Debunking Credit Myths
So, we are going to go True and False style, doin' a little quiz here at the end. But our first myth is checking my credit report will hurt my score. Raise your hand if you think that's true. Raise your hand if you think it's false. Yes, everyone gets 100% in here. So, checking your own credit report is not going to hurt your credit score. So, if you're applying for a loan, someone else is pulling your credit report, yes, it's going to be a ding on your score, but if you personally are doing your, you are entitled to one free check of your credit report from each of the three bureaus. It is not going to hurt your report. This is very important 'cause a lot of people are afraid to check their reports because they believe it is going to ding their score. You're okay to check. Next up, a potential employer can check my credit score. Raise your hand if you think it's true. Gotcha. They can check your reports, not your score.
So, they're pulling a truncated version of your credit r...
eport and your report does not have the score at the top. So, remember that if you pull your credit report, it's not gonna show your score up there at the top. So, that's what that they can pull. I should carry a balance month to month on my credit card. Raise your hand if you think it's false. Yes, excellent. This comes back to my idea of pay it off on time and in full. But I want to debunk this myth because it is one of the most popular ones that I hear when it comes to credit cards. It's gonna take a second so bear with me, but I'm gonna dig in to where I think this comes from. It is important to show utilization. We've talked about it as 30% of your total credit score. But what can happen is, if you're like my sister and you're paying off your card every week, at the end of the month, it might show that you didn't make any purchases, it might report as $0 spent, $0 owed.
Now, what typically gets reported to the bureaus is that final information. So, at the end of every single month, it looks like you spent $0, it's showing then that you have 0% utilization. Here's the problem with that. The point of utilization is to know that you can spend a little bit of money and pay it off on time. Because if you don't, if you just have 0% utilization of a credit card that you got, you know, last year, and you never made a purchase on it, there's no proof to them that you can actually handle credit properly. So, I believe that where this myth came from was a misunderstanding of showing utilization on your credit or on your statement in order to have it reported to the bureaus. What you want is at the end of every month, you've got a very small statement, less than 30%, preferably single digits, and then you're gonna pay it off on time and in full. Because if you're carrying a balance, if you're carrying it over month to month, then you're starting to accumulate debt and you're gonna start paying interest. But if just have a balance, you're showing utilization and you're proving that you can handle credit responsibly. So, that is where I believe that that myth probably came from because there's a fundamental misunderstanding between having a balance and carrying a balance. So, having is just having it and paying it off, carrying is you maybe only pay the minimum, and you're carrying some money over, and you're right now paying interest on that debt. It's good to max out my credit card or get close to the limit. Is this true? Raise your hands if you think it's true. Is that false? Yes! Excellent. So, like I said earlier, you might feel like, Hey, this shows that I'm responsible, I can spend all this money and pay it all off. Nope, that's not what they wanna see. They want you to just use a little bit of it and pay it off. I can just use a prepaid card or a debit card to build my credit score. Raise your hand if you think it's true. Correct. It is false. That was confusing. No one in here raised their hands, which is why they were correct. (audience member laughs) This is false. (audience laughs) You cannot use a prepaid card or a debit card to build your credit score. Even if you hit, swiped as credit, I think sometimes you will misunderstand that with a debit card, they think they're running it as a credit card, you're not, because your debit card or a prepaid card is tied to existing money. So, you're not actually using a line of credit and you're therefore not proving that you have responsible manner of using credit that's been given to you. Don't accept a credit limit increase. Raise your hand if you think this is true. False. And it's okay that everyone paused because honestly, it does kind of depend. It depends on you and it depends on your relationship with being able to handle credit. Because accepting a credit limit increase, which they usually do if you've been on your best behavior for maybe a year or so, or maybe you start earning more money now, they just kinda automatically bump you up a little bit. The problem with that for some people is then you're tempted to spend more which, spoiler, is kind of the plan, because then that could get you to go into debt. So, if you know, Hey, right now, I have a $2,000 line of credit, if they bump me up to four, I'm gonna take advantage of it. Just decline the increase. But if you also know, All right, I've only been spending a little bit every month, I've been very consistent, I always pay it off on time. Great. You know what's gonna happen by extending and upping your credit limit increase? You automatically have lowered your utilization ratio. Because now you're spending the exact same amount, your limit is much higher. So, that's a very easy passive way to even do better and have better information being reported. But, again, if it's gonna tempt you, say no, which is why it actually does depend. So, this is just a real-life example. If your limit is $5,000 and you spend 1,500 a month, and then they up you to $8,000, you just passively drop your utilization from 30% to 19% without doing anything 'cause you just kept spending the same amount. We talked about this already so everyone should get it. Should you ever close your oldest credit card? I'm just gonna say it false (audience member chuckles) or true? And actually, it does kinda depend. This is generally good advice. But like I said, there are shades of gray. If it's a crappy card and a crappy product, and you've got something else that you're doing to put positive information on your credit report, whether that's student loans, whether that's another credit card, shut that bad boy down. But if you've had it since college and there's no annual fee, and you're totally fine with it, you're not carrying debt, great. One other reason I know people sometimes wanna close it is if it's a card that you did carry debt on and you are just so mad about it, and you wanna be done and cut that thing up, (audience member chuckling) all right, that might be great for your psychological relationship to money. And as long as you've got another way that you've been establishing and continue to build credit history, perfect, that's totally fine. All right, that wraps up credit scores and reports. Does anyone have any other questions? Yes.
