Transform Your Financial Future by Mastering Credit Basics

Imagine facing higher interest rates, difficulty in loan approvals, and strained personal relationships all because of one simple thing: bad credit. On this episode of Money Matters, I, Kim Chapman, promise to demystify credit and its substantial influence on various facets of our lives, from job hunting to renting apartments. You'll gain a clear understanding of what credit is and its critical role in securing better financial opportunities. I'll walk you through how to access and review your credit reports from Experian, TransUnion, and Equifax, emphasizing the significance of regular checks to ensure they're accurate.

Reflecting on a personal experience, I share the mistakes of acquiring multiple credit cards without comprehending their long-term consequences, highlighting the importance of maintaining a balanced credit mix. Learn practical strategies for effective credit management, such as budgeting, automatic payments, and discerning between hard and soft inquiries. Additionally, discover how to leverage free credit monitoring services like Credit Karma to stay vigilant about your credit health. Equip yourself with actionable insights to not only maintain but also enhance your credit score, setting the stage for a brighter financial future. Listen in and take control of your financial destiny!

Transcript

Speaker 1: 0:02

Welcome to Money Matters, the podcast that focuses on how to use the money you have, make the money you need and save the money you want. Now here is your host, ms Kim Chapman. Welcome to another edition of Money Matters. I am your host, kim Chapman, and today we're going to talk about a subject that is essential to having good money management skills credit.

Speaker 1: 0:24

What is credit? What is a credit score? How does it even impact your bottom line at the end of the day? So first I want to start thinking about what exactly is credit? I can give you a really elementary kind of picture of it.

Speaker 1: 0:38

Think about when you were young. At some point in time, we all borrowed money from our family, our friends. Did we pay it back? Did somebody borrow money from you? Did they pay you back? Maybe in that scale it didn't have a great great impact, but just imagine if you had to report that incident somewhere. Somebody borrowed money from you $5. Did they? They didn't pay you back, or they didn't pay you back on time. That's actually credit. So, believe it or not, even as young kids, we're exposed to what credit is without even knowing it. But let me give you a textbook definition it's the ability of a consumer and we're all consumers to obtain goods and services before payment, based on trust that that payment will be made in the future. So it's a little bit like your reputation. Did you do what you promised that you were going to? You were able to get access to a product maybe a car, maybe a house. You got to be able to take that home with promises that you were going to make that payment later.

Speaker 1: 1:41

But let's talk about why is credit really important? Because it's important for more than just the ability to get those goods and services. Did you know up to 50% of employers today will check credit before they will offer you employment? That's right. To get a job, you may need to have a good credit score. Renting an apartment, of course, they want to make sure that they don't have to hound you every month, every 30 days, to get that payment. So they will check your credit for an apartment, your phone, your utilities, all those big ticket items, credit cards and here's something that might surprise you what about your auto insurance premiums? Did you know that? Not only do they take into account what type of vehicle it is, what your driving record looks like, what your age is, is it a sports car right. They also look at your credit, especially here in Louisiana. So if you don't have a very good credit score, that could be one of the reasons that you may have a premium higher than you think you should have. So credit is really, really important for a lot of reasons. So, even if you're not in the market to go out and charge up a whole lot of things, think about it from a perspective of how does it impact me if I want to go get a new job? How does this impact me when I have to get auto insurance?

Speaker 1: 2:58

Now, what are some of the effects of bad credit? Because, of course, we all know somebody with bad credit and they may seem like, hey, life is just as good for the next person. But there are some things that maybe that person is facing that you don't know about, such as maybe they do struggle to get approved for a loan, but if they do get approved, could they be facing higher interest rates or more restrictive terms on loans. They could have trouble renting an apartment. Maybe they didn't get a job simply because their credit was not up to par. They could have trouble getting a cell phone contract. I just mentioned that. They might have higher insurance premiums. And, of course, if you don't have good credit, could the bill collectors be calling? Money definitely is always listed as one of the number one reasons that people divorce. So think about it. If you're struggling with your credit, that means that you're having financial problems, so that could be a potential reason why you have a strain within a relationship. So credit is really, really important. The effects of it are things that everyday people deal with, but there are always solutions to how we can improve our credit.

