Lessons

Lesson Info

What is on Your Credit Report?

So what is on your credit report? You're gonna be seeing information like your credit cards, your student loans, personal loans, auto loans, and mortgages. It's really any time that you have borrowed money or been given a line of credit from an institution. That's going to be getting tracked on your credit report, and the kind of things that they're gonna be keeping on there is are you paying on time? Have you ever missed a payment? And the other big important thing are negative marks. So this is, when I mentioned briefly in the last segment about what happened to my husband, this really happens very common in the United States for people with medical debt. Millions and millions of Americans have their credit scores crushed because items go in medical debt to collections, and it could be things that you did not even know existed. So, I'll get back to that in one moment, but I do wanna say pay day loans and title loans usually are not on a credit report if you are paying them on time. I...

f you go delinquent on them and they go to collections, that's when those bad boys end up on your report. They do contain a lot of information about anything negative, so it's not just a positive, I've been paying on time. Here's the different types of loans that I have. It's also the I didn't pay my Verizon bill and it went to collections. I didn't pay my medical debt. It went to collections, anything like that. It'll also take note if you paid late, if you're delinquent or defaulted, if you have unpaid tax leans, if you've gone through bankruptcy or foreclosures. That's all recorded on your credit report, not forever. This stuff actually does eventually roll off, depends on what they would kind of determine the severity of the offense, if you will. Late payments, defaulted loans, generally are about seven years. Things that can be a bit more severe like bankruptcy could be seven to 10 years until it rolls off your report. So one thing that's very interesting for us right now, we're in 2018, it's 10 years after the financial crisis. A lot of people have foreclosures rolling off their credit reports at the moment. 'Cause that's been an interesting thing to see how people's credit scores are just actually, almost automatically getting cleaned up because something's rolling off, and they still have to rebuild. The other thing to know is that a negative mark actually doesn't carry the same weight over the life of it being on your credit report. So as soon as it goes on there, it's a heavy hitter. It could knock 100 points off your score in a night. So I mentioned earlier where my husband, he went to the doctor. Apparently they sent blood work in or something. He had moved and never got the bill, and $25 went to collections. Easily could have paid that, just didn't know it existed, and he actually found out about it 'cause he pulled a copy of his credit report and saw that he had an item in collections, so we got in touch with them. He paid it off and started to rehabilitate his credit score in a way that I will discuss shortly. But that was over 100 points in basically a night that got shaved off, and he was working his way up from, I believe it went down to a 580 credit score. He is now over 800. He is actually very proud that he has a higher credit score than I do. It's one of his big points of pride at the moment, so shout out to him if he's watching right now, but one thing to know is if an item goes into collections, like it happened for him, five years down the road, it's still gonna be noted on there, but you've hopefully been pumping positive information along the way, so they're not gonna count it quite in the same severity because they see that you've been on good behavior for the last few years, and that's going to start to diminish the negative impact of that mark, but as soon as it goes on, it's a very heavy hitter. Now the other thing is something like a bankruptcy or a foreclosure, depending on what you're applying for, even if it might not be crushing your credit score because it's been seven years, there are some lenders who might look at that and see that you experienced it and just automatically say, "No, it's a no-go for us. "We're not going to loan you money." So it's not only about what's happening to your credit score. It's also about having that history being tracked on your report. Now what everyone always loves to know is, how is my credit score determined? So just so you know, there are multiple types of credit scores, but in this particular case, we are specifically talking about FICO credit scores. Those are generally the type of credit scores people are referring to or wanna know about. Other credit score styles, it's usually these same five factors, but this is the known, generally-used FICO credit score model. And like I said earlier, these are not all weighted equally as you can see right now. First we have new credit. 10% of your credit score is new credit. Now sometimes this freaks people out to ever apply for a new line of credit because you're told it's gonna hurt your credit score if you do. If you apply for a loan, if you apply for a new credit score. Okay, yes and no. Yes, if you apply for a new credit card, it's gonna cause your credit score to dip, usually just a handful of points, talking typically five to 10. Now if you're applying for a lot of credit cards all at once, that definitely could be noted as red flag. Why is this person applying for so many different lines of credit, but if you're just applying for one, I wouldn't generally freak out about it unless you're right on the cusp between a good and a fair credit score and you're just trying to rebuild, alright, maybe that's when you don't wanna apply or another time to go on lock down is if you're planning to apply for a mortgage anytime soon, I would not apply for a new line of credit for a solid nine months because you want your credit history and your credit score in the best possible place in order