Yeah, we did have a question from Cat and it's, again, trying to understand how you're paying and when with credit cards
and the different benefits. So, she says when trying to pay in full and on time, how do you figure out when to pay? I know that has to do with the statement period, but how do you track those dates slash manage that, that to say this better, she worries about being charged interest and or not getting the benefits. So, earlier, she was saying that she has like a cashback card, so the question being, like, does she have to have that balance, I guess, in order for her to get that reward? If she pays it a few days after she spends it, does she get that reward?
Yeah, if you're paying it off every week, you're still gonna get the reward 'cause the credit card company is still tracking that. The bigger issue with what I was saying was the bureaus. If you show $0 utilization when it goes to the bureaus, with the final statement, that's where it might be a problem for your credit score, but your credit card company knows, and also you've got a record, so if they don't give you your points, 'cause let me tell you, I have called up a credit card company before and said, Hey, I hit my sing-on bonus, where are my 80,000 miles? So, sometimes, you have to give them a couple statement cycles, read your fine print. Sometimes, it happens. Now, in terms of when you should pay the bill, the best time is the day that you get it. Because then, you know, I'm paying on time and in full for the bill I was just given. You usually do have a grace period on the credit card. Generally, it will say, you know, you just got your October bill, it's October 31st, you just got that bill, but the payment is not actually due until November 30th. They usually give you a 30-day window. For the sake of your sanity, I say just do it the day you get it, it just makes everything much easier and streamlines it, and pay off that statement balance. If you wanna pay off the current balance, let's say it's November 2nd and you made a purchase on November 1st, so your current balance is now a mixture of what happened in October and the first two days of November. But if you always pay on time and in full of your statement balance, and just immediately after you get it, or within a day, I just think that's the easiest way for your sanity. Yes.
What do you think about financial gurus who advise you to just ignore credit, don't have any credit cards 'cause that was kinda the tradition that I came from before I discovered Broke Millennial. And just wanted to, like, so that's kinda where I'm coming from, so then I got a credit card to build my credit, but also I hate playin' that game, so what do you think about that?
It's a lot about your personal financial situation, your psychological relationship to money, and how you handle credit. If you know without a doubt you will carry debt, like I said earlier, don't do it, it's not worth it. But that also come with an understanding that it could make the rest of your financial life a little bit more difficult. If you ever need a loan, if you ever need a mortgage, if you ever need an auto loan, it becomes much harder. So, the gurus who do say that advice, they aren't wrong. I understand wanting your people to never ever be in debt. I don't want any of you to ever be in debt, but I also feel realistic about the fact that it's really hard to buy a car outright in full or buy a home in cash, or to pay for college without student loans. And some of us already made those mistakes, so we're beyond that point anyway. So, now its about kind of making the most with the situation that you have. But I would like you to be very introspective and recognize that, especially with credit cards, if you know it's just gonna create debt for you, those people who say that are right, do not have one, it's not worth creating debt for yourself. But recognize when you need a loan, it's just gonna be a little bit more of an uphill battle. You might need to and if you're freelancers, you're already used to this. You have tax returns, have proof of income. It's just gonna be a bit more, and your interest rate might be a tad higher, so it could be a little bit more expensive to go that route, but on the flip side, you're not creating debt, so then you're keeping that part of your financial life much cheaper. Yes.