Speaker 1: 4:04

So let's start by looking at your credit report. How do you access your credit report? So there are a couple of places that you can look. First and foremost, the government-created website for you to be able to access a free copy of your report once a year is annualcreditreportcom. Again, that's annualc report dot com. That's going to give you access to all three of the major credit bureaus. Do you know who they are? I'll pause a second. Think about it. There's Experian, transunion and Equifax. So anytime that you're looking at your credit report, at least on an annual basis, you want to make sure that you lay eyes on all three, because they may not be the same. They may not contain the same information. So if you look at one and you see an error, that same error may not be on the second one. So make sure that you're looking at all three of the credit reports Annualcreditreportcom and, of course, there are going to be other opportunities or other platforms for you to check your credit. There are systems offered by your credit card companies and then companies like Credit Karma that allow you to go ahead and check your credit. It's a soft pull and so it will not impact your credit score.

Speaker 1: 5:18

So let's talk about the report. What is on a credit report? We know that it's going to give you a three-digit number that's your score that tells how likely it is that you're going to pay back that money that you borrowed. Those numbers range from 300 to 850. The higher the score, the better your credit is. But there's more information other than just a score. There's a lot of information about you that maybe you didn't know is on your credit score. It's gonna have your name. It's gonna have your address Any address, of course, that you've listed on a credit application in the last five years. That information is gonna be on there.

Speaker 1: 5:58

Now let's talk about names, because this is something that I'm really, really picky about when you use credit applications or put your name on a credit application, be really, really consistent, and I recommend that you use your government name. That will reduce the likelihood that there will be mistakes on your credit report. My name is Kimberly. Most people call me Kim all the time, but anytime that I fill out a credit application I will use Kimberly. So if I'm reviewing my credit report and I see any entries by Kim, that's a red flag because that's not something. That's not a name that I'm going to use. I am only going to use Kimberly. So again, your name is on there, your address, your date of birth and even your employer. Make sure that you review this information. Don't gloss over it, because any mistakes that you have could be of red flag that maybe there's some type of error or it could be identity theft.

Speaker 1: 6:50

Now I can tell you what's not on your report anything that can be used to discriminate against you. So think about it. Your race, your religion, your marital status those sort of things are not going to be on your credit report and that's just your personal information. But when we get down to the nitty gritty of it, it is going to have all of your credit files. Who do you owe? When was the account open? What is your balance and, of course, most importantly, what is your payment history? Did you have any delinquencies right? All of that information is on there and there's a logarithm that each of these credit bureaus use that basically determine what your actual credit score is.

Speaker 1: 7:31

Now we've talked about reviewing your credit report and looking for errors. What do you do if you find an error? Think about it for a second. Basically, there's a way that you can dispute your credit report, and you can do it for free, and I definitely want to stress that you can do it for free, because there are a lot of organizations out there that will assist you with disputing things on your credit report, but a lot of times they charge a fee. So I want you to be clear that there is an avenue where you, as a consumer, can dispute mistakes off of your credit report for free, where you, as a consumer, can dispute mistakes off of your credit report for free.

Speaker 1: 8:07

Once you access your credit report depending on whether you're using Credit Karma, annualcreditreportcom, whatever site you use there should be a platform or even a paper form that you can complete and send to the credit bureaus citing what the mistake is. Be prepared to show proof. So, for example, if a lender or a creditor has listed you late maybe in November of 2023, and you feel that you paid on time, you can dispute that, but you're gonna need to show proof that you did make the payment before it was late. So, again, you can dispute mistakes. Ideally, it's a little time. It takes a while to process this. So usually what happens is you go online, you complete the dispute, it's going to go to credit bureau. Then credit bureau in turn, is going to contact that lender with what your dispute is. Generally, they have 30 days to respond. They may respond sooner than that, but just keep in mind they have 30 days. So correcting mistakes is not something that happens within a day or two. So keep that in mind. Have a little patience, but be diligent about it, because you can get mistakes removed off of your credit report if you can prove that it's a mistake. So let's move on.

Speaker 1: 9:20

We've talked a little bit about, of course, your credit scores. We've talked about the importance of having good credit, how it impacts not only your ability to borrow money but even jobs. But I want to talk about the other factors that really help determine your credit score. Making your payments on time that is key. That is number one right. That accounts for 35% of your score. Even one late payment can tank your score and it can take months and months to rebound from that. So make sure it is a priority if you want to build credit, maintain good credit right, make those payments on time, and there's so many different tools to do that and we'll talk about that in a minute.

