36: Understanding Your Credit Score

Welcome to the Sugar Daddy podcast. I'm Jessica and I'm Brandon and we're the Norwoods, a married millennial couple, here to help you build wealth so you can live the life you've always dreamed of. Brandon is an award-winning licensed financial planner with over 10 years of experience and millions of dollars managed for his clients all over the US. Don't worry, we leave all the intimidating finance mumbo jumbo at the door Stick with us as we demystify the realm of dollars. So it all makes sense. While giving you a glimpse into our relationship with money and each other, we are so glad you're here. Let's get started. Hey babe, what are we talking about today? Today we are talking about your adult GPA. Your credit score. It's your credit score. Yes, I mean really, there's no better way to describe it than an adult GPA, because it is the grade that financial institutions give you to essentially deem how responsible you are, what your likelihood is of repaying your debts Correct? So your adult GPA, aka your credit score, is made up of five components. So for anybody listening today that is looking to increase their credit score or better understand where the score comes from, how it's calculated, this episode is for you. We're going to keep it short and sweet and give you some tips to hopefully help you improve your credit score, and if you have any additional questions, as always, reach out, slide into our DMs, leave us a voicemail, send us an email and we would be happy to answer your questions. So the adult GPA, aka your credit score, is made up of five components that the credit bureaus use in order to give you your score. So TransUnion, experian, equifax those are probably names that you've heard. They're probably also names that you see when you open up your credit card apps, and your credit card apps, most of the time now, are going to give you a score. Now there is a caveat, excuse me. The score that you see on your credit card statement or on your credit card apps is usually going to be higher than if you had a financial institution run your credit like do a hard pull on your credit. So just rough numbers. This is totally made up. Let's say your credit score on your American Express is coming up at a 780, which is great. When you go to apply for a mortgage or a car loan and they pull your credit, you might show up in the 750s or 760s. Typically they say that your score on your credit card reporting is going to be about 20 to 30 points higher than if you actually did a hard credit pull. So just you know. Food for thought as we kind of kick this off. But 10% of your credit score is made up of new credit. So how recently you have opened new accounts? This is why financial experts will tell you don't be running around in these streets opening cards left and right, because it is going to ding your credit. Yeah. So promise and buy could think of as if you're, for example, looking to buy a house, looking to get a mortgage, you know, sitting out the mortgage lender, First thing they're gonna probably tell you is don't apply for any new credit cards, don't apply for a loan for a car, nothing of that nature, because it is a hindrance to being to the amount that you would be approved for for a mortgage. Literally every single time we've gone for a mortgage, the first thing they say is don't spend any more money, don't add anything to your credit card, don't go out and buy anything big, because it's going to ding you. The next thing that impacts your credit score, and is another value of 10%, is your credit mix. So what kind of credit lines do you have? Do you have credit cards, car loans, mortgages, home loans, personal lines of credit? What does that look like? Is all of your debt? Credit card debt Is all of your debt. You know real estate debt. It's going to matter because, again, one of the things that you hear constantly in finances diversify, diversify. Well, your debt should also be diversified. So 10% of your score is going to be made up of your credit mix. 15% of your credit score is going to be made up of your history of how long you've had accounts. So how long have these accounts been open? This is a great call out for people who have preteens, teenagers, kids that are getting ready to go to college, young adults. This is why, if you have great credit, it makes sense to add your children to your credit cards as authorized users. Now, one caveat there is set a credit limit right. I remember, I remember when I went off to college, my parents I think I had $300 a month on one of their credit cards and, listen, it was not 301, it was 300. And that card would show up declined if I was trying to go over. So there are mechanisms in place for your kids to not, you know, go buck wild, but it is a great way for them to establish a credit history so that as they grow and they're learning about money and they eventually will need their own lines of credit, they have an out is a credit history that is substantial, right, that's maybe one, two, three years old or even longer. And another little hack there too, is that you know, obviously there are a lot of talk around student loans, a lot of craziness going on with them, not necessarily the best you know time period for student loans per se, but you know, if you do have to use student loans as a way to pay for college, taking student loans out in your child's name and then being able to help them pay it off actually helps. So one of the things I actually say to people is that if you can, even if you're going to pay for your child to go to college, you have all the money to pay for them to go to college. If you have the ability to take out a student loan, go ahead and take it out in the child's name and, as soon as they graduate, pay it off. That is a huge credit boost. Only do this if you can actually pay them off, correct? Because, you don't want to actually screw your kids? Yes, Do not take out the student loan and say you have the money, and then you don't have the money.

That's not what we're talking about.

