Su puntuación de crédito: Qué puede (y no puede) hacer por usted

Bright Dickson (0:09):

Welcome to "Money and Mindset With Bright and Brian," where we chat about personal finance with a twist of positive psychology to help you find joy in practicing good money habits. I'm Bright Dickson, a lifelong student of positive psychology. And I'm joined with my pal, Brian Ford, our financial wellness expert. Today on the podcast, your credit score. How does it make you feel when you hear those words? Well, think of this episode as everything you need to know about credit scores. We'll dive into how this important number affects your life, the factors that influence, and how to achieve and maintain an excellent credit score. Brian, I know you've been genuinely itching to talk about this. Are you ready to get started?

Brian Ford (0:50):

Absolutely. Let's go.

Bright Dickson (1:02):

OK, Brian, let's jump right in. So while we know basically what a credit score is, can you break it down for us? And also, why should I even bother with working to improve it? Why does this matter? What is it? Give us the details.

Brian Ford (1:16):

Yeah. Look, I'm excited about this episode. There's so much misconception, kind of false information out there when it comes to credit scores, I think a little straight talk will be a good thing around this subject. Our credit score quantifies the risk we pose to lenders. Sometimes it's good to put ourselves in the shoes of the folks we are trying to impress, so to speak. So in other words, your credit score gives lenders an idea of how likely you are to pay back borrowed money. The higher your score, the more likely you are to pay back the loan, and the less risk you pose to the lender. If you've got a good credit score, you've got better options when you need to borrow money for a car or a home. So what I want to emphasize really is that an attractive credit score gives you the power. It allows you to get the best interest rates, and when we get lower rates, this can save us thousands of dollars over time.

Bright Dickson (2:12):

Yeah, Brian, I love that. I know that you know that my brain gets a little fuzzy when terms like interest rate come up, it just kind of gets a little fuzzy in there. But I do think it's really important that we double emphasize that, right? That when you're in control of your credit score, you're really putting yourself in the driver's seat and you're in control of your future. You're putting yourself in the best possible position to be able to do what you want to do.

Brian Ford (2:38):

Yep, that's exactly right. I also want to mention that a good credit score can not only help you get a lower interest rate. There's that crazy, fancy finance term again, Bright, but not only are we going to get lower rates when we borrow money, but it's also important when applying to rent a home or an apartment. Sometimes a future employer may want to check your score. There's two people going for a job and all else being equal, the credit score can kind of push you over the top if it's higher than that other person. And a lot of people don't realize that many auto insurance providers, they'll use your credit score to determine the amount you pay each month for auto insurance.

Bright Dickson (3:18):

Really? I didn't know that. So if I have a good credit score, I'm probably going to pay less money each month for car insurance?

Brian Ford (3:25):

Almost certainly. I mean ...

Bright Dickson (3:27):

Wow.

Brian Ford (3:27):

... look, the type of car you drive and your driving history are the other two big variables, but the third one, the third big variable on that is your credit score. A lot of people don't know that.

Bright Dickson (3:36):

I had no idea. Good to know. So break it down for me, Brian, how is a score calculated? What goes into it? How do we know what's what there?

Brian Ford (3:47):

Well, before we get into how the score is calculated, we want to keep in mind that our credit score, it's different than our report. Your report is important. It gives you the details of all the different loans you've got. You can see them, and really it's the why you have a good score or not. However, it's not your score. It's important to look at both, the report and the score. So once you check your score, how in the world do we know if it's any good? Let me see if I can demystify that just a little bit. The credit scoring system ranges between 300 on the low side, like yucky, stay away from that, and 850 on the you're killing it side, so 300 to 850.

Brian Ford (4:33):

If your score is 600 or less, we've got some work to do. Definitely keep listening to today so that we can give you some tips on how to get that score up. If your score is between 600 and 670, it's fair. Not good, but you're on the right track. 670 to 730 is good. And anything above a 730 is great. You're probably going to get the best rates and terms on loans. So, that's kind of the breakdown there. And we're going to get into the details of this breakdown in our next segment, but at a high level, your score's made up of five main categories. And the categories, they're weighted differently. So in other words, some areas or some categories are more important than others.