Speaker 1: 10:02

Credit utilization is another important factor when we're talking about your credit. What is credit utilization? How much of your available credit do you use? Think about it. You have credit cards, right. What are your limits? Let's say you have a credit card with a limit of $1,000. To be in good standing with the credit bureau, they recommend that you not use more than 30% of your limit. So what does that mean? Your limit is $1,000. 30% of that is $300. So you really want to keep that as a target amount that you don't want to go over 30%. So, regardless of your limit, keep that percentage in your head and try to maintain balances under 30%. The higher your balances are, the lower it will impact your credit score.

Speaker 1: 10:49

Now let's talk about length of time. With credit history. That accounts for 15% of your credit score. How long have you had an account? If you're young and you're 18, 19, 20, and you're just starting out with credit, you're probably not going to score really really high on length of time with credit history because you just started out. There's not a quick fix for that right. You just have to keep maintaining your accounts, paying them on time. Age will come over time, but we do look at that. That's very important. Somebody that's had an account for six months is going to be evaluated a lot different than somebody that's had an account for six months is going to be evaluated a lot different than somebody that's had an account for six years. New credit how much new credit do you get at one time?

Speaker 1: 11:30

I'll tell you a little story and I'll tell this story over and over again. When I was young and didn't know a lot about credit, I remember getting my first credit card. I was in the mall, it was raining. They rolled out a card of umbrellas and said hey, if you fill out this application, this credit application, we'll give you a free umbrella. Well, since I didn't have an umbrella with me and it was storming outside, it seemed like a good idea. So I filled it out and, lo and behold, guess what? I got that credit card. I was very excited, had no idea what I was really getting myself into. But the story continues because, guess what? The store that granted me the credit card was not even one of my favorite stores. So I thought, hey, if I got a credit card at this store, maybe I can go to the store that I really like and get one. So sure, that's exactly what I did. Went to another department store, filled out a credit application and, boom, they extended credit to me.

Speaker 1: 12:25

So at this point, not knowing any of this information that I'm sharing with you, I thought I was on a roll. I have two credit cards. Now. That means I have good credit, right? Oh, if only I knew then what I know now, because, of course, I continue to rack up credit cards thinking I was building credit. And that's a common mistake that a lot of consumers make is, when they're in the process of building credit, they mistakenly get too many accounts at one time, and that's what I did. I walked out the mall that day with probably three to five new credit card accounts. I thought I was bawling, and then, of course, later, I found out, not such a good action. So be mindful of how many credit accounts that you open in a short time period, which is usually about a 24 month window, because that is what really impacts your credit score the most what's happened in that recent 24 months. And then, finally, the last factor that impacts your credit score is your type of credit. So we've been spending a lot of time talking about credit cards. That's just one type of credit.

Speaker 1: 13:30

Credit cards can be secured or unsecured. So ideally, you want to have an account with unsecured debt and secured debt. Unsecured means there's no collateral behind it. Your credit cards, student loans, secure debt does have collateral. Think of things like your house, your mortgage or your car loan, because, of course, your car is the collateral. If you don't make the payment for the car loan, we all know what happens, right, you don't make your mortgage payment, unfortunately. We know what happens there. So you want to make sure that you have a good mixture of credit unsecured, secured, revolving and installment. Now, how does this all really impact your bottom line?

Speaker 1: 14:13

When we're talking about credit scores, what's the difference between somebody that has a 500 credit score and an 800 credit score? When we're talking about your wallet. Well, when we're talking about your wallet, well let's look at it. When you go to get a loan, your interest rate right. What it costs you to borrow that money is impacted by your credit score. So if I use just an example a car loan somebody with good credit could buy a car for $25,000 and may only have to pay back an additional $2,000 in interest. That's actually a quote from when interest rates were really really good. But, on the other hand, somebody that borrows that same $25,000 but has a low credit score could pay back $10,000 or more. That's right. The person with good credit $2,000 to $3,000. The person with bad credit, $10,000. That's a pretty big difference for the same amount of money that's being borrowed. So it's really, really important that you take care of your credit so that you don't have to pay higher fees or higher interest for borrowing money.