My mom took out student loans for undergrad and then paid them off, so like basically coming out of college not really having, you know, any type of full-time job, I had 800 credit score. Right Now. I did see a very recent viral post about how a parent took out loans in, or in the student's name. The grandparents said that they were going to pay off the loans the grandparents passed away. Their will wasn't set up properly, it was a whole mess and then, unfortunately, the girl who had taken out the student loans got screwed in the process. So, yes, there are ways to establish great credit for your children, but you need to be responsible and you need to make sure that all of the mechanisms to do that are in place. We were also going to do an episode focus on student loans as far as the responsibility of how much you should take out and reference to you know your specific major you're looking to go into. So we will have a whole episode about the ROI on going to college and how you should navigate the student loan aspect when it comes to that. So you're saying I shouldn't take out $100,000 in student loans to become a teacher and make $36,000 a year? Yeah, I'm a huge Duke University fan. I'm a Duke basketball guy. I know a couple of people that went to Duke undergrad for education majors. That makes no sense. Okay, we're getting off topic here. Unless they got a scholarship, which they did not. Okay, this feels personal. So 30% is your credit utilization rate. This is really, really important and this is a big, big factor in your credit score. How much of your credit line are you actively using? In order to calculate this, you would take the debts that you have. You would divide that number by the available credit that you have multiplied by 100, and you want that to be under 30%. Now there are people that will tell you be in the single digits, right, be under 10%. Yes, there is something to be said for having a low credit utilization rate, especially if you're trying to get a mortgage, if you're trying to get a car those are typically the two biggest purchases that you make they are going to want your credit utilization to be under 30%. So keep an eye on what that looks like for you. One of the things that credit experts often suggest is, again, if you have a high credit score but maybe your utilization rate is not where you want it to be, you can call your credit card companies and ask for an increase. So let's say you have you know whatever credit card. You've got a $10,000 limit. You can call them. If you're in good standing, you have a zero balance, you make your payments on time, etc. And you can ask them to increase your credit line. Well, let's make this actually a little bit more applicable. If you have a $10,000 limit on the card and you have a $3,500 balance on it, okay, so now you are at 35% credit utilization. If you were to ask for a credit increase of, say, like $1,000, that's going to knock you underneath to the 30%. Yeah, and most credit card companies. Again, the way they make money is by hoping that you don't pay your bill on time. So, again, if you're in good standing, most of them will give you an increase. In good standing is just simply making your minimum payments on a routine basis. Yeah, you're not missing payments, you're not delinquent, your account is in good standing For us. Typically, we get letters throughout the year saying your credit limit has been increased, your credit limit has been increased Again. They want you to spend your money with them, right? So if you're not automatically getting those letters or those emails saying, hey, we've increased your credit line, you can call the same way. You can call them the same way you can call on an annual basis and you should to ask them to lower your interest. You can call and ask them to increase your line of credit. That's another call out. If you are in good standing once again, you can also sometimes negotiate to have a lower interest rate. Yes, and you should be asking to do that at least once a year, if not twice, for all of the credit cards that you have. The other area, the last area and the largest, is your payment history. So again, how many payments have you made on time in full in comparison to the amount of payments that you've missed, that are delinquent, that are in collections, etc. So, you paying your bill on time, even if it's just the minimum balance, not necessarily paying them off in full, which is what we would recommend, but if you're just paying the minimum, are you doing that on time? Yeah, this is 35% of your credit score. So this is actually the biggest factor in your credit score as far as how good it is or how bad it is is that you are consistently making payments on debts that you owe. Exactly so. Let's just recap. So 35% of your credit score is made up of payment history. How many are you paying? How many times are you paying on time in comparison to the amount of payments that you've missed? How many times are you paying on time in comparison to defaulting, being late, etc. And I also think there's even a breakdown within that, as far as, like, there's a difference between you know being 30 days late, 90 days late and 120 days late. Yeah, when they send you to collections it's not going to be pretty, so don't do that. 30% is your credit utilization rate. Again, try to keep that as low as possible. The caveat here is that not using any credit can also ding you. So if you have, let's say you know five credit cards, $10,000 each, so $50,000 of available credit, and you have a zero balance on everything and you're not utilizing anything and you're not charging anything ever, that's also not great. So I would recommend you know if you're not comfortable using credit cards, you're not into credit card points and miles or things like that, that's okay. What is one thing that you can put on your credit card and pay off early or on time on a monthly basis? Maybe it's your gas, maybe it's just your groceries, maybe it's your kids' daycare, maybe it's I don't know an ice cream cone once a month. Whatever it is, put something on your credit card and pay it off on time, so that the lenders know that you are being responsible, you're actually utilizing credit and you're paying your debts off on time. Yeah, it's definitely a game. There is a gamification to credit score where you know it's everybody's like oh it's a made up fictitious number and stuff like that. But there is definitely a game and there's a correct and wrong way to play it. Yes, 15% is history of how long your accounts have been open. So again, the longer the better, because they want to see that you've been hopefully responsible for a long time. And also just a little caveat with the history and also the utilization. Don't close down old credit cards that you don't use either, because that could be, you know, detrimental to one. The history of credit being open and also it can also impossible increase your utilization