Brian Ford (5:22):

So here's the five, Bright. First, we've got payment history. Payment history makes up 35% of your score. Number two is amounts owed. This is 30%, and this is big. I want to focus on these first two because the majority of your score, 65% is essentially making your payments on time and not having excessive debt. That's what those first two categories come down to. Number three is length of credit history, that makes up 15%. Number four is credit mix, that's 10%. And at number five is new credit, and this is also 10%. Besides checking your score before we apply for a new loan, which most of us, that's kind of what we do. It's like, "Oh boy, we've got to go get a loan. What's the score?" We also should be really proactively looking at our credit report and the score about every six months.

Bright Dickson (6:16):

Every six months, so that sounds like something pretty actionable that I should just put on my calendar to do on a regular basis.

Brian Ford (6:23):

I love it. Put it on there. Every six months glance at it, see where it's at, and kind of see what you can do possibly to improve it. Or maybe you're good. I mean, some people get freaked out and their score's at a 735, and they're freaking out over little details and they're like, "How do I get it higher?" And it's like, "You're good. That's pretty dang good." So again, go back to kind of that scoring metric and see where you're at on it. And if there is some room for improvement, then yeah, dig in.

Bright Dickson (6:50):

OK, cool. Good to know. So now that we know why our credit score's important and how it's calculated, in just a second in our next section, we're going to get more specific about how you can increase your score. So stay with us. So Brian, for our listeners who are taking steps to get their finances back on track maybe after some missteps, what's the first thing they should do to raise their credit score?

Brian Ford (7:26):

Yeah. The first thing that comes to my mind is, in past episodes we've talked about how financial confidence comes down to taking care of what you can control. And I want to emphasize that ultimately you have control over your credit score. I want our listeners to consciously take ownership of, and responsibility of their credit score. I mean, the credit ranking system, it is what it is. And the sooner we learn the rules, the better the whole credit score picture will look for us. When I'm chatting with folks, they're kind of frustrated. It's sometimes helpful to think of our credit score maybe as our grownup report card. And let's say we're talking, I've got a couple teenagers. In fact, oh my gosh, my boy just turned 13. I've got three now. Whoa, it just hit me, sorry.

Brian Ford (8:12):

OK, so we're talking to a kiddo trying to figure out credit scores, or even maybe their grades. When a student gets bad grades, he can blame the teacher, his unfavorable circumstances, or even inaccurate information. But the fact still remains that that student has a bad grade attached to his name. A credit score is no different. No matter what excuses we might make for it, the number does exist and it has our name on it. So we want to check our score, kind of see where we're at, but take ownership for it. When I was in college, my friends would, seriously, they'd make fun of me. They were so perplexed at my knack for getting decent grades, without seeming to overwork myself. And they knew me way too well to believe that it was due to raw intelligence. But what helped me was my ability to quickly assess the teacher and the rules and requirements for success in each class. I never wasted extra energy on what wasn't important to that specific teacher, or on things that wouldn't directly affect my grade. And I approach my credit score in a very similar way.

Bright Dickson (9:20):

I mean, when I was in college, I wasn't thinking about what anybody wanted from me at all. I mean, maybe I was doing a little people pleasing, but I was definitely not getting it down to a science. So good on you, Brian.

Brian Ford (9:30):

Yeah, it was more of an efficiency. It wasn't intelligence, it was like, "All right, what's this dude care about? That's what I'm going to do." Which assignments are important to this individual teacher, and kind of get after it and let the other stuff kind of go by the wayside.

Bright Dickson (9:45):

Smart. So what else, Brian, what else do we need to know around this?

Brian Ford (9:50):

Yeah, let's get into now like, how do you have a good score? The first thing that I think of is, when you check your score, if it's lower than expected, take a closer look at your report for any mistakes. And if you find an error, like a missed payment, and you're sure that, "Hey, there's no way, I made these payments." Or what it might be, whatever mistake it is, you need to report that mistake to the appropriate credit reporting company. And there are three credit bureaus, there's Equifax, Experian, and TransUnion. So if the error is on your Experian credit report, that's who you need to contact. That's who you report it to. And it's easy. Each credit bureau has their own website. And on that site you'll find, it's called a dispute form. You fill that out, send it in. If they agree with you and they find that you're correct, they'll remove the mistake and your credit score will go up accordingly. So, that's kind of the first thing I think of.

Bright Dickson (10:49):

OK, that's good to know.

