The Importance of Having a Good Credit Score
Why should you care about your credit score? It can save you money! Join Lynne and Scott Dobson as they discuss all the ways a credit score helps you save your money… and it’s not about taking on a lot of debt! Using a credit card wisely can help build the credit you need to save on an auto loan or mortgage in the future. Listen today on Money, I’m Home!
00:06 Lynne Jarman-Johnson: Money, I’m Home. Welcome on in. I’m Lynne Jarman-Johnson from Finance to Fitness. We’ve got the topics that you need to learn about to make your life better. And today is a really important one, and it’s something that really can affect you throughout the course of your life. But Scott Dobson is here. He is our At Work coordinator, and he really helps us with financial education, not only to our members, but our business partners. Scott, welcome on in.
00:32 Scott Dobson: Well, good morning. Thank you. Thanks for having me.
00:34 LJJJ: So, Consumers Credit Union is… I think one of the things that I love the most is our focus on educating individuals about life choices that they make that can be really beneficial long-term. And sometimes, oops, you need a little reset.
00:53 SD: For sure.
00:53 LJJ: Today, we’re going to talk about something that can affect you literally from the moment that you start to get your first job, your car, your house, your apartment, even your cell phone, your credit score. So, this is something that really is a hot topic for you, isn’t it?
01:12 SD: Yeah, it is now. And as you say, going through your life, I guess, it always has been. When I think about… I go back to when I was 18 years old and to where I am today, that my credit score has definitely affected my life and it affects everyone else’s, too. And it changes a lot over your life, and the good news is, is you’re completely in charge of it. The hard part is, is you have to take action and you have to take steps, you have to do things. But if you have no credit score, you’re in a great opportunity to have a wonderful credit score. And if you have a not great credit score, you’re also in a wonderful opportunity to get a great credit score. You just need to know what to do and then just take those steps to actually do it.
01:53 LJJ: So, let’s start with what a credit score even is and how do you figure out if it’s good or bad. Some people, they’re even afraid to look.
02:02 SD: Yeah, yeah. I could see people who have trepidation like, “I don’t even want to know. I’m sure I have a terrible credit score.” So, it is a little stressful, but really a credit score really, what it is, it’s a report card on your history of borrowing money with major institutions. So really, what it does, it shows who you borrowed money from, when you borrowed that money, how much money you borrowed, and how you paid it back. Probably, the most important part is how you paid it back. So, the credit report just looks at your history and looks at those factors. And based upon all of those factors, does a complex mathematical formulation and comes up with your credit score.
02:44 LJJ: What’s a great credit score?
02:47 SD: 834 is the highest credit score I’ve ever seen in my 22 years of looking at credit scores. So, anything over, let’s say, a 740 is considered a great credit score. If you have an 800 plus, then you’re doing everything right. You don’t have to worry about anything else.
03:03 LJJ: So, where is it that all of a sudden, it would be considered, you’re kind of on the line?
03:08 SD: Yeah, average credit score, we might have, say, is 720 or… And if you get down into the 600s, they could just, described differently as challenge credit or working on credit. And then credit scores in the four or 500s, it would definitely be more difficult and hard to get a loan, or a credit card, or a car loan, if you had a 400 or 500 credit score.
03:28 LJJ: What is interesting, it really does make a difference between what type of loan you’re even offered.
03:35 SD: It is funny when I say, they do calculated mathematical computations about what you can get. It comes up with that score and that has a huge difference on what you might be offered and the terms of those offers. If you’ve ever seen, “Hey, guaranteed financing. You can come here, we guarantee that you’ll get a loan.” That could well be true. But some people with a great credit score, when they get a car loan, they put zero interest down, and they get a very low interest rate and a very low payment. People that have a challenge credit score might have to put 50% down. So, if you’re buying a $10,000 car like, “Yes, we can finance you. We just need $5,000 in cash, and then you’re going to have a really high payment because we’re going to charge you a high interest rate.” So, it’s a lose, lose, lose. So, you can’t get it done, but there’s huge differences on how you’ve taken care of your credit.
04:25 LJJ: And you did mention, those small points make a huge difference as you’re growing.
04:29 SD: They do. And it’s things that you make habits, and it’s things that you decide to do every day and every time into your paycheck. Now, that really affects your credit score in the future and that’s really what I advise people to do is, today, you’re building your credit score for the future. No matter where your score is now, you can do things right now to help you improve your credits for the future. So, when you are all looking in that car, you do have a great credit score when you’re ready to buy it.
04:55 LJJ: So, let’s say, there’s an individual who doesn’t have any credit score at all, what should they do to try to get a really good credit score right off the bat?
