Learn Your Credit Score
Step four, is we're gonna run your credit report. I think people do this a lot more today, especially again, like if you use mint.com they'll show you your credit score for free. You guys all seen that. You haven't seen that; you don't use mint.com? Actually, you have to click into the buttons to get your credit score. They don't just pop it up for you, you actually have to want it. But they don't charge you for it. But you're entitled to your own free credit score every year from the credit bureaus. At annualcreditreport.com. This is like a really free one. It's not like one of those commercials where it's like oh yeah we're free, and then they're not really free, 'cause then they charge you a month later. This is really free. Once a year they have to give you one. Every 12 months what you should do, is you should actually run 'em. I almost feel like even if your credit score's high; like it's easy for me, quite frankly, at this point to fall into the trap of not pulling these once a ...
year because I have a high credit score. I've seen that my score's high. But there's so much fraud now, that I almost feel like we need to look at these more often to make sure that nobody's trying to steal our identity. You need to understand what's in the report. The three bureaus are Equifax, Experian, TransUnion. It is remarkable you would expect that all three bureaus would always have the exact same information. And you guys are looking at me like, I know. And they don't. Which is just first of all aggravating as hell, but that's how you catch mistakes. So I've gone through situations where Equifax has got it right, Experian's got it right, and all of a sudden TransUnion doesn't have something right. And then you gotta go fix it. Here's what you'll find when you run it, when you run it and you find mistakes. Here's examples. Some of it's small just like name, address phone numbers wrong, out of date. Your social security number is wrong, that's kind of a big one. Your birth date's wrong. Your birth date's wrong on yours?
There's no spot on the; do you have to send it in?
No, there is; so on all these websites I don't know where on the report, but on all these websites there is now a spot to click into to fill out a thing on whatever the problem is.
Well maybe I need to look at it further, okay.
They don't always make it easy to find. Your marital status is wrong. Your payment record is wrong; that's the one you care the most about. Accounts that were closed are listed as open. So here's the brutal thing about credit scores. I'll give you the good news and the bad news. The bad news; you can have a great credit score and then you can have one or two payments be late, and that credit score can drop 50 to 100 points in like 30 days, 60 days for sure. You can all of a sudden max out your cards. Even though you know you're gonna pay 'em off, you can max out your cards. And if you've got two credit cards, and all of a sudden you've maxed them out. And I'll go through FICO a second. And it looks like you're using all your credit up, your credit score can drop 50 to 100 points. The good news is, you can also fix your credit scores, and get them to go up 50 to 100 points. Usually not in 30 days. Usually in 90 days to 180 days. But in less than six months, you can bump your scores back up 50 to 100 points. Oh credit cards that are listed that you did not apply for. So find your FICO Score. So FICOs sort of like the leading credit score that everybody uses. It's Fair, Isaac. The whole key to the credit score is the interest rate, right. Because; this is an older chart; just as an example, in this example here if you had 760 to an 850 credit score your interest rate's 3.75. Well that means that monthly payment here is $1,390. It's on a $300,000 mortgage. You have a low credit score, you might still get the mortgage, but your at $1,673. Here's the key guys, the difference between good credit and bad credit in this person is $100,000 in interest payments. One of the reasons the poor and the middle class stay poor or middle class is their interest rate. You know, so my dad was right. Like when I was 18 or 19 years old, and I showed him the problem that we had. And he said, "No, no, you have the problem?" He was telling me you screw this up you screw up your whole financial life. But you screw this up, you don't screw it up forever. You can fix this. You just have to take action. What is in your FICO score? This is right off of Fair, Isaac's website. These are the things that make up your FICO score. 35% of it is payment history. Pay your bills on time, your score's going up. How much money do you owe? 30% of it. 15% is the length of credit history. 10% is new credit. 10% is the type of credit used. I use to teach people long time ago, to close old accounts that you weren't using. Now I don't teach that, because things have changed. This is why financial education never ends. Because now, because of this category, you've gotta keep those cards open and just not use them. Because the longer you have these loans and this credit card access, then the better your credit score is. That bugs me, but that's just the truth. You're watching at home, and you have old debt, and you have credit vultures that your debt has been sold to. And they're now harassing you. You need to know your rights. So your rights are; we're gonna go through your rights. You need to know about what's called time barred debt. Nobody talks about this. But the fact of the matter is that every state has a different time barred debt rule. This is not a national rule, this is a state by state rule. So