Brian Ford (10:50):

Yeah, yeah. Let's make sure there's no errors there, and let's actually be looking at a score that reflects actually our behavior. So when we think about raising our score, in its simplest form, your credit score comes from your credit history, your payment records, and how much debt you have. I mean, I've got friends who don't understand much more than that who have high credit scores. And many times we try to complicate issues when we would be better off just keeping things simple. So, to have a good credit score you need to have a long credit history, always pay your bills on time, and not carry excessive consumer debt. That's really the simplest form. So if you follow these simple rules, over time your credit score will rise automatically.

Bright Dickson (11:38):

Two thoughts. Number one, I'm impressed that you talk to your friends about credit scores, that has never come up with my friends. But two, what is excessive? How would you define excessive consumer debt?

Brian Ford (11:54):

Yeah again, you want to put yourself in the shoes of the lender. If you've got debt that it's difficult for you to make those payments and you're even falling behind on those payments, you have excessive debt. So it's all relative to your income. But if you're making payments, no problem, you're well within your means, or you still have extra to save and you're investing for retirement, you're building an emergency savings account and still covering your debt payments with no problem, you're probably OK.

Bright Dickson (12:21):

OK, cool. That's good to know. So those three things, long credit history, pay your bills on time, no excessive debt. What's the more technical analysis? So I know that you like to dive into these things, and I like to listen to you do that. So break it down. Give us the breakdown.

Brian Ford (12:38):

All right, here we go. So I'm going to go back to those five categories again, and I'm going to give us a few tips in each one of these categories that will help raise our score. And remember, the first two categories are more important. So if you're trying to raise your score highest the fastest, pay most attention to these first two categories. OK, 35% of your credit score, if you remember, is derived from your payment history. You need credit in the form of a loan or a credit card to show a history of payments. If you've never borrowed money, you have no payment history. So, for your first loan or credit card, you may need to secure that loan with collateral. That's called a secured loan, and that's really just money in the bank.

Brian Ford (13:16):

Or you can have a co-signer. So someone who already has good credit, already established, co-signs so that the lender knows, "Ah, we don't really know about this person, but ah, the second person's got credit, we trust that." So, that's how you kind of get started. But the biggest takeaway in this section relative to payment history is, always pay your loan payments on time and as agreed with the lender. Consistently paying your bills and loan payments on time, it's the simplest action you can take to have a good credit score. And on the flip side, having a bill sent to a collection agency can quickly drop your score.

Bright Dickson (13:55):

Yeah, that's not a good spot to be in.

Brian Ford (13:57):

Nope. We want to be careful of that. And remember, that's the biggest section. So that's 35%. So next on the list you've got amounts owed. So 30% of your credit score is calculated from your amounts owed. And in this section, again, we want to be careful not to have excessive debt. Let me get more specific. We want to avoid maxing out our credit lines, or carrying a high balance on any of our accounts. More specifically, a decent rule of thumb, just to kind of keep in mind is, avoid borrowing more than 50% of your credit limit. For example, your credit card limit, say it's four grand, try not to exceed $2,000 on that particular card, that will keep you in check. Your credit score will factor in your highest recent balance on each account.

Brian Ford (14:48):

A couple other things in this category. Pay more than the minimum amount required by the lender. So let's say your minimum payment on your credit card is 25 bucks. Consider paying at least $50 or $100. Better yet, pay your card off in full every month. And lastly in this section, when you have multiple lines of credit, try not to carry balances on all of them at the same time. So for example, if you've got seven or eight lines of credit, work towards using maybe four or five of them at any one given time. Having a balance on all your lines of credit at the same time, it may negatively affect your score.

Bright Dickson (15:24):

Hmm, that's interesting. OK. So the basic measure is, minimize sort of what you're borrowing at all times on all levels, right?

Brian Ford (15:34):

Yeah, you think of the lender. They want to make sure that you're comfortable with paying this back. This is a comfortable level of debt. They want to know that, "All right, this person's got access to let's say $10,000 worth of credit, but man, she's only using two or 3,000. She only uses it for what she needs and she can pay it back easy. Ah, we like her." Again, kind of thinking the way they do helps.

Bright Dickson (15:59):

Yep, OK. All right, what's the rest of it? So that's 65% or more?

Brian Ford (16:03):

Yep, hey ...

