Podcast - Credit Scores and How They Can Affect You

Jag:

Welcome back to Financial Matters with Richard Oring. It is episode number three. I am Jon Jag Gay, joined again by Mr. Richard Oring from New Century Financial Group. Good to be back with you, Richard.

Richard:

Hey, Jag. It's really good to be back, especially right after the Thanksgiving holiday. Hopefully, you had a great time with your family.

Jag:

Definitely did. Looking forward to the rest of the holiday season. With holiday season coming up, this is such an important topic today because I know sometimes people have to borrow or they want to make sure all their Christmas or holiday presents are taken care of. Today, we're talking about credit scores and understanding the important of how hit can affect you. Very timely topic for this time of year. Richard, we'll start right at the top. What is a credit score?

Richard:

Well, you know what? Before I even answer that one, let's talk more not just what a credit score is and how it's going to affect you, but a lot of people just think they use their credit, they pay it, so they must have great credit. Let's talk about how the score is calculated, also. I think that's going to be really important to understand.

Richard:

What is a credit score? I think we've all heard of a FICO score. It's a three digit number based on information that credit, our lenders, report to credit agencies, and it comes up with our credit worthiness. This usually helps lenders determine how much, or if they're even willing to lend us money. More importantly, at what cost? You go buy a car. Sometimes they say, "Oh, we want to know the interest rate, so we your credit." A lot of those introduction interest rates you see on TV for promotions and stuff, that's usually set for people who have extremely good credit.

Jag:

We had a running joke when I was working at a radio station of a guy who had been working in radio for 50 years. He would say, "Oh, yeah. We always do these appearances with car dealers. 0% financing available." He'd always look at me and go, "Nobody gets 0% financing." You know what's crazy is even the utility companies now and apartments and stuff, they determine if you need to put a deposit down based on your credit.

Jag:

Then some states allow car insurance companies to do a search charge if your credit's not good. They think that you're more likely to put a claim in. Where I live in the state of Michigan, that is absolutely true here. Credit scores go into your car insurance rates. I know that is a legal battle they're fighting in the capital in Lansing to try and change, because there are some people who are paying more than they should in insurance just because of their credit score.

Richard:

Yup. I think the [inaudible 00:02:15] came from just overturned that, actually.

Jag:

Louisiana?

Richard:

Yeah. I think they stopped doing it. I know Pennsylvania stopped doing it.

Jag:

Rich, most people have heard of the credit score called the FICO score, but there really are two scoring models, right?

Richard:

There's actually multiple ones, but the big ones is FICO, and the other one is VantageScore. For today, let's really focus on the FICO. That's what most people are familiar with.

Jag:

Yeah. That's kind of the big one. Yeah. A lot of times we've seen the score eight. Now they're coming up with the score nine. It's being updated. What's going on with that?

Richard:

It's interesting. Most people don't even know there's multiple scoring models. If you really dig into your credit reports, now they have these online services you can just log in and look at anytime you want.

Jag:

Oh, yeah. I've used those for sure. Yup.

Richard:

Yeah. It's interesting because you see your FICO score, but then there's another section where you can see other scores. There is auto scores, lending scores. Each lender has their own criteria, what they're looking for for lending. The one they always report was the newest model until... Not always the newest let me say, but right now it's the FICO score eight, which is the general one, which is not being replaced with the FICO score nine. Probably over the next 12 months, the eight will be gone and the nine will be there. The reason why they're doing it is why they have different models, and why they're changing it is to incorporate unique features. Leveraging new risk prediction technology and reflects more recent consumer credit behaviors. Where we spend money is much different than our parents did with credit.

Jag:

It's almost like a software gets upgraded to version 1.0, 2.0, 3.0, 4.0 and so one. As our behaviors change and the technology can monitor it and do a better job of figuring out and predicting and things like that. That's why they keep upgrading, and they're headed to the FICO score nine next, right?