to apply for that mortgage, but otherwise, it's just a measly 10% of your credit score. It's not a huge point, and I also want you to understand the difference between a soft pull and a hard pull. Now this is related specifically to loans, not to credit scores, but with a loan, sometimes you might go onto a website and see them say a term like, "We do a soft pull. "It won't harm your credit score." What that means, is they're basically pulling a truncated version of your credit report in order to pre-approve you, and they might say, "Hey, if you end up applying for a loan with us, "this is the kind of rate that you're gonna get." That does not get recorded on your credit report. It doesn't ding your credit score. A hard pull is what gets noted on your credit report, and it's what could ding your credit score. Generally, every time you apply for a credit card, it's gonna be a hard pull, but with loans, it could be a soft pull to go through a pre-approval process. Another thing to know is if you are also applying for a loan, it's okay to shop around, because you're applying and seeing what your interest rates are in order to compare and go with the best, lowest-possible rate. If you do that in a 14-day window, or up to 30 days, but I would try to do it in a 14-day window, the credit bureaus see what you're doing. You haven't gotten and taken out six different loans. You're looking at different lenders and seeing who's gonna give you the best deal. They understand that's what you're doing. Generally, they're gonna just weight that as one inquiry. That's what it gets called when you apply for a new line of credit. It's a credit inquiry, so it's not going to decimate your credit score to go out and comparison shop for the best deal, and I really like to emphasize that and drive that home, because I feel like sometimes this small 10% percentage factor will keep people from going and shopping around for deals whenever they're applying for a loan, if it's an auto loan, or a mortgage, or a personal loan, but I really do want you to feel enabled and empowered to go out and find the absolute best deal, so if you're gonna do it, shop around in that 14-day window. Pick whichever one is best, and move forward. Any questions, particularly on new credit before we move forward? Does everyone feel good? Okay. Credit mix, also just 10%. This one also sometimes gets called diversity of credit, and basically means what types of credit do you have? Do you just have credit cards? Do you only have a couple of student loans? Or do you have an auto loan, a mortgage, student loans, credit cards? They love to see you have multiple types of credit. Of course they do, because then you have debt, but you don't have to have a ton of different types in order to have a strong credit score. I've built my credit score just using credit cards. Now I will say sometimes if you go to apply for a loan, and you've never had a history of having an auto loan or never had a history of having a mortgage, sometimes it does take a little bit more paperwork. They're gonna do a little bit more of a deep dig, but one thing I really like to stress here is please do not take out a loan for the sole purpose of building credit history. I have had people ask me that question. I have known people whose parents have advised them, well, you could have paid for that car in full, but just take out a small auto loan to build that credit history or just take out one student loan to build the credit history. I would really prefer you to just use a credit card and pay it off on time and in full so you're not carrying debt as a way to be building that credit history. I don't ever love to say, "Yeah, take on debt "just for the sake of building your credit score up." Why put yourself in debt? Why have to pay the extra money? If you just use a plain vanilla credit card with no annual fee and you're always paying it off on time, and we will keep digging in to more information about that, it's an easy way to be building your credit score. So don't go into debt just for 10%. Length of credit history, 15%. Basically, if you don't die, this factor keeps getting better, and it's how long you have been using credit. Now I will say the question I generally get asked here is, is it okay to close my oldest credit card? That's always the question because you get told it's tied to the length of credit history, so if you close your oldest card, you're eliminating that history. Yes, that's true. It doesn't roll off immediately, for one. For two, if it's a crappy product, if you have a credit card that you've had since college, but it's charging you an annual fee and it's nickel and diming you, and since then you've also had another credit card or two, just close the first one. You're okay. You might see a little bit of a dip, but if you're healthy into the 700 range, I don't want you holding on for a crappy product just out of fear of this particular percentage. So let's say that your senior year of college, you got a credit card. It's charging you an annual fee. You've had it for six years. Two years later, you got another credit card, and let's be honest. With millennials, you've probably also been paying off student loan debt. You've got a nice mix of credit. You've got a good history. Get rid of the crappy card. You might see a small hit, I will say, but you also will rebound quickly if you keep putting positive information on your credit report. Another reason I think that it's interesting to tell people, "Hold on to your oldest card," is because we don't tell them, "Hold on to your student loans," because the thing is, as soon as you pay off your debt, it's done. You're no longer reporting credit history. It's eventually going to roll off of your credit report, so no one's encouraging you to stay in debt for longer with your student loan. Keep amassing that interest rate, so that is one myth that I do like to debunk right here, is if it's really old and if it's crappy, shut it down. If it's fine, if there's no