretty hard for you to say that hundred thousand and it could be another five, ten years before she saved that. So I think she was really ready to become a homeowner, and she and she looks she I had a really low rent apartment in manhattan, and so she knew she probably could never afford an apartment in manhattan, but she grew to love the catskills and woodstock area, so she was able to buy a home there. What she had to do was wait probably six to eight months. She finally got a credit card. She first had to get a secured credit card. Then she got a regular credit card, and so she was able to build up her history in six to eight months and then but it was just a shame because I think she missed out on how she wanted to buy and so she feel like she missed a little bit of opportunity listen if you cannot borrow money great but that's not an option that's what I'm saying what if you don't want to borrow money? I mean there we'll talk about home finance I mean I think there are some advantages to personal most of us cannot buy real estate without getting a mortgage so you do need to borrow but if you could buy cash free grade the thing is especially if you live in a high tax area you do need some tax deduction and so having a real estate mortgage you're able to deduct the interest there was some question about that a few years ago but you are able to deduct that still so you know, some of us do need a deduction in that sense situation for us when we moved here from australia five years ago was you don't have a credit history here and if you have it in australia and what we found which sort of can't help if you have always done the debit cards oh not if she was american life is that we had to contact our straining credit card people and ask like american express asked them to give us a u s version of that card right to get started right which was ridiculous, right? It is ridiculous, but they don't know so they don't have to trust you in that way have a comment, a question for you from pure joy. My husband and I recently made the decision to stop paying a mortgage hitting us to strategic foreclosure. There are major problems of their house mold of water issues underwater due to glut the full closures in the area is a common problem, right? Our credit score had been really high, but now we're bracing ourselves for huge drop we have only one creditcard credit availabilities under thirty percent, but do you think we should try to open a couple more before the credit score drops more? Yeah, I would definitely open just don't borrow the money absolutely yeah, there I should say the credit card companies will do a lot of things, but I don't think they'll just close it on you if you're paying your bills on time and you're not maxed out so I would definitely trying to open his eyes. I don't see as many as they can but open a fame or absolutely that would be a great suggestion just don't borrow the money necessarily don't start using the cards but have it available to them maybe just put twenty five dollars a month or fifty dollars a month just to keep it active if you will just a very small nominal fee