Richard:

Yeah. When you kept on talking about updating version one, two, it reminded me when Windows first came out. You used to have to run to the computer store every couple months to get the three and a half inch floppy to get your Windows updates. Do you remember that?

Jag:

I'm just old enough to remember that. Yup. All right. In the FICO score, Richard, there are five major factors that make them up. What's the big one to start with? The first one.

Richard:

Well, yeah. Let's go one at a time. Payment history. As you can expect, every payment of the past is the most major factor in calculation of the credit scores it helps determine future long-term payments. Behavior both revolving credit cards and installment loans. It makes up 35% of the calculation. The type of debt will fall into this is your credit cards, your retail accounts, installment loans, mortgages and so forth.

Jag:

That's over a third of your total credit score, you said. 35% is your payment history, which is why it's so important to make those payments on time.

Richard:

Yup. Let's not forget, I'm going to keep going on that [crosstalk 00:04:55]-

Jag:

But wait, there's more.

Richard:

There is more. There is the public records. You've got bankruptcy, lawsuits, any wage garnishments and things like that can also be reported in that category.

Jag:

Lots and lots and lots go into that payment history. Again, so important to ake payments on time. Then any black marks on your credit card, and they will really show up and affect you there. Payment history is the first of the five factors. What's next?

Richard:

The amount you owe makes up 30%. This category is basically credit utilization, percentage of credit available. I try to tell my clients, "Always try to keep the balances under 30% of what your available balance is. Over 30% can actually hurt you." Owing money on your credit card, using it a large amount doesn't mean you're a bad risk if you're paying it off.

Jag:

Right.

Richard:

In our household we have a few credit cards. I always never try to charge more than 30% on any of them. Then I'll go to the second one if I need to. But again, credit cards are meant for short-term debt. It's not a loan, so we try to pay those off within a month or two. There are times when we have to make a big purchase and I want to get the points, the airline miles.

Jag:

That's something that I think a lot of people fall into, Richard, is, "Oh. Well, I'm just going to use the credit card for everything so I can get the airline miles, or the points." But if you're spending more than you can pay off, when you start paying interest on those credit cards, you are wiping out any benefit that you're going to get on those points, right?

Richard:

Oh, it's crazy. Again, the worst thing you can do is start using a credit card and not having a plan to pay it off in the short-term. Period. You charge today, you charge tomorrow, then you have an emergency and now you have this debt. If you look at the interest, what you're paying for that year, it's ridiculous.

Jag:

It just snowballs from there.

Richard:

Yup. If you can't afford it, don't buy it.

Jag:

Easier said than done, but so true.

Richard:

Especially around the holiday time right now. Everyone's buying up gifts for their kids, and loved ones, and so forth. Just make sure to do it on a budget.

Jag:

Okay.

Richard:

Hey, Jag. The other thing I always hear from people is like, "Oh, don't close your credit card. It could hurt you." That can hurt you. One, by closing credit cards, if you don't have a long enough credit history, you're taking one which is accumulating a history for you, and just getting it taken away from you. That's one factor that can hurt you, especially in the beginning of trying to build up your credit. The second thing is it lowers your available credit you have. If you have a credit card and you're not using it, as long as it doesn't cost you anything to maintain it, it might make sense just keeping it because it gives you a higher amount available, which you're not utilizing.

Jag:

This is the whole debt to credit ratio thing. If you have a credit card with a limit of $10,000, and you've got $2,500 on it, but you have this second credit card, and that is a lower percentage of your total available credit that you're using, you close the card, your limit is less, and you're using a higher percentage of it.

Richard:

Exactly.

Jag:

Length of credit history is a big thing to consider too, right?

Richard:

Yeah. The more history they have, the better they can rate you as a borrower. The factor is based on length of time of all your credit accounts, which have been open. It also includes the time frame since it accounts most recent transaction.

Jag:

I didn't know that. Okay.