05:06 SD: The best thing to do is you need something to report to the credit bureau. Something that says, “Hey, I have a loan out there.” So usually, people start with a small credit card or they get a small car alone. And what you want to do is, what I advise people is, you get a small credit card, go use it one time, pay your balance on it, and then every month when the bill comes, pay it and promise yourself that you’re going to do that.
05:33 LJJ: No matter what.
05:33 SD: No matter what, you have to pay that. You’ve made a…
05:34 LJJ: Now, when you say small, you mean that the balance on it is small?
05:38 SD: Yup, yup. Credit cards. A lot of people use credit cards to buy stuff. Credit cards should be for an emergency. So yes, go buy a pack of gum on it to make sure that your card works, get your 98 cent bill at the end of the month, pay that 98 cents. And then, set that credit card aside. You don’t need to use a credit card every month. It’s there maybe for an emergency. So, if you buy gas with it once a month, and then pay that $26 bill in full every month, that’s a perfect way to build credit. One little thing and you get used to… Boy, I’ve got this bill that I must pay every month, get used to that one little bill. Pay it on time in full, every single month, and you’ll do nothing but build your credit score.
06:16 LJJ: You mentioned down time. So, let’s say that you purchase a cool brand-new phone, and it’s a little bit higher than what you expected. But you’re ready, you know that you’re going to be able to pay it off by so many months. How important is it to, A: pay the minimum but be on time.
06:36 SD: Yeah, be on time. When I say your credit report is your report card, what they report is if you didn’t pay on time, and what lenders want to see if you’re going to your credit union and saying, “Hey, I’d like to borrow some money.” And they look at your report card, and every time that you’ve borrowed money, you paid it back on time. There’s a real high likelihood that they’re going to want to loan you money again. So, you want people to look at your history and say, “Yep, I’m the type of person that pays my bill on time, no matter what.” So that’s why you want to have a very small balance or almost no balance, it makes it a lot easier to pay it on time. Then if you got a brand-new credit card, spent all $500 on it, and then you had a $500 bill at the end of the month. That would be very stressful and not the way you’d want to build good credit.
07:20 LJJ: Where does it impact you, you mentioned the car or a home loan. Can it impact you in jobs, what about personal relationships where the stress level just becomes too high?
07:30 SD: Yeah. I think your personal finances first of all is what stresses most adults out, more than anything else, and your credit score is definitely part of your personal finances. So, yeah, personal stress, if you’ve got a big bill due at the end of the month, and right now you don’t have the money to pay that bill, that’s stressful, so you don’t want to have that. So, yes. It’s not just your credit score, it’s your personal life, too. You don’t want to have that stress in your life of, “I’ve got this late payment looming, or I’ve got this big bill that I’ve have to pay, that I’m not sure how I could pay.” So number one, low stress, that’s fun, that makes life a lot easier. But two, you couldn’t… A lot of employers look at your… You have to sign a disclosure, they’re going to look at your credit score and base that… It’s part of your report card. Is this a responsible person? Can they pay their bills on time? Well, so they’ll look at that. If you, well, get a new cell phone, most cell phones look at your credit score. Even dating websites, I’ve heard, have put your credit score on there, because, “Who wants to date someone with a low credit score?” You’d rather date someone with a high credit score. [chuckle]
08:37 LJJ: That’s amazing, really.
08:38 SD: I have no personal experience with that, but I have heard it [chuckle] at a seminar that I did. Renting an apartment, buying a house, car insurance, which is…
08:48 LJJ: Hugely expensive.
08:48 SD: We live in the State of Michigan, it’s the most expensive place in the nation to get insurance, plus you get to pay more if you don’t have a good credit score. So just a whole bunch of reasons…
08:58 LJJ: Ding, ding, ding, ding. How lucky you are?
09:00 SD: Yes. [laughter]
09:03 LJJ: I remember being younger and thinking and scratching my head thinking, “This seems like it’s backwards.” But it isn’t, but it just felt backwards.
09:11 SD: Yeah, it does feel backwards especially to young borrowers like, “Well, I can’t get any credit because I don’t have any credit.” That’s a thing that people get stuck in. PS, “Consumers Credit Union has that Credit Smart Program that can help people out with that to get them started in the right direction. So, if you have no credit, and can’t get a credit card, come on in, and we can help you out there with that.
09:29 LJJ: We sure will. What have you found as you go to companies… Scott, you’re out representing us in a lot of seminars, do you find that this topic is something that people still, no matter how much you explain it, it just feel… You’re a little bit cautionary if you just don’t understand, or you’re scared for what your number might be?
