March is National Credit Education Month. As it draws to a close, today, Paula Christine and Producer Jon Gay do a deep dive into credit scores. Why are they important, how do you build credit, and how do you rebuild your credit score if it's dropped?
There are many ways to establish credit when you're young. This could mean using a secured credit card (where the limit is backed up by a deposit in a bank account). Or it could mean having a minor as a co-signer on a loan, such as an auto loan. Just be sure you're making those payments!
Why is a credit score important? It will affect your ability to get a home or car loan and the interest rate you'll pay. And here in Michigan, it can even affect your car insurance rate. This is unfair, and there's work being done to change this, but for now, it remains the law.
How do you find your credit score? There are three credit bureaus that you can check online - Experian, Equifax, and TransUnion. You should download your credit report and ensure there are no mistakes. And if there are marks against you, you should work to fix them. Paula also suggests freezing your credit, and only unfreezing it when applying for a loan. Any inquiries into your credit history (whether you asked for them or not!) can impact your score.
If you have a low credit score, you might also consider being a co-signer on a loan. And if you're in debt, some companies exist to help you create a plan to get out. Or, you can even negotiate with credit card companies yourself!
You can work your way out of debt with discipline. You can pay off multiple credit cards one at a time, either by smallest balance or highest interest rate.
Paula has several tips on getting out of debt on the resource page of her website here: https://paulachristine.com/resources/
Need help with your financial future? Learn more about Paula and her work at PaulaChristine.com or send her an email: Paula@PaualChristine.com
Jon
Welcome to Beyond the Paycheck. I am Paula Christine's producer, Jon Gay. Paula joins me now, great to be with you as always.
Paula
You too Jon. So what are we going to talk about today?
Jon
So we're wrapping up National Credit Education Month, that is the month of March, and this is such a critically important topic that I wanted to dive in with you today. And there are a lot of different areas to cover. So let me start at the beginning, I know a lot of our listeners who are on the younger side and might be looking to establish credit, maybe they haven't had a long credit history. How does a young person just getting into the world start establishing credit and building their credit up?
Paula
There's a couple of things that you can do. So when my children became of age, I set them up with a secured credit card. So what that means is like, you might have a $500 limit on your credit card, and the bank will hold $500 in cash in the savings. So then the bank is a guarantee that they're going to get their money. So that's what we call a secured credit card. So those are relatively easy to get and you just want to make sure that you're making your payments on time. But the bank knows that they have the money set aside so that they know that they're going to get paid. Another thing you could do is just try to apply for your own credit card without doing a secured card. But one thing that I like is every parent may get to the point where they have to buy a car for their kid, or maybe they're buying a car for their kid and their kid's a teenager or not for their kid but for themselves, and you could add your child on as a cosigner, and therefore they're starting to establish credit, and you're going to make the payments, and so it will look good on their credit history. So those are just a couple of different ways that you can establish credit. But when you do that, you have to make sure that you can make those payments.
Jon
Right. The flipside of establishing credit is that it has to be good credit, if you're establishing bad credit and missing payments in the early stages, that's going to set you way behind the eight ball, which leads into the next part of this discussion, which is the credit score. I think we're the only country that does this, actually. But why is a credit score so important?
Paula
So the credit score determines, first of all, if you're going to get accepted for that application, and likely what your interest rates going to be. But it affects a lot of different things too. Doing some research on credit cards this month, I also found that even on deposits on like your Verizon account, if you were to open one, or I know in the state of Michigan, your credit score affects your insurance premiums. Why one has to do with the other I don't know, but so it's very important to keep that score up.
Jon
On the car insurance, they've been fighting that out in Lansing too, about trying to outlaw that practice, because it can be discriminatory in some cases too.
Paula
It's not fair.
Jon
It sucks. But if you have bad credit, you're going to be paying more for your car insurance.
Paula
But most of the people that get into that bad credit is usually medical bills because if you go to the hospital and have something you can make up those medical bills, and then how are you going to pay for them. So I don't think that that's fair, just because you got sick that you should be penalized on other areas, but that's just my opinion.
Jon
Then other people if they get into a situation where they are accumulating debt, sometimes it becomes a spiral with spirals on itself and they're on a lot of life preservers always.
Paula
Well, maybe we can even jump in, and maybe you're with a spouse who gets you in huge amount of credit card debt. You just don't even know it until you get divorce, and then you find out. It did not happen to me just an experience. But yeah, so let's talk about credit score before I forget for a minute. A credit score is basically just a prediction of your credit behavior, how likely you are to make the payments and make them on time. So you want to make sure that your credit score is somewhere above 670. From 670 to 740 is good. From 740 to 800 is very good, and anything over 800 is excellent.