Richard:

Newer credit users can have a difficult time achieving a high score because they don't have the history. As you start opening your first account, your score will naturally start going up because of having it longer on your reports.

Jag:

Got it. What about credit mix? That's another factor here too, right?

Richard:

Yeah. Lenders are sometimes looking for different type of debts. They're looking for a combination of credit cards, retail accounts, installment loans, mortgages and so forth, to see how you handle different kinds of debt. It's funny. In my household, I hate retail cards. It's the one thing I can say, and I have very good credit. But the one thing I will not ever do is we go to Macy's, you go to Kohl's, and they always go, "Oh, if you open a credit card, 15% off." I'm like, "Yeah, no." It drives me crazy.

Jag:

It's so funny because that actually happened to me. I was buying some audio equipment on Black Friday a couple weeks ago. I went into Guitar Center, and I was making a rather sizable purchase, and they said, "Okay. Well, we can give you a credit card and knock another 15% off the order, or 10%," or whatever it was. I'm like, "Well, it's going to save me a lot of money. As long as I pay it off before the interest kicks in, I guess it's okay." But it is something that happens so much, especially during the holiday season when you're making large purchases.

Richard:

The only time I used to do it is we used to live right next to a Kohl's store. They always had these big promotions. If you had a credit card with them, so much percent off. All these coupons. That could be free. It's like 40% off.

Jag:

If my mom tells me how much Kohl's cash she has one more time, I'm going to scream.

Richard:

Exactly. We would go shopping for the kids, and we put it on the credit card. Literally, the very next transaction after I signed the slip was I took out my wallet with cash, and I said, "I'd like to pay my credit card bill right now, please." You can actually pay your credit card at Kohl's at the register.

Jag:

That's brilliant. That money is never there. You never forget about it, and it never charges you interest. I love it.

Richard:

Yup. Yup. It was great. I think the credit mix makes up about 10% of the credit score.

Jag:

The fifth of our five factors going into your credit score is new credit. Explain that.

Richard:

10% goes to the new credit. The one thing lenders are looking at is how much new debt you're taking out. The first thing is you apply for a debt. It gets reported as an inquiry on your credit report. It stays on for two years. They only use one year to calculate your score, though. If you were looking for a car, you don't want to just go to different dealerships just to find out who's going to give you the best interest rate. Find out the car you want, figure out your credit score before you get there.

Richard:

When you go to the car dealership, you don't have to use their lending program. You can go to the bank. You can get your own preapproval through that. You don't want to just open a credit card and be like, "Oh, okay. I got this card. I racked up 10 grand on it. Man, I just got another offer at 0% for balance transfers," and playing that game. Lenders look to see how often you're opening new accounts. It can actually hurt you. Only open an account if you really need to. If you open one, try not to open another one right away.

Jag:

That is really good advice. All of a sudden, they see you taking out or trying to open all these different credit cards, all these different credit inquiries. If I'm a credit bureau, I'm saying, "I don't know about that person." That's certainly something that catches people's attention.

Richard:

Yup.

Jag:

All right. Those are the five factors that go into your credit score. I want to come back to something you mentioned at the top, Richard, which is this FICO score nine that's being rolled out. What are the differences between the FICO score nine and the previous versions?

Richard:

Sure. Like I said before, they changed these scoring models based on the current times. How many times did you go to a hospital and you get the bill, the insurance company pays for it, and then all of a sudden you get three more bills?

Jag:

All the time.

Richard:

Right. Well, that's common. If you ever noticed the collection agencies don't call you as much anymore for medical bills, they're not allowed to report it to your credit. An unpaid medical bill can't be reported to your credit bureau for like... I don't know the exact. Don't quote me. I think it's 18 months now.

Jag:

There's more of a grace period now is what you're saying?