I have two questions. One is about closing credit cards. You know, if you're just trying to kind of refine and just kinda simplify, and you're like, Oh, I don't use this Target card anymore I don't use it, as far as that closing down cards, I don't know if that hurts your credit score at all.
So, will hurt in the sense of you're going to lose a little bit of credit length of credit history. So, generally, when you think about length of credit history, it's typically an aggregate of all of the information. So, if you close an oldest line and you close the one that's been opened 10 years, the rest you've only had opened three, it's gonna start to shorten your credit history now down to three years, 15% of your score. So, it will,
But if it's like three, three to five years and it's not your oldest?
then, I wouldn't stress out about it too much. People who are hardcore travel hackers are opening and closing all the time and many still have 700s.
Not advising, just saying, (audience member chuckles) it exists. I wouldn't stress too much about it if you're still pumping that positive information on there. And know that you generally will rebound pretty quickly. If you do something like that, and maybe it drops 10 points, maybe you see a 20-point drop, but typically within a couple of months with good behaviors and they're like, all right, you're back to good behavior, good business, we're fine.
My second question is about the utilization. You mentioned paying it off every week. So, I'm just curious about this because if you get a card and it has a lower limit, but you have like a reward amount you have to hit, like, say $3,000 in ninety days,
if you buy something and then just pay it off, like, Okay, great, I'm gonna pay it, it doesn't actually, is that a way to work the system in a way for utilization where your utilization looks slow, but you know, you're like, Okay, I'm gonna put this on here 'cause I'm gonna get miles or whatever.
And then, go at home two days later or something and pay it, and then at the end of the month, your utilization looks like 10%. I don't know, I'm just curious (laughs).
Yes, actually, you're right, that is a hack. I don't talk about it a whole lot because it can be a little bit confusing. But the premise here is, let's say your limit is only five grand, but the sign-on bonus is you have to spend $3, in the first three months to get the deal, you got the card, you also needed to buy a new computer, that computer cost you 1,500 bucks, plus you made a couple of other purchases, and now you're 50% utilized. Generally, yes, if you pay it off in the middle of the month, so at the end of the month, you only have, like, $400 as your balance, typically that's what gets reported. I am gonna say, not always, sometimes, they will pull the information from earlier in the month. It depends on the model, there's so many factors here, but as a general rule of thumb, that is a possible way to hack the utilization situation. If you need to spend a little bit more, but you don't wanna be 70% utilized, pay it off the first couple of weeks, so you get it down really low by the time the statement actually cycles. Yup.
You just mentioned in the last answer that a significant drop in your credit score maybe between 10 to 20 points. And I just wanted to ask you specifically what would the quantity of drop beats where you and you're like, worry that, Okay, 10-point drop, time to sprint into action, maybe seven-point drop, not a big deal.
For me, now, a lot of things impact your score. So, holiday season is coming up. Your utilization might spike. It might still be below 30%, but if your utilization is usually 4% and now this one is 12%, it's still good, but for you specifically, they might be like, Hold on a second, this isn't normal behavior. And they might drop you a little bit, but there's a rational explanation for why that might have happened. So, maybe you were at a 798 and now you're at a 790. But you understand why. To me, I would get concerned if I saw like a 40-point drop seemingly out of nowhere, if I haven't applied for anything, if my utilization is exactly the same, and all of a sudden, there's been a big drop, that's gonna send red flags off for me that maybe someone is applying in my name, or something is happening, or maybe, you know, 100-point drop, I'm betting something went to collections, go pull a copy of your credit report. Now, I will say there are points where a 10-point drop is quite significant, and that's when you're right on the cusp. So, if you're at the and you are hitting, you're so close at 700, you're getting there, and now you're down to a 675, that does not only feel significant, but it is in terms of what you could get approved for. So, I do, I say it a little bit flippantly about it, it's not a big deal, five to 10 points, but that is with the assumption that you're into the healthy credit score range. Otherwise, I understand. I guess my other point is I just don't want people to feel super stressed every single month if they see a little bit of fluctuation. That stuff can be normal, especially 'cause your spending patterns change month to month. So, if it is a little bit of five or 10 points, but there's a rational explanation, don't beat yourself up about it. That's the other part here, I'm coming back to this idea of not shaming yourself.