the states have voted, and every state's different, for what is called a point in time in which your debt is no longer your liability, believe it or not. Now not student loans, specifically credit card debt. So time barred debt, the way it works is, the time bar might be four years as an example. And your debt, believe me by the time it gets to this point, if you're not paying your debt at all, the bank or whoever you borrowed the money from is gonna sell that debt to somebody else. They're gonna take the write-off, they're gonna sell the debt typically for ten cents on the dollar. Often it's less than a nickel. It's a great business, by the way. If I didn't stand for what I believe in, which is what I do now, this would be the business I would be in, 'cause these guys make a fortune. They buy the debt for a nickel, they harass the shit out of you. And then you give them a dime and they double their money. Yeah, it's amazing right. They call you up and they say, "Hey David, how are you?" "Oh good who's this?" "Listen, we have your debt here, "you're liable for it. "We just first of all, we wanna make sure, is this you?" You're like, "Who are you?" The answer is, "I don't know what you're talking about, "I don't know who you are." And then, "No, it's not mine. "If you think that you have debt that's mine, "you send me it, and you prove it to me." That's it, conversation's over. Don't ever engage in one of these conversations. You make them send you documentation that proves that you took the loan out. In most cases, they don't even have documentation. They only have the debt. Then they go out and buy 20,000 of these. You're on a spreadsheet somewhere. Here's your name, here's your address, here's your phone number, here's your debt. Guess what, the loan documents are missing. They have a real problem collecting that debt. That's just the truth. Secondly, if it's gone past a time barred debt date, you're not liable for it anymore unless you send them one payment. You acknowledge the debt is your, and you send them one payment, and you just started the clock ticking again. So, I've had people who've done like The Today Show. We're talking to somebody. I look at the debt. I go, "Your debt's five years old. "You live in a state where time barred debt's three years. "You're good, your time barred debt "you don't owe them the money." Now, by the way, I'm giving you these techniques. I don't actually philosophically believe that not paying your debt is the right thing to do. I actually think, if you borrow money, then you need to be a grownup, and show up and deal with it. But, I'm also trying to be your consumer advocate here for you, and show you the techniques that you can use to protect yourself. Does that make sense? So I don't actually want you borrowing money and then going, okay well I just won't pay it. And then five years later I'll get away with this. That's not cool. But there are things that you should know, so that people can't take advantage of you. If you're in dire shape, go get help, know these laws. Oh, I see this is page 163 of Debt Free For Life. You can Google this stuff too. I wrote a whole book on getting out of debt. I don't have a picture of it, but Debt Free For Life was the book I wrote after I did the Debt Diet series. And it's a great book on getting out of debt. But the Automatic Millionaire covers it too. Pay your mortgage off faster. I think these are some of the most important tips I'm gonna give right now. I say right now meaning like when I think of debt, your biggest debt is gonna be your mortgage. How many of you have mortgages right now? Quite a few of you. Mortgage debt. First I just wanna show you the difference between a 15 year and a 30 year mortgage. Inherently we know this, but the difference in a 15 year mortgage and a 30 year mortgage is astronomical in terms of interest rates. Interest rates and payment plans. So, on a 15 year mortgage we have a $300,000 example here. This is somewhat an old slide 'cause I'm showing 6%. But the mortgage payment's $2,532. 30 year mortgage is $1,799. Check out the interest payments. The difference in interest payments on a 15 year mortgage versus a 30 year mortgage. It's the same house; It's $191,000. So this is the weird thing, 'cause I keep going back to $10 a day. The average person who buys a home, if you could come up with $10 a day extra, in most cases you can do it, 15 year mortgage. And save six figures in interest payments. Now I'm gonna let you in on another little secret about 15 year mortgages, or paying a home off in 15 years. People who tend to pay their homes off early, tend to retire sooner. My experience is, that people who pay their homes off early, on average, retire five to 10 years sooner. So I go back to my days being a financial planner working at Morgan Stanley. The clients retire in their 50s. Late 50s or early 60s. Almost always it's 'cause their home was paid off. They did a nice job saving, but they also had no debt. So I wanna give you another way to do this. Oh, I'll do this in a second. I'm gonna come back to this. I always say you need to wanna have a debt-free goal, a debt-free day. So if you're working on debt, actually coming up with, this is the date I wanna be out of credit card debt, this is the date I wanna be out of student loans, this is when I want my mortgage paid off, this is when I want my rental property paid off. And having that somewhere right in front of you. Because when you talk about financial goals, make them specific and measurable, and achievable. Your debt-freedom day is a great goal to have. Does that make sense? Let's do questions now.