Richard:

Yeah. It's funny. My wife, she got a letter from a collection agency for an unpaid medical bill, which I had no idea what it was for. I called them. I was like, "Look, there's no way my wife can owe this kind of money. We have great medical insurance. There's got to be a mistake." It was the birthday. They had the birthday wrong. When they started trying to strong arm me about getting pay, they wanted me to pay, and then resubmit and I'll get reimbursed myself, I'm like, "Yeah, no." I'm like, "That's okay. I know I have 18 months or so, so you don't have to call me again. I'll get it resolved."

Richard:

Then they changed their tune, and they were really cool about it. Then it got fixed and it was paid for. It was no big deal. But that's one of the biggest changes is when I first got in the business, I would run credit reports or mortgages. I did mortgages my first year. It was unbelievable how many little medical things were unpaid on the credit reports.

Jag:

Yeah.

Richard:

Like $50, $100. Clients didn't even know about it. The first thing is the credit nine, the medical debts aren't affected as much as credit score eight.

Jag:

That's such a huge thing. I'm so glad to hear that because even you look at the political debate and the campaign for 2020, and everybody is talking about healthcare and medical. I don't think I know a single person that doesn't have some sort of horror story when it comes to healthcare, whether it's a prescription, or a hospital visit, or an urgent care visit, or whatever it is. These bills that nobody knows how this works, including the people who work in the industry sometimes. I'm really glad to hear that those are not going to be as much of a factor on FICO score nine.

Richard:

The other big thing is paid collections. You had a debt. Let's say a medical one. They issue it to the first collection agency. I don't know what hospital you have near you. Let's just hospital A bills you. You don't pay. It goes to a collection agency, and you don't pay. That collection agency then turns it over to another collection agency, and you pay. Now you have maybe the hospital reporting is unpaid. You have the first collection agency is not paid. Then the third one shows that you paid it. The other ones will show paid, but that's three things being reported on your credit bureau. They're making the pay collections not as astringent as it was before. If you pay it, it's not going to hurt you as much.

Jag:

Wow. That is huge. I never would have thought of that, that, "Okay, the debt's paid. It's paid." But realizing that debts and collections get passed from organization to organization, and it's in everybody's system to submit to your credit report.

Richard:

Right. Sometimes you can fight that because it's the same debt, but a lot of people aren't looking at their credit that carefully. Then when you need to apply for a credit and they tell you this, it's going to take you over 30 days to get it removed. Then when it gets removed, then you have to wait for the next calculation for the credit report. One more big thing. Let's help our college grads and people out of high school and so forth build up some credit. Now they're including rent payments to help you with your credit history.

Jag:

That can help you. That can help you with your rent payments.

Richard:

It gives you some history. When we go back to one of the factors is the history of your debt. Now they can start building it much sooner.

Jag:

I like that. I think about being 22 or 23 and trying to get my first apartment. The only history I had, because I had been living with my parents and living at college, was like one credit card from college was all I had on my credit history. It's nice to know that paying rent can help you build up your score now.

Richard:

The other thing, you mentioned college. This is scary. I remember when I was in college. I didn't have a credit card right away. I remember Discover Bank. You got a free t-shirt and a sleeve of tennis balls.

Jag:

I was going to totally go there too.

Richard:

You fill out the application, and you get this stupid little credit card, and you have a limit of like $300. You think like, "This is great." Before you know it, you're at senior year, and now your credit limit is like 5,000. You used it, and your first job is to pay off that debt.

Jag:

Yeah.

Richard:

Any college kid who's listening right now, walk past that table.

Jag:

I will second that 1,000% because same thing happened to me. I was in college from '98 to '02. You and I are at a slightly different age here, but same thing. "Free t-shirt." "Oh, cool. I'd like a free t-shirt. Okay, yeah. I'll sign this thing. Sure." Get the credit card, and I was up near the limit, so they raised the limit. I got up near that limit, and they raised that limit. I got near up that limit, and they raised that limit. Next thing you know, it's senior year. I don't have any money, but I'm 21 and I don't want to lose these greatest years of my life, so I'm going to the bar three nights a week with my friends, and I'm just swiping the card three nights a week at the bar on campus.

