Healthy Financial Habits: Credit Score

Intro

Understanding and Building a Healthy Credit Score

Alright, so today we're going to talk about a “Credit Score” and we're talking about Healthy Financial Habits – so that's been our our theme for the last few weeks. So what is a Credit Score? Well, a credit score is a prediction of your credit behavior, as how likely you are to pay back a loan on time. So while at this point, I don't think that credit score is important, because we don't have any debt. I feel like it's good to give you all or give you the most information that I can so.

So credit companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, other products, as well as for tenant screening and insurance. So when we leased our house for a year to pay off all of our debts, that was one of the things that the property manager did – was they use a credit score in order to screen the tenant.

While you're working on paying off your debt, and getting everything in order (so that you can have financial confidence,) your focus needs to be that you pay your bills, and you pay them on time. Because it doesn't matter if you don't pay your bills on time, your credit score is not going to matter anyway because it's going to suck. be aware of that. If that is something that you're wanting to do and build and increase so that you can get a better interest rate or so that you can purchase a home, or credit limits or whatever, you need to focus on paying your bills on time. So that's the biggest thing.

The other thing too is that credit card companies or the credit companies, the biggest factor is your debt utilization, which means “how much debt you have” to “how much credit you have.” “Debt” is the money that you owe, and “Credit” is the money that you borrow to create the debt. So you want to focus on like I said, paying the bills.

You also want to focus on not opening up more credit cards, and there's a sale that happens every time that you go to a department store or, you know, whatever kind of store, and you go to purchase something, and they're like, “Would you like to open a credit card?” and they’ll say “it’s 10% off,” or “it’s 20% off”. And when you do that, they are betting against you that you are going to not pay your bill, because that's when they make the money. So they're not trying to save you anything, because what's going to happen, or what usually happens, and I would say, I don't know what the statistics are, but if I had to guess, I would say 9 times out of 10, or 8 time out of 10. When you do that credit card in your life, they're like, “Oh, you can pay it off with the first bill.” But when you do that, and you get the first bill, you might not have the money that you had in your pocket when you were at that store to make that purchase, and then you can't pay the bill. And then what happens? You owe them now – they've increased the interest to 20% or 25% more, and you're stuck paying that bill and now you've just erased the discount that you had when you when you got the credit card. So don't fall into that trap.

I was at a store, and I won't say what the name of the store was, but I was buying a bunch of clothes for the spa show that I was working. And so I didn't have any black clothes. So I had to buy a bunch of black clothes, and my bill was like $700. And I'm not saying that to, like, feel bad or whatever. What I'm saying is that the lady standing next to me, who appeared to have more money than me or be more financially well off than me. The lady that was checking out said, “Well, you could get a credit card, and you can get 20% off this purchase right now!” And I was like, “No, thank you. I don't I don't do that because we are debt-free.” And I always felt like I have to explain that to people because they're like, “What?” So I tell them what that we are debt-free, and we don't do credit accounts. And so the lady next to me chimed in and said, “I always just do it just to get the discount.” Well, that's the way the majority of people are, is they get that to get the discount. So they think that they're going to beat the system. But the thing about it is, is the system is set up to make you fail, waiting for you to fail. So don't fall into that trap.

And if you have the money to make the purchase, which is the reason why you're in the store, pay for it and cash and then you own it, you don't have to take that home with you. And you don't have to pay that and a month from now or six months from now or a year from now, when you have overextended yourself and the money is not available. To me that 10% or 20% discount is not important, because to me being able to pay them with cash and say, “Thank you have a great day!” and then not have to worry about it. I don't have any baggage when I leave the store besides the bags that have my clothes in it. Then I don't have to stress about not having the $700 next month or the $700 minus the 10% ($70) and have have that $630 to pay. So just be mindful of that. Don't get sucked into that and be like “Oh, I could get more if I do this!” No, don't do that.

When you open those cards, though, the biggest thing is that the credit score that you're working so hard on takes a hit because you're opening up more credit and you're you're giving yourself the opportunity to be more in debt.

How the credit card formulation works is that you.. and I don't even pretend to know what their calculation is, so I'm not even gonna go there. So when they calculate that, they may say, “Oh, well, you've got 10 credit cards, and you've got 10 out of 10 at the 90% mark” Where it means that you only have just a little bit of credit left on each one of those cards, so that you can spend, so that looks like a risk to them. So they're gonna say, “Oh, no, well, she needs to have a higher percentage rate and interest rate.” or “We are not going to give her credit because of this.”

Big things for your credit score is that the debt utilization which means your credit to debt ratio, and if you pay your payments on time is huge. So those two things are the most important if you're looking to work on your credit score, and keep it healthy while you're in this process.

So the other thing too, is you want to cut up those cards, and I've mentioned that before, because if you cut up the cards, you can't use them again. However, if you leave them open and you cut them up, you're still paying for them, then you're still working on that credit, so that you're using that to your advantage.