annual fee, you've had it for a really long time, it's not harming you at all. A really great way to use that is to just link it to something small like a Netflix account and have it charged, just one small thing, once a month to keep it active, because I will say, credit card companies, if you go inactive for a year or two, they can send you a letter and say, "Hey, you're not using this anymore. "We're closing it down." So if you wanna keep it active, just linking it to a very small annual, or not necessarily annual, very small monthly reoccurring charge that you can then automate from your bank account to pay off on time and in full, just got that nice cycle happening in the background, so you don't even have to keep it in your wallet. Yes. I'm just remembering advice over the years. I had a Target REDcard that encouraged me to spend a lot more money at Target than I should perhaps be spending, and I remember asking you if I should keep it open, and you advised to close it so that I wouldn't keep overspending because that was a vicious cycle. Yeah, and that's a great point. I think that that's one thing that you have to know with credit cards, and we will be addressing that throughout this point, is that if credit cards aren't good for you, if you know that it just creates debt, I don't want you building a credit history with it. It's not worth the credit card debt you're going to be going into. We will be digging into that, but that is a great point, that if it is encouraging you to spend more money, which is really why the reward systems are the way they are, then please do not keep it, and please do not be perpetuating a debt cycle for yourself. It's so much better not to have one. I will also say, I am very hopeful that in the next five to 10 years, a lot of this information is actually going to change, and we're going to start to see a difference in how people, credit score models may be working, how people are evaluated, but for now, this is the system in which we are working. There have been some announcements recently. There's something called the UltraFICO Score that they announced they might be bringing out that actually gets tied to your bank account. Here's the thing. It's new, and we don't know who's gonna use it. Just because it exists doesn't mean that that's what a potential lender is actually going to use to determine whether or not you are a good borrower, so I do really wanna keep focusing on this, kind of the tried and true method of what people have used, but I am hopeful that we'll eventually see other things, like hey, there's a record of if I've paid my utilities on time every single month for 10 years. Can we talk about that as opposed to needing products that for some people, definitely can tempt them into staying in a debt cycle? Now I just talked about three factors that are 10%, 10%, and 15%. Pretty measly compared to these two heavy hitters. These two factors of your credit score account for 65%, which is why these are the two I really want you to pay attention to. I was a little dismissive of the other three factors, to be honest, but these two are so important. The first is on-time payments. This accounts for 35% of your credit score. It is the single-biggest indicator of whether or not you are going to pay your debts off on time in the future is whether or not you've done it in the past. So that is why it makes up 35%. I've heard from people who work in the credit reporting industry that they've done a lot of research to see what other factors are a very good indicator of whether or not people will pay on time, and without fail, it always comes back to, have they done it in the past? And this is just the easiest way for you to always be protecting your credit. Always make your payments on time. It is also an example of where it is not okay to ask for forgiveness instead of permission. If you are in a bind, you need to be proactive about reaching out to whoever you owe money and seeing if you can work something out. Do not miss a payment and then call and beg for forgiveness. Always be asking for permission first, and it's another point where, for example, on a credit card, this is something that can come up for people. Let's say that it's the end of the month, and you have a $200 credit bill due, and you know you cannot pay it off. You have other financial things like having to pay rent or what have you. That $200 bill is too much for you, and there's a minimum due of $25, and you're like, okay, this bill's due on the 31st. I get paid on the fourth, and on the fourth, I'm gonna be able to pay the whole thing off when I get my new paycheck, so you know what? I'm just not gonna worry about it. I'm gonna wait and pay it off then. No, no. At least pay the minimum due, because that counts as an on-time payment. Yes, I always want you to pay on time and in full, but if you can't, at the bare minimum, always pay the minimum due on time, because you're protecting this 35% factor. If you can pay more than the minimum due, please do. Like I already said, every penny above the minimum helps chip away at a principal balance of debt, but that is one thing that I've heard people feel confused about is, well, I can pay it off in full in just a couple more days, so I'm gonna hold. Don't hold. Always make it on time. Pay it by the due date. Question. Most major credit cards or banks or institutions have a feature where you can actually set the minimum due payment automatically, right? To protect yourself from that? You can, and you can have it automatically pull out, which, if you've charged a bigger bill and if it automatically deducts, it might send you into overdraft. That can be a good feature. I want you to be more hands on, especially in the beginning, with your financial situation, and that's why I want you to always log in. Another great thing to do is set up text message alerts. I actually get text messages from all of my credit cards. One, when I make a purchase, which is a great fraud protector, so if somebody