Jag:

Boy, did I spend years paying for that both literally and figuratively. Yeah. Please walk away from that credit card if you are a college student. Any way to avoid it, avoid it. Okay. For those of us college or otherwise, with credit cards, and really with the FICO score, Richard, what are some steps that we can all take to improve our FICO score?

Richard:

Well, besides walking away from the Discover table and not take the t-shirt...

Jag:

It's not just Discover anymore. It's everybody. Yeah.

Richard:

Exactly. Just walk away. It's important to actually check your credit reports. There's three major credit agencies. The first one is TransUnion, Experian, and Equifax. Each of those agencies allow you to order your own credit report once a year, and it won't affect your credit score. It doesn't count as a money inquiry.

Jag:

Okay.

Richard:

That's really important.

Jag:

I'll say here, Richard, so I applied for a loan for a car I think a year or so ago. The guy at the dealer misspelled the name of my company when he ran the credit. I had to go to all three credit bureaus and explain what happened, because there was an extra employer on my credit card report because dummy over at the dealer misspelled it when he scribbled it down on a piece of paper to try to get me approved for a loan. Really, check everything.

Jag:

We were talking about some of these other monitoring services that can help you out, they really do jump in. When I opened that credit card that I opened up a couple weeks ago, I must have gotten three or four emails and all these alerts on my phone, "You have a new inquiry on your credit history. You have a new inquiry on your... " That is important to have so that if it's you, you see it. If someone is trying to get credit as you, you see it right away also.

Richard:

Yup. I use the Experian, so I pay like $19 a month. What they do is they update it every month for me. It's actually daily, their credit reporting. They give me alerts if something happened. I think it's every three months, they give me my TransUnion and my Equifax one. But what's nice is if you see something, it's not like the old days where you have to hand write a letter to them or type up a letter and send it to them.

Jag:

Oh, yeah. You do it right online.

Richard:

Right online. I tell clients all the time, "If you're going to go for a mortgage, pull up your credit. Even if you were late, 30 day late on a credit card four years ago, dispute it because there's a chance the lender might not respond back in time, which then they legally have to remove it." I learned that from the person who trained me on mortgages. They said, "If you know you're going to get a mortgage eventually, just dispute everything on your credit report because maybe half of it comes back changed."

Jag:

Yeah.

Richard:

Then it increases your score right there. Again, I'm a big fan of signing up for one of those services. Just a couple of weeks ago, I see my credit alert. I get a ding on my score. Not enough to move me in categories. I said, "What the heck is this?" It was a large excess use of a credit card.

Jag:

Really?

Richard:

It's not even my credit card. I'm an authorized user on the card of another company. Imagine that if you're an employee of a company, and that company gives out credit cards to their employees, that company credit card, even though you have no control over it, can affect your score.

Jag:

Wow.

Richard:

You got to be careful with that.

Jag:

Always, always, always monitor your credit score. If there's something on there that's not right, act.

Richard:

The other thing is pay your bills on time.

Jag:

Yeah.

Richard:

I'm not a big fan of people paying their bills once a month, because if you get the bill at the beginning of the month, and it was due it could be an overlap of timing, and then all of a sudden you're getting 30 day lates. Try to pay your bills minimum twice a month. The ones that will come in the first of the month, pay them off in the middle. Then the ones at the end, pay at the end of the month.

Jag:

I have an app on my phone. I think it's called Mint where it has a calendar with everything that's due. It syncs up to all my accounts. If I haven't paid a bill and it's coming up in a day or two, I get a push notification right on my iPhone that says, "Hey, you haven't paid this bill. It's due. Pay it." It's saved me more times than I can count.

Richard:

I think what Apple's doing, they're trying to really educate consumers with their new credit card they have. Their app is designed to show you to pay it so you have no interest.

Jag:

Oh, wow. I didn't know that. Okay.