Speaker 1: 15:16

Credit inquiries so I mentioned before using annualcreditreportcom at least once a year to look at your credit. It's extremely important. But there's that common misconception that, oh, if I check my credit, it's going to hurt my credit score. So let's talk about credit inquiries. There are hard credit inquiries and there are soft credit inquiries. A hard credit inquiry occurs when an individual applies for any type of credit card, such as a mortgage, auto loan or credit card, and that can affect your score. However, a soft inquiry occurs when the individual checks his or her own credit report, gives potential employer permission to check credit, or when financial institutions you already have business with check your credit. A soft inquiry cannot impact your credit score.

Speaker 1: 16:08

Ok, that's how you're going to be able to maintain it if it's good, or build it if you need to do some work on it. Now I want to give you a couple of tips in terms of how to build or rebuild your credit. First and foremost, if you open a new account, you want to maintain that account for a minimum of six months, and obviously with a good payment history. Six months and obviously with a good payment history. I've seen people make the mistake of opening an account in January and then, three months later, paying it off, thinking, oh, I'm paying it off early. That's a good thing. Unfortunately, what you're trying to build is a payment history, and if you cut off your payment history at the knees, then you're kind of doing yourself a disservice. So the minimum is six months if you're going to have a new credit file.

Speaker 1: 16:54

Next, of course, as I mentioned before, paying your bills on time. So let's look at it. How can we pay our bills on time? One follow a budget. A budget is essential to you being able to keep track of your bills, all of your obligations, and making those obligations on time. Schedule automatic payments. Technology has made life a lot easier today, and that's one way to make sure your payments are made on time without you even having to lift a finger.

Speaker 1: 17:22

Set reminders hey, if you're a little seasoned now got a little gray on top of the head and we don't remember things as well as we used to set reminders so that you can ensure that you're making your payments on time, because it's really, really critical to your credit score. Try not to apply for too much debt at one time. As I mentioned before, that's a red flag to lenders when they see that you've applied for multiple credit applications at multiple places at one time, because they're looking at why do you need so much money above what you're bringing home from your regular income? You want to make sure you check your progress. As with any goals that you set, it's imperative that you check your progress. So if you're working on your credit, if you're working with a person, or even if you're trying to do it on your own, check your credit score periodically to make sure what you're doing is actually working.

Speaker 1: 18:19

In hindsight, had I known or had the ability to check my credit score as I thought I was building credit when I was 18, 19, and 20, I would have quickly learned that my score was going in the wrong direction. So that could have gotten professional financial help to see well, what am I doing wrong, what can I change, what can I do better. Like I said, building and maintaining credit it's not rocket science. It just takes consistency consistency of paying your bills on time, keeping your debt low, watching how many accounts you open and having that diversity within your account.

Speaker 1: 18:54

Now, the last thing that I want to talk to you a little bit about is predatory lending, because it's fine and dandy to have a great credit score, but where do you go and get credit from? Where you get credit from actually can impact your credit score, and so I want to talk to you just a little bit about predatory lenders. Those are lenders that basically prey on individuals that are facing financial trouble. How can you identify them? There are places like payday lenders sometimes finance companies because they have very, very high interest rates and the negative impact of those can really do more damage than good. Because they often have high interest rates, inflated fees. They may pack the loans you know insurance, make you feel like you're obligated to get that insurance just in order to have the loan. They may have abnormal prepayment penalties. What you want to pay your loan off early, we're going to penalize you because we want to make all of that money. Predatory lenders often don't even report to credit bureaus, so not only are you facing all of these negative impacts, but it may not even report to your credit bureau. So again, if you follow just the simple steps that we've talked about today, this will help you build or maintain your credit score. So that's all of my tips today for how to build and maintain your credit. I hope you found this helpful. Check out our website. Contact me directly through Neighbors Federal Credit Union, because I would love to spend more time talking about how to build and maintain a healthy score.

Speaker 1: 20:30

Using free credit monitoring services like Credit Karma can be an excellent way to keep tabs on your credit health without spending a dime. Here are some tips on how to make the most out of these services. Regular checks Schedule routine checks of your credit reports to identify errors or potential fraud. Early Alert setup Activate alerts for any changes in your credit report, such as new inquiry accounts, quickly to catch and address any suspicious activities. Score insights Understand the factors affecting your credit score through the platform's insights, helping you make informed decisions to improve your score. And then simulate scenarios. Use those score simulators to see how different financial actions, like paying off debt, might impact your credit scores. And finally, check out neighborsfcuorg slash financialeducation to learn more on how to use the money you have, make the money you need and save the money you want. Thank you.