When I started my debt-free journey with my husband, I closed out all the credit cards that we had, because we had multiple credit cards, and a lot of them were sitting there with like 0 balances. So I closed them and then I had them sent me a letter saying that the account was closed. And then on your credit report, It will say “Closed Account,” “Closed” or “Closed by” I forget what the word is, it's not creditor, if it's “Closed by the creditor,” that means that it's close by who issued it, which would be Macy's or Dillards, or Best Buy or whatever. So when you close it yourself, it'll say that it's “closed” so you want to have that record that you close the account yourself, and, and that takes time.

When you close out credit card accounts, your credit score is going to take a little bit of a hit as well. So while you're paying off the debt to keep your score up; to keep it from going down, cut off the cards so you can't use them, and then just pay off the bills and pay them on time. Pay them the least from minimum or the lowest one – we've talked about that before; the Debt Snowball is that you list your debts from smallest to largest. And then you pay the smallest one – you pay as much as you can at that and then you pay the minimums to everything else. Then when you pay off that first one, it's giving you momentum – so that's why it's called a “Snowball.” It's it's giving you momentum so that it's rolling down the hill, it's picking up all the snow and or all the the credit and eliminating it. So when you do that, I would say, and you can take my advice with a grain of salt, I would say, you could leave your card open as long as you cut it up. All right, so I've harped on that long enough.

So the consequences of a low score, which was one of the one of the things we talked about too in the email that was sent out, is that it could result in you paying a higher rate or not getting a loan. If you're trying to accomplish something, whether it's purchase a car or purchase a home or or something to that effect, and you need your credit score to be higher in order to be able to accomplish that. The biggest thing is to pay off the debt first. Don't get into more debt, because getting into more debt is just going to stop you from being able to move forward. And once you're debt free, once you've paid off that debt, you don't owe anybody anything. And you can use your income to pay for things. And you will have more money than you realize that you have. Because what's happening as you pay out all these, all these monthly bills to interest and late fees, and the credit card companies. When you instead could just be paying yourself. So something to keep in mind. You want to focus on not getting any more cards, or loans and just pay what you have.

The other thing I've said too, is that; just because you can afford the payment doesn't mean that you should get it; doesn't mean that you can actually afford it, just because you can make the payment, doesn't mean you can afford it. Delay your purchases.

Since I've started this, this process of going through and doing these Coffee Chats and thinking about things that my husband and I did as we were growing up, we've grown up together, because we got married when I was 20, and he was 22. And so we didn't do that, because you know, I remember we, our washing machine went out, and so we had to finance our washing machine with Montgomery Ward, which a lot of you won't know what that story is, but and I remember we had a $500 credit limit or something like that, it was ridiculous, but we had to do that, because we're gonna have washer and dryer. Well, we didn't have to do that, because that was how we were conditioned to learn how to purchase things. And if we would, looking back at this new way of being able to actually learn a new way, it's the way our grandparents handled money. So if we went back, and we handled that differently, if we would have save that money, rather than paying it to that, and then we could have gone to the laundromat, or we could have made other choices. We could have taken our laundry to our parents house or something to get by, instead of opening a credit card. There's all kinds of things that you can do to live within your means and not have to open up credit and oh, somebody else. So all right, so I'm gonna stop harping on that, too. All right.

As I said earlier, I touched on it, is that your credit score is just how much debt you have. So when you buy something on credit, you don't own it, the bank owns it. So when you don't pay it, they can take it from you, or sue you for the money that you owe them. So what kind of fun is that?

One of the things that Dave Ramsey says is that, your credit score is just “how much debt you have” score. That's exactly what it means is that when you borrow and the type of loan accounts that you have, how long you've had your loan accounts open, how much available credit you're using, any new applications for credit, because every new application that you have for credit is going to hit your your credit score, and if you're turned down, then that's a negative mark. So there it goes. It's just making it go down. So that's not a good plan either. And then whether you've had debt sent to collections, foreclosure or bankruptcy, and how long ago.

To kind of go back to what I said in the beginning is that you don't have to have a credit score in order to do a lot of things, but we have been brought up thinking that we need to, but we don't. So 62 million or 11% of the US population are credit invisible with an additional 19.4 million having credit records that are unscalable. So this makes it 45 million or almost 20% of the US population doesn't have a credit score, or that it's unscored. So that's a lot! And you would think people don't have that, well, if you don't need to use credit to purchase something, then you don't need a credit score.

So, again, Dave Ramsey talks about how you can you can get mortgages that you don't have to have a credit score for. If you have 12-months of rental history; your rent, your utilities, those things go to increasing your credit score or go to your credit. And then also student loans (which we're going to talk about student loans next week). But when you're trying to do that, you don't have to go out and get a credit card or a car loan or anything else in order to build your credit. Take the advice, hold on to what you need.

Healthy Financial Habits: Credit Score

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Understanding and Building a Healthy Credit Score

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