Bright Dickson (16:04):

What else is in there?

Brian Ford (16:05):

... We're doing math. Now, we've got three categories to go, but remember, this is the lesser of the three. Some people get so worked up about some of these ones, and it's not as big of a deal. So I want to make sure that the weighted aspect of your credit score, it's important to keep in mind. OK, 15% of your credit score, it's determined by your length of credit history. This one's probably the easiest to understand. The longer you can show responsible use of credit, the better your score will be.

Brian Ford (16:34):

So, pretty simple. A person who has responsibly managed her credit for, say, seven years will have a higher credit score than an individual who has responsibly managed her credit for two years, all else being equal. As far as history goes, it's important to use your credit accounts. A lot of people are like, "I've got this account, but I never use it. Is that helping?" The answer is no, you need to show a history of paying on time. So just having a credit card or access to a loan, but never using the lines of credit, it won't build a history. You need to actually borrow money and responsibly pay it back in order to establish good history.

Bright Dickson (17:11):

So with a credit card, it would be better for me to spend $100 on it every month and pay that off, rather than just not use it?

Brian Ford (17:21):

If you're looking to build credit. If your credit score's cool, well, then you're probably good. You can just maintain it with your other lines of credit. Maybe like an auto loan or your mortgage or what have you. But if you're trying to build credit, yes, you want to use your actual credit card or that line of credit. Hey, well look, Bright. I think your dog's getting excited about credit scores, so I'm not sure what that was all about. No, most likely he was ...

Bright Dickson (17:45):

He loves personal finance.

Brian Ford (17:46):

Yes. I like your dog already. All right, let's keep it rolling. So, we've got two sections left to go. Ten percent of your credit score, it's determined by what's called credit mix. And it's helpful to have a mix of credit cards, retail accounts, installment loans, and a mortgage. But you don't need to worry. You don't have to have each one of them. In fact, you don't want to have too many credit lines in any one category. Avoid having more than a couple credit cards, one or two auto loans, one or two of any kind of loan, but a mix does help. Again, it's only 10% of your score, having a mix looks good.

Brian Ford (18:25):

And then the last section, Bright, this again is only 10% and it's really a category called new credit. And we want to be careful not to open up multiple lines of credit in a short amount of time. So for example, opening up three or four lines of credit within a short period, like a month or so, may lower your score. So when starting out, it's best to open up lines of credit slowly over time as needed. Kind of that natural flow of what someone might need looks good. Again, if you're just getting going, you may begin by opening up a cash secured credit card. So they give you a very small amount on a credit card. They know it's backed, because you've got the money in the bank. Then six months to a year later, your score starts to get built up. You may need to get a reasonable student loan. A year later you may get a small and manageable auto loan, and so on.

Brian Ford (19:12):

This is a small thing, but we do want to avoid having multiple lenders check your credit score in a short period of time. So if you're applying for multiple loans with many different lenders and your credit score has been checked, say nine or 10 times in a couple weeks, this may lower your score. Having said this, checking your own score every six to 12 months will not negatively affect your score. It's one of those misconceptions that checking your own score is going to lower it. That is not true. You should be checking your own credit score at least once a month, we talked about possibly every six months.

Bright Dickson (19:49):

So just on the reg, make it up part of your routine? Question for you, Brian, 10% is new credit. If I maybe close a credit card, I pay it off, where it's zero balance. If I close a credit card, is that going to hurt me?

Brian Ford (20:03):

It could. It's one of those that I don't talk a lot about, because it gets more attention than I think it deserves. It's a very small portion, but it can affect the credit mix, and it can affect kind of your debt ratios. And so, there's no doubt, closing a line of credit or canceling a credit card could lower your score for a time. The reason I don't bring this up is because ... it's crazy. I don't want people to make bad financial decisions just because it's going to lower or increase their credit score. Make good financial decisions and know that by doing that your score will be just fine. So what I mean is, I've seen so many people know that they need to close out a certain line of credit. Maybe it's a credit card. Maybe they have too many. And they're like, "Ah, I know myself, I don't need three, or I don't need these four charge, these store charge cards. I only need one or two credit cards."