09:53 SD: Yeah, for sure. It’s the number one thing that I can talk about, especially to diverse groups, because if you’re a 19-year-old kid, and it’s your first full-time job, or you’re the CEO of the company, and you’re thinking about buying a boat. Either way, credit score is important to you, and it’s important to everyone, and it’s difficult to understand. Like I said, they use difficult math to determine your score, and your score changes all the time. So, it’s not like you get locked in at 20. And, boy, I have run into so many people that say, “I have bad credit.” I’m like, “When did you check your credit? Nine years ago.” [laughter] And they did have bad credit nine years ago, but since then they got a car loan, that they paid off for five years, perfectly on time, and now they have wonderful credit. They changed their habits themselves and got a good credit score.
10:41 LJJ: What about those apps? You see a lot of advertising about check your credit score. Now, I’ve heard that if you keep checking your credit score that actually can ding your credit.
10:52 SD: It kind of works like, “Think of yourself as a gruff old banker.” If someone came to you every single day, asking for a loan, which is usually if you go out and have a company check your credit, you’re saying, “Oh, would you like to get this credit card? Oh, yes, I would. Yes, I would. Yes, I would.” If you’re always out there looking for a loan, it looks like you’re desperate for money, and it’s going to make it less likely that you’ll get a loan, but that’s having someone check your credit. If you go to one of the apps and you’re looking at your own score that doesn’t affect it, you looking at your own score is okay. But if you’re out trying to get a loan…
11:29 LJJ: Someone else is looking at your score to get a loan for you.
11:32 SD: Yeah. If you go to a retail store and every time they say, “Would you like to apply for our credit card?” And every single time you say, “Yes.” It looks like every two weeks of your life, you’re trying to apply for new credit which makes it less likely, that you’d be approved for credit.
11:46 LJJ: And that’s really interesting, because every time you do go shopping and even now online, it’s the very first thing that’s asked at checkout.
11:54 SD: Sure.
11:54 LJJ: 20% off if you get this credit card, and every time you do that, “Oops.”
12:00 SD: Oops.
12:00 LJJ: Oops.
12:01 SD: Yep. And even if you get the credit card, it’s usually they can offer you that great deal, because they know about 65% of us are not going to pay off the card, and we’re going to replace the 20% discount, we got the check out for a 25% interest rate that we’re going to pay for the next four years paying the card off. So, it’s rarely a good deal unless you’re a very self-disciplined person that always pays off your credit cards every month.
12:25 LJJ: Tell us about… This is going to sound probably silly to some people, but the fact that now there is credit cards, debit cards in phones, and you bank mobilely. How have you found… Is that mudding the waters of people understanding the difference, “Well, I am using my credit card,” but in reality, they’re using debit?
12:48 SD: Yeah, and it does get more confusing, and it gets more confusing. And the reason we talk about credit all the time is there’s things like your cellphone bill doesn’t usually report good things on your credit report, but it does report bad things on your credit report. The credit card you use inside of your cellphone that reports every month if you pay it on time, good or bad. But the debit card hidden inside it, also does not report to your credit report. So, yes, there’s a lot of nuances, and there are a lot of things that define your credit report. So, in general, don’t take on a bill that you can’t pay and pay all of your bills on time. But the ones, it is a little complicated, which reports to your credit report every month, which only report if you’ve done something bad.
13:35 LJJ: Isn’t that interesting?
13:37 SD: Yeah, it does make it interesting, and it makes people wonder about their score all the time. But it should keep you interested in looking at it and saying, “Boy, what changed, what have I paid? Does it show anything new?” And, also, the credit reporting bureaus are not perfect. There’s mistakes on the credit reports pretty regularly, especially if fathers and sons have the same name, or you lived at the same address with someone for a while. It’s not hard for things to get confused. So, looking at your credit report. If you come in and open an account with us, we go through it line by line, and you can see, and you say, “Oh, I never… I did live at that address, but I never had a Verizon phone.” You can go get that taken off of your credit report, if it legitimately was not your bill. Sometimes you’ll find things that you didn’t even know that were due you, close an old bank account, and they charge you one more fee and then got a judgment against you and like, “Oh, my gosh, I owe them $48. And so, it’s good to look at your report and be able to see what’s on there and take care of any errors that might be there.
14:38 LJJ: And bottom line, don’t be afraid to talk about it.
14:41 SD: Don’t be afraid to talk about it and know that you can totally change it by changing some of your everyday habits. If you don’t like your credit score now, in 12 months you can have a completely different credit score just by taking action and being a little bit in control of your finances.
14:57 LJJ: Scott Dobson, Consumers Credit Union. Money, I’m Home. From Finance to Fitness. Hope you enjoyed today, and we’ll talk next week. I’m Lynne Jarman-Johnson. Thanks so much Jake Esselink for his wonderful production skills, and we’ll talk with you soon.