because now you have a lower credit limit. Yeah, If you are like I got to get rid of these credit cards, I don't want to use them. I don't have any self-control. Cut that. Get the balance to zero. Cut them up. Don't ask for a new card and keep the account open. We do not close our accounts. A I don't know when I'm going to potentially need that. We get various offers in the mail constantly for cards that we haven't touched in years. We definitely lean heavily towards one or two credit cards, depending on what promotions and bonuses and miles and things they're offering and what we're trying to achieve for the year. But we don't close accounts that we're not utilizing. I just paid off a rooms to go card. We bought all our furniture. We don't need our furniture. We had 0% interest for five years. You better believe. We used it and now the current account has zero balance and I'm just not looking at the card. It's in our safe and that's it. We're not going to lower that credit utilization because I don't have plans on buying a new couch anytime soon. You were going to say something. Nope, Okay, so 15%, the length of history that you've had credit, and then your credit mix Again. What kinds of credit lines do you have Mortgages, car notes, credit cards, personal lines. You want to diversify that as much as you can. And then 10% new credit. So don't get yourself in trouble by going into a store opening all these credit cards. You know it could absolutely ding you and definitely if you're looking to purchase a home and or a car you do not want to have all these new accounts opened up because it is going to ding you when they pull your score. What else I think that's it All right. Like I said, kind of quick into the point, quick overview of you know your credit score as far as your being your adult GPA your adult GPA. Now, one of the things that we're going to close on is why a good score matters, and a good score matters for a variety of reasons. The higher your score, the more credit you can obtain. We all know that having more options is good, right. There's not ever going to be a detriment to having options, getting better rates. So your credit score is going to absolutely impact what your rate is on that mortgage, what your rate is on that car, potentially what your rate is on those credit cards being able to negotiate a lower interest rate. I know, because of our credit score, we haven't had to pay a deposit for our new utilities. Every time we, you know, change, change where we live and we have to start our new utilities, they'll run your credit and because of our credit score, we did not have to put down any kind of deposit, which is really nice. When I finally got off of my family's phone plan and I went kind of ventured out on my own, they did not require a deposit after pulling my credit because of my credit score. So there are benefits to having a high score and that's obviously what you should be shooting for, because you want a good score. And also now you have jobs that are actually pulling your credit score. Do I think it's necessarily right or wrong? You know that's open to interpretation, but you could also be a detriment to you in the job market, Because there are some jobs that pull credit scores. Well, I mean, think about it, right. I think it depends on the job. For sure. But like I don't want to necessarily work with you, know a financial advisor or somebody in the finance space who's maybe giving me advice on how to manage my finances and they're walking around with a terrible credit score. Well, here's the reason why I say there's nuances to it is because why do you have a bad credit score Because we personally have friends that have had bad credit scores through no fault of their own. Yes, it's absolutely true, and there are parents doing terrible things in their kids credit, you know a divorce. Yeah, there's definitely nuanced reasons and so that's why I say you know, it depends. It depends. That's a good answer. All right, what does a good score look like? So an excellent score is typically rated as anything above a 720. You can go all the way into the eight hundreds, right? Most people kind of cap out at eight fifty. But if you're low seven hundred, seven, twenty or above you are doing a great job. There's probably room for improvement in some way. Maybe it is that credit utilization. So run those numbers and see. But seven, twenty and above you are considered to have an excellent score. Six, ninety to seven, nineteen is good. So six, nineteen to seven, ninety, six ninety to seven, nineteen is a good score. So room for improvement there. Six hundred and thirty to six hundred and eighty nine is considered fair, and then three hundred to six twenty nine is bad. So if you are hovering somewhere in the seven hundreds, you can always work to get that score up Up. Also, I think something that's important to call out is you want to monitor it for sure, and it's something that you want to keep up your your pulse on. You know, run your annual credit report, make sure that there's no credit being opened without your permission in your name. You can lock your credit bureaus. We've talked about that a whole bunch of times, but also know that when you're doing the right thing your credit can be dinged. So when I paid off that rooms to go credit card, my score dropped the next month by like nineteen points and I knew it was because I had paid off that account and that's the game part. It's the game. So it's frustrating, but then it will go back up. It ticks me off to let it lie. Give it a minute and then yes, to Brandon's point, it will go back up. But if you're paying down debt, your credit utilization is going down, going down, the number of accounts that you're using is going down, etc. Your, your number, your score is going to take a hit temporarily. Do not focus on that, don't be discouraged. But no, the better you're doing with your accounts, you're, you're going to take a ding. It's, it just doesn't make sense. The algorithm doesn't make sense. Stick with it, Work the plan and you will be just fine. All right, we hope this episode was helpful. If you or somebody you know is working on increasing their credit score this year, please send them this episode, share it, rate, review, subscribe and if you have any questions that need to be answered by a professional, please reach out to Brandon and schedule your free console. We'll talk to you soon. Thanks for listening. Don't forget Benjamin Franklin said an investment in knowledge pays the best interest. You just got paid Until next time. Thanks for listening to today's episode. We are so glad to have you as part of our sugar daddy community. If you learned something today. Please remember to subscribe, rate, review and share this episode with your friends, family and extended network. Don't forget to connect with us on social media at the sugar daddy podcast. 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