Richard:

Yeah. Then they show you your credit usage if you're using it more than you normally do and sending you reminders. I think that's great, especially for younger people trying to build credit. I think that's a great system, especially if you see what that interest is going to cost you.

Jag:

Yeah. When it compounds, it just gets out of control so fast.

Richard:

Here's the other thing I always tell people. Let's say you get laid off, and you're struggling with your bills, and you know you're not going to be able to make a full payment. Call the lenders. Be honest with them. They will work with you. I know a lot of car loans and so forth, they'll let you take one or two payments in your five year period, and move it to the end of the loan. You can skip one or two payments. You don't dinged on your credit report. It's going to cost you a little more interest because that payment is not paid, but you'll pay at the end.

Richard:

It's better than getting a 30 day late on your credit report. Credit card companies will sometimes work with you. Sometimes if you know you're not going to pay it off, they'll switch it from a credit card to a loan with terms, like paid off over some time. Sometimes they'll let you miss a payment. They'll work with you if you're honest with them. They don't want to chase you down. They understand people have hard times sometimes.

Jag:

That is so true that you'd be surprised how much they're willing to work with you. From when I worked in radio, and there's no job security in radio, and I was laid off for budget cuts several times in my radio career. I can call the credit card and say, "Hey, I just lost my job. I want to make this right. Will you work with me?" Most times, they've said, "Yes."

Richard:

Yup. Other things you can do, as we mentioned earlier, don't close the unused credit cards. You don't want the lower your available credit. Don't open multiple cards for a short period of time. I think I mentioned it before. Don't play the game moving balances from one card to another just because they're 0% interest. You shouldn't have charged it if you couldn't afford to pay it off. Try to live without. Live within your means. Unless it's an emergency, which I get.

Jag:

When I was in my 20's, I got burned playing the 0% game. I opened up cards, I moved it from one to the other and surprise surprise, I never did pay it off before the 0% interest went away. It doesn't work.

Richard:

The one thing I find really interesting as a financial advisor doing financial planning is now we're doing a lot of debt reduction planning. In the past when we did financial planning, it was always for people who were planning for retirement, education. Usually these clients had good incomes and assets they wanted to protect, or make sure they accumulate enough to meet their goals.

Richard:

Today, we're meeting with younger clients, middle aged clients, even older clients who have debt. They come to me lost like, "What do I do?" The planning software is now for us it really just built out debt planning. Now we can put down their loans, their credit cards in to our program with their interest rates, minimum payments. We can run different strategies like, "How do we pay off the debt with the least amount of interest paid to them?" Or we run a strategy, "How do we get rid of the debt as quick as possible? Which ones does it make sense to pay?" Higher interest rate. The ones with higher minimum payments and things like that. There's a lot of different strategies for the planning of the debt now, which is really interesting.

Jag:

If you need help with that, or if you need help with anything related to your personal finances, your credit or otherwise, Richard is the man to se. New Century Financial Group. What are the best ways to get ahold of you, sir?

Richard:

Pick up the phone. Call me at 609-924-2049 extension 126. You can always reach me through email at roring@ncfg.com, or you can always schedule an appointment on our website with me at www.ncfg.com, and I always offer video conferencing if it's easier for you.

Jag:

Awesome. If you're not able to make it over to the office. NCFG New Century Financial Group. Financial Matters with Richard Oring. That'll put a wrap on episode number three. Have a great holiday, sir. We'll talk to you in the new year.

Richard:

I'll talk to you after the new year. Thanks, Jag.

Jag:

Richard Oring's branch office is 1 Airport Place, Princeton, New Jersey 08540. The branch phone number is 609-924-2049. Security is offered through Royal Alliance Associates Inc. Member FINRA SIPC. Advisory service is offered through New Century Financial Group LLC, a registered investment advisor, not affiliated with Royal Alliance Associates Inc. New Century Financial Group LLC and Royal Alliance Associates Inc. does not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.