Brian Ford (20:55):

And they've made that decision based on the fact that they've got too much access to credit and they're getting into too much debt. So they make the good financial decision to close it. And then they read some blog that's like, "If you close this credit line, your score will go down." And then they don't do it based on that, as opposed to just making good financial decisions. So, it is true, I won't say that it's not. But it'll only drop a little bit, and most likely over time it's going to go right back up. So if it's the right thing to do, do it, I wouldn't worry too much about the score itself. So, good question though.

Bright Dickson (21:28):

So I might take like a tiny hit, but in the long run it's a better choice?

Brian Ford (21:32):

Yep, I think so. I think so. Yeah.

Bright Dickson (21:35):

OK, cool. That's a lot of information, Brian. I might have to process on that for a sec.

Brian Ford (21:42):

You might actually go back and listen to your own podcast. I don't know, who knows?

Bright Dickson (21:47):

I mean, it's all, I only listen to this podcast.

Brian Ford (21:50):

What?

Bright Dickson (21:50):

What else would I listen to? I'm just kidding.

Brian Ford (21:54):

I know. Look, I think we could go into, your last question was a good one. There's a lot of small nuances we could get caught up in, but I want to bring us back. Let's remember, in its simplest form, we need to have some history, and that takes some time. So be patient. But beyond that, the two main areas that will really help are one, always pay your bills on time. And two, don't carry excessive consumer debt. Those two things, you'll usually be in pretty good shape.

Bright Dickson (22:22):

That's good to know.

Brian Ford (22:23):

Yeah. Look, dog's excited. We covered kind of the nuts and bolts of the money side of our credit score. So in our final section, Bright, I'd love to get your take on the mindset side of it.

Brian Ford (22:46):

OK, Bright. How can our listeners stay optimistic if their score is not so hot and they've got some work to do raising their credit score?

Bright Dickson (22:55):

Yeah. I mean, Brian, you referenced this before, but I think this goes back to the control thing. So this is yet another good example of how beneficial it is to, number one, understand your reality. The score is what the score is. The number is what it is right now. And then take action on what you can control. So, there's some survey information out there that says 60% of Americans are stressed about debt. And we know that when we think about stress, a great way to relieve that stress is to focus on what you can control, and take action on that. A mentor of mine used to say, "The antidote to anxiety is action." And I think much of the time that's true. And in the end, if you want to relieve the situation and get yourself in a better situation that doesn't cause the stress, you have to address the situation.

Bright Dickson (23:53):

So you can't avoid the reality. You've just got to jump in, embrace it, and figure out what you can control. The other thing is around creating habits that can help you gain that control. And when I would say, "Brian, exactly when do I need to set the reminder?" For me, the reminder's like having it on the calendar, that ensures that I'm actually going to do something because for whatever reason, whatever is on my calendar, I do it. And that's a habit that helps me gain more control. And I know we've talked about automation a lot and it seems to me that with some diligence and close attention we can use automation and better habits, not to change the past, because we can't do that, but to move forward in a more sustainable and confident direction. And just a little thing on debt. Debt basically is a numerical representation of decisions that we've made in the past.

Brian Ford (24:52):

Whoa.

Bright Dickson (24:53):

And the number ...

Brian Ford (24:55):

For a nonfinance person, that was pretty rad.

Bright Dickson (24:59):

Well, good. Thank you. Thank you, Brian.

Brian Ford (25:02):

That was a pretty cool definition. Yeah, good stuff.

Bright Dickson (25:04):

And I want to be clear that the numbers don't necessarily reflect the experience and everything that was in your mind when you made those decisions. So there are lots of reasons that people go into debt. Some are really rational, like when you look at it, right, that I had to do that thing, I had to make that decision then. And I made that decision knowing it could cost me in the future, but that was the right decision at the moment. There's all sorts of stuff that goes in there. And for our listeners, what's important is that you go back and figure out what got you there, and why. Including emotions. So with debt a lot of the emotions that come up when people are in debt as anxiety, guilt, shame, maybe some embarrassment, maybe some anger, all that stuff.

Bright Dickson (25:57):

And there are probably emotions that led you into getting into debt in the first place. So think about that. Go back and kind of look like, even go through your statement on your credit card and be like, "All right, what space was I in when I bought that or I made that decision?" Be kind and gentle and understanding with yourself around that, but do that work. Because there's probably really good information in there that you can use to change your behavior in the future and make that plan of action. So if you identify, for example, like, "Ooh, in a lot of those things I bought that thing because I was feeling shame about this situation, or I wanted to avoid feeling shame about some kind of situation. So I bought that so I wouldn't feel it." Just know that. That needs to be part of your calculus because it's not going to change just because you kind of decide to, it's going to change because you do that work. Brian, what would you add there? And it's like, getting emotions in here, it gets a little murky, but I think it's important.