I have a question, can you do that same thing with a car loan?
Do the banks work with you. I mean, because I obviously automatically taken out. How would I set that up?
So first of all, car loans. First of all there's multiple types of car loans right. A car loan can be from the actual, well it's always a bank, but the car company is usually who gave you the car loan. So you borrowed money to buy the car?
Yeah, I have a loan on a car.
Okay, so then the first thing you have to do is go back and see can you make a pre-payment without penalty.
I did check that, there's no pre-payment penalty.
So then what you can do is simply add extra per month, or add extra once a year. And then the key, same thing with a mortgage, is to make sure that they actually reduce your principal.
Yeah, so if it's online, how is that done? I guess that's my question. If it's automatic.
So let's say your car payment's $300.
You need to call the company up, say I wanna make extra payments, how do I do that?
Make the extra payments separate from the initial payment so that you can track it.
And then you can look at the actual principal and see, did they credit it.
Which you have to do, because I swear to you you will see that there are times that when you make extra principal payments, they just go missing. I don't know how it happens, but swear to God it happens all the time. So you need the record that you made a separate payment. And then you need to go back and make sure they credited it.
There's a thing in your book that you talk about paying every two weeks. Could you do that with a car?
So my question's about mortgages. And so several years ago I read a book, and it's an older book, so it could be irrelevant now because I'm sure the interest rates were much higher than they are right now having historic lows. But I remember it made a lasting impression on me, and it talked about if you make an extra $50 a month principal payment towards your mortgage, that you can shave off about eight years on your mortgage. So going from a 30 year, basically to a 22 year if you just make an extra $50 a month towards the payment. Now again, I don't know if that was a different time.
It all comes down to your mortgage. So I'm gonna show you a bi-weekly payment plan here in a second. I actually am okay with you having a 30 year mortgage, because it gives you flexibility. I want you to make extra payments. So typically what it is, is one extra payment a year pays a 30 year mortgage off on average five, six, seven years sooner, depending on the interest rate. A bi-weekly mortgage does the same thing. So in this case, that person's $50 example, the home was probably $100, and the extra mortgage payment was probably $500 over the year, so it was $50 a month. That's how that number came there.
And that was my follow-up question was about the bi-weekly, bi-monthly mortgages where, is that truly something, and would you set that up automatically so every two weeks you would have a payment removed instead of monthly.
So I'm gonna go through bi-weekly in a second. I like bi-weekly payment plans a lot because it's automatic, forces you to pay your mortgage off early, it's great for savings, easy with cash flow if you have a regular paycheck. So everybody's rushing and taking notes, but I'll cover this.
I just wanna get two quick questions from our online audience. This first one comes from Kirsten, and she says, "What if there's a yearly charge for the credit card. "Should you still keep it open once it's paid off? "Or do you close it if there's a charge?"
I know, that's such a good question. It's tricky; it's tricky because some of these cards are $95 a year now. Some of them are even $200, $ 'cause again you wanted the points. It depends, it really depends.
Marta wants to know, "What do you do to diversify "your credit usage if you don't have a mortgage "or you don't have a car payment?"
Okay, so if you don't have a mortgage and you don't have a car payment, then here's the weird thing. It's almost insane to say this, but you have to borrow money in order to have a credit score. So you have to go out and get some credit cards and then use them, and pay them off to get a credit score. It shouldn't be like that, but it is. So typically, that's what people do.