makes a purchase that isn't me, I know immediately, and another thing, too, is you can get just a weekly text. It's like, hey, here's your balance right now. Just a heads up. So that's a really great way, also, to stay on top of it, and you can get text reminders or E-mail reminders about when your bill is due. But yes, if you wanna make sure that you're never missing a payment, setting it to always pay the minimum is helpful, but for some people, that still could be an amount that's gonna overdraw you, which is why I want you to be very proactive about staying on top of it. And then the next one, 35% is the thing called utilization. I mentioned it briefly in the last segment. So it also gets referred to as amounts owed, if you hear that term. That's utilization. For example, if you have $1,000 line of credit, you spend $250 of that line of credit, you're 25% utilized. This just refers to the amount of available credit that you are using. If you use all $1,000 of it, you are 100% utilized. Now the goal in this segment, you can think 30 and 30. It accounts for 30% of your score. You don't want to use more than 30% of your available credit limit. Why? Now, sometimes, it might sound like, hey, if I max it out, if I go all the way up to the $1,000, but I pay it off on time and in full, that still looks super responsible because I'm paying the whole thing off, and I proved that I can actually spend a lot but still pay it off, no, no, no. That's not what they wanna see. What they wanna see is, we can tempt you with a nice chunk of change and you're not gonna spend it all. That's how you should think about it. They're giving you an amount that you can spend, but they wanna see that you're not going to spend it all 'cause you can resist the temptation. That, to them, indicates to you that you're a very trustworthy borrower, so the goal is to only use 30% or less of the available credit limit that you have. So if you have $1,000 line of credit, in a month, you don't wanna spend more than $300, and then when that bill comes in, we pay it off on time and in full. You're gonna hear that a lot throughout this entire boot camp, and the single digits is super sexy to the credit modeling companies. If you are below 10%, that's we're weak at the knees. You are such an attractive borrower. We are loving it. So that really is the big goal, is to get into that single digits land, if you can, and that can be very hard, especially when you're in the beginning stages of credit 'cause your limit might be so low that you're like, that means I can spend $10, so it's okay if it just takes you a little while to get there, but that is the goal. Yes, questions. Alright, we have some questions coming in I'm gonna come back. that are sort of related to this building your credit, credit history, credit report. So Mr. Lynch says, "I got a business credit card," and it's the only credit card that he uses for the past two years. The goal was to help build credit score, but now he's wondering if a business credit accounts are not reported to your personal credit report. So that's a good question, and infuriatingly, it depends is kind of the answer. You should have personal credit. That's really what you should be building, and you actually kind of can. You're probably building a business credit score in tandem that is tied to you. It is tied to your information. Depending, though, if you have your social security numbers tied to that, it could be your business number that's tied to that. So if you're looking to build a credit score just on your own, personally, separate from your business, which I do recommend, because I want you to bifurcate business and personal as much as possible when it comes to your money, then you should have just a plain, vanilla credit card, no annual fee. Do not be focused on rewards, just something easy peasy that you're making one small purchase a month, paying it off on time and in full, and if you're worried that it's gonna tempt you into overspending, don't even keep it in your wallet. Connect it to something like your internet bill or your cell phone or Netflix or whatever is a small, reoccurring monthly charge that you know is gonna be consistent so it's not gonna surprise you how much it is, and then have it automated to pay off on time and in full. That's a really quick and easy way to be rebuilding. Yes. Are we gonna talk further, then, about credit cards and types and such? Because Katie Day had asked, "What are your thoughts "on credit cards that earn mileage? "Are there any that you want to avoid?" 'Cause you mentioned those vanilla cards. I would like you to think about that being a black belt financial move. So if you are going to be using credit cards in order to travel hack or anything like that, you need to have, I would like you to have not carried a single balance from month-to-month on your credit card for at least two years. You've always paid off on time and in full. Your utilization is low, and you have over a 740 credit score. That is not any sort of anyone else's prescription for how to do it. That's just what I'm telling you. That's what I advise, because it is so easy to get yourself into credit card debt trying to chase those reward points. So it's not a right. It's a privilege to do that. You have to have earned the right to do it, so that's really how I'd like you to think about it. In terms of, are there crappy products? Sure. There are always crappy products out there, but there are great ones, and there are places where you can compare products. Sites like MagnifyMoney, NerdWallet, Bankrate are all places that compare different financial products, and you can ask around. Blogs have a lot of great information about it, but be sure to be reading the fine print, and also know that a lot of those cards come with medium to hefty annual fees, so you have to decide whether or not that's worth it for you. We will definitely talk more about that tomorrow on the credit card section. Yes. Alright, awesome. More questions