Brian Ford (27:05):

Yeah, absolutely. Look, we're emotional beings. I mean, goodness sakes. I'm pretty logical, but I've come to terms with the fact that I make a lot of decisions with emotions. So there's a few things you said in there. One is kind of going back. I hadn't ever thought of that. All right, I've made some financial mistakes, I've gotten in ... made some decisions, maybe purchased something, and going back and thinking about kind of where my head space was, why did I make that decision? It wasn't in line with what I really care about in life and what's most important. Why did I do that? And I like the idea that just doing that gives me kind of a, "OK, I get it now. And I'm better prepared to not make that mistake again," which is cool. That's the first thing.

Brian Ford (27:47):

But I also like how you said, "Be gentle with yourself." This isn't an exercise to like, so that you can have bad self-talk and kind of reprimand yourself. I agree, be gentle. It's amazing that the things we say to ourselves in our own minds, and we would never say that to somebody or a child. So I think being gentle while still going back and being for real, like, "OK, yeah, this is where I'm at." That's good stuff. I appreciate that.

Brian Ford (28:17):

And to continue that conversation, I want to mention that, yes, our credit score is an important tool for our financial life, but it's not the only metric that's important. We can't put too much emphasis on just our credit score. Some of us may mistakenly confuse our credit score for financial well-being. They are not the same thing. Your credit score is simply one area of your financial life. And yeah, we want to be mindful of it. We want to manage it. We want to improve that. So again, we're in control. And not to go into too much detail, but probably your overall net worth, that might be a little better overall measure of financial well-being, and not mistaking kind of credit score as that metric. I wouldn't want anyone to think like, "Yo, I've got a great credit score. So I'm able to buy this expensive big home, no problem at all." That's not what your credit score is saying, it's not ... it doesn't carry quite that much weight.

Bright Dickson (29:13):

Yeah, Brian, and on the flip side, listeners who are currently experiencing a lower credit score shouldn't be discouraged from going after those big money goals too. That the habits that get you a higher credit score, those are also the habits that are going to help increase your financial well-being over time in the long run.

Brian Ford (29:35):

Yeah, absolutely. Let's work towards raising our score, but realize it's certainly not everything when it comes to measuring financial well-being. Well, Bright, what else should we be mindful of as we work to improve our credit score while still being gentle with ourselves?

Bright Dickson (29:55):

I think the other thing is like, raising your credit score can take some time. It's not going to be instantaneous, you're going to have to work at it. So, get ready to cultivate that endurance. Credit scores are something we manage for our entire adult lives and you've got to have that long-term mindset and that's how we grow. So first awareness, second attention, and then third effort. So you can do it. All you need is a little awareness, attention, and effort, and keep going forward.

Brian Ford (30:26):

Yeah. Look, this is going to take some time. Having said that, I'm amazed, with our credit score, kind of on the other side of things, I am surprised that when we understand—and I've seen this with lots of folks who their score's not where they want it to be—and when they start to understand really the rules of how their credit score's derived, and they start to follow those rules, their score will start to improve almost immediately, and it'll start going in the right direction. So, keep that in mind as well. Start making good decisions and watch that score kind of level up a little quicker than you might even think.

Bright Dickson (31:01):

Thanks for listening to this episode of "Money and Mindset With Bright and Brian."

Brian Ford (31:05):

If you liked this episode, subscribe to the podcast on the platform of your choice, or send it to someone you care about.

Bright Dickson (31:12):

And don't miss our next episode of "Money and Mindset," when we'll talk about how to raise financially responsible children. What are the top lessons to teach kids? Should you give them an allowance, and how much? Brian and I are going to answer these questions and more.

Brian Ford (31:33):

Speaking of questions, we want to hear your questions about your money and your mindset. We've got a new email address, so send them to us via email. The address is, askbrightandbrian@truist.com. Again, that email address is, askbrightandbrian@truist.com.

Bright Dickson (31:56):

We can't wait to talk through any questions you might have on our next episodes, and see you then.