coming in. This is from Katherine Lynn. What if you have been denied a secure card? Can you still build credit history? So being denied a secured card is tough, because a secured card is what you want to be using if you're getting denied for a regular credit card, so I guess my first question would be, which company denied you the secured card, and did you call them? Did you get on the phone and actually speak to a representative? So there are a couple different places that do secured cards. For those of you who are unfamiliar with the term, we will get into it in a little bit, but it's a way that you can build credit with training wheels. It's a credit card, but you have to put a deposit down, and that usually acts as your credit limit. So, basically, they say, "You haven't had credit history. "We don't trust you yet, but we're gonna "let you build it with your own money." So you put, usually, about $250 down. That functions as your limit. So you have a very low credit limit, usually about $250. So make super small purchases like one tank of gas or buying one cup of coffee, or whatever it is, paying off on time and in full, and in about a year or so, hopefully you've built some credit history and you can switch over to a regular, unsecured credit card and get your refundable deposit back, assuming you're in good standing. Now, if you've been denied for a secured card, my question would be, who denied you? Can you go to a different credit card company to see if they will approve you? I also would like you to look for options that have no annual fee, they aren't nickel and diming you. There are a lot of very predatory secured cards out there. So, Capital One has a good one. Discover has a good secured card. You can be looking at those cards, and get on the phone and talk to a representative. If it was just an online rejection, see if you can talk to them in person. It could help. That's great, thank you. Alright. Yes, one more. So along the lines of Mr. Lynch and then the mileage cards, we were actually having this conversation this morning. I have been considering getting a mileage card 'cause I'm gonna have to be flying a lot for work, but I was also like, oh, can I put my personal things on there, and then we were talking about paying from our business account to our personal card to be able to pay for things. So I just am curious if you had thoughts about that, 'cause you had just mentioned about separating business and personal, and we were talking about possibly having one Venture card for business and one personal and transferring miles or something, so any thoughts you have, I'm really open to that. Sure, and we can talk about more in picking financial products, as well. One thing I will say, is you wanna keep business and personal as separate as possible, especially if you're ever gonna get audited. You really don't wanna give the IRS a reason to come for anything, and it keeps things clear. It gives you boundaries. I think that's important. There are some credit cards with some portals where you can try to merge, but I think, for the most part, business is gonna be business. Personal's gonna be personal. You can use your business points, though, for personal matters. I don't really see an issue with that. So if you get a card and you've gotten a lot of bonus points with that, and you wanna book a vacation with the points, and you're not paying for it on your business credit card 'cause you have all the points, okay, but otherwise, keep as separate as possible. I am gonna move on, 'cause I wanna be aware of time, and we can pause for more questions as we go, but these things are not part of your credit score, race, age, religion, national origin, gender, marital status, employer, occupation, the interest rates you're being charged, I think is actually interesting for a lot of people. It's just the fact that you have the card. If you're in credit counseling, it's not reflected, and if you are paying child support or alimony payments. Now if you go delinquent on those, that could show up 'cause it's a negative mark. This is always the big question. What is a good credit score? Your goal is to get into the 700 plus club. That is where you start to unlock the top-tier financial products. Now if you wanna strive for excellent, we're looking at 750 plus, but usually it's 720 or above, you're really getting into the best options. 800 plus is exceptional. It can be very hard to get in there, especially if you don't have a strong diversity of credit. I feel like that's probably one of the big factors there. I've had credit for a decade, just credit cards, and I'm just kissing 800. I'm at 798. (audience laughing) But some people take a lot of pride in that, especially if you're a money nerd like myself. Now once you dip into the 640 to 699, that's when it's gonna start to get hard to get access to certain products. If you're at the upper end of it, you're probably still gonna get approved for a credit card. If you're tipping towards 640, it's hit or miss whether you're gonna get approved. An exception, actually, usually being store credit cards. That's an interesting loophole, so for the woman who brought up the secured card earlier, I'd be curious if you could get approved for a store credit card if you have no history of credit. It could be hard, but that should also give you an indicator of the quality of a store card product, because if they are willing to approve people that are lower in the credit score range into fair and even poor credit, it's also because there's an easy debt trap there, so it can be very lucrative for them, but typically, department store cards are a little bit loosey goosey compared to some of the bigger banks, and now once you start to get into the low 600s to the higher 500s, we're looking at poor, and then you're down into bad credit. Now you'll be surprised, we'll talk about it, how easy it can be to actually rehabilitate out of bad credit or to just establish and build credit history in the first place.