Jon
How do I find out what my credit score is?
Paula
There's three credit bureaus, there's TransUnion, Experian, and Equifax. You can go on and register and find out your credit score.
Jon
There's no charge for that, right?
Paula
I don't believe so. But while you're on those websites, I want you to freeze your credit. Is your credit frozen, Jon?
Jon
It's not. Why would I need to do that?
Paula
So nobody can run your credit. Because when you get those annoying credit card applications in the mail, and they just keep coming and coming. And every time they send one, they tend to run people's credit. So it will show up on your credit.
Jon
Do they run the credit when they send you or do they run the credit when you actually apply for one?
Paula
I think they do a soft credit beforehand just to see if you're a viable candidate. I could be wrong.
Jon
Like a soft inquiry. Okay.
Paula
Yeah. Then if I steal your identity, which I did, by the way, wink wink. No, just kidding.
Jon
Don't joke about that, that's scary stuff.
Paula
You can't access my credit, because my credit is frozen. So I have all my credit frozen. And if I had need to go, I just leased a new vehicle. So prior to applying for the lease, I unfroze my credit, they ran my credit report, and then I froze it back up again.
Jon
That is an interesting way to do things because like you said, if there's ever a credit inquiry whether you know about it or not, that can definitely impact your credit score if people keep checking in on it. But if it's frozen, not only are you preventing those inquiries from negatively impacting your score, you're also in some ways protecting against identity theft and somebody's trying to apply for a car or a house or something in your name.
Paula
Correct, and I have my credit frozen for years. Last time I think I unfroze it was to lease my vehicle a couple of years ago, because I'm just normally not getting new credit. And the time that I had unfrozen to do my lease, I'm not getting a ton of ice frozen back up again. But all of a sudden, I started to see an increase, and the credit card application's coming in the mail.
Jon
Funny how that works.
Paula
I am assuming it has to do with that.
Jon
Yeah, if you weren't before, then you're getting now.
Paula
It just seems really apparent that I'm starting to get them. So hopefully they'll stop because I went years without getting a credit card application in the mail.
Jon
That part's really interesting. Okay. So obviously, the credit score is so important, and you're judged on it, because it's your likelihood to pay it. And it's really not fair the way it's set up on a horse with the system we have. So that leads me into the biggest question of the day, Paula, which is, if I have a bad credit score, how do I get out from under that? How do I start to improve my credit score? What do I do?
Paula
Well, you need to go to the credit bureaus and download your credit report and see, first of all, if there's any errors, or any things that you need to clean up.
Jon
What you should do, regardless of your credit card score.
Paula
Correct, yes, everybody should do that. Make sure that there's anything that you can clean up, like maybe you had some debt that you didn't pay, maybe can pay it down and get that cleaned up. And then if it's still low, sometimes you can become a cosigner on somebody else's loan, that'll help your credit, or you can become an authorized user on someone's credit card. So let's say that when you are married, or just getting married, something you had bad credit, I didn't of course, you did. So I can put you on my credit card as an authorized user, and then it will reflect on your credit score.
Jon
Will it reflect badly on you, though, if you add me?
Paula
No, it will not. Because it's an existing card and two I always make my payments on time.Yeah, and you'll just reflect that into your credit score. So there are some tools, but if you are struggling, there's credit counseling agencies that you can work through, that will help you get a handle on that.
Jon
I think what's important to know too is that, let's say the bulk of your debt that you were in and was causing your bad credit score was credit card debt. A lot of these credit card companies, there are people who can professionally negotiate with them if you got way into debt on these credit cards. A lot of times they'll work out a payment plan or settlement plan. There are a lot of different tools these agencies know, that can help you climb out in maybe a reasonable payment every month that you can swing.
Paula
Yeah, those are counseling agencies, they do help people, but it's very much you have to be very discipline to do that. Because if you say you're going to make that payment, you have to be able to make that payment. But there are other ways without going to them. You can call the credit card companies yourself, and talk to them and see if they can lower your interest rate. And sometimes they will just tell them your story, and sometimes they'll lower the interest rate. Or you can sit down and compile all your balances and your interest rates and put a plan together to figure out how you're getting out of debt. How many times do you hear on TV about these people that got 60,000, $100,000 in debt and accomplish getting out of it in two years?
Jon
It's wild. But it can be done with some negotiation on your part and sometimes the help of a professional, maybe somebody like you even.
Paula
Or just putting a plan together and taking control of your spending, or getting a second job or whatever it needs. If you really want out of debt, there are steps to do that.
Jon
What's the old adage, the best way to eat an elephant is one bite at a time. Sometimes you've just got to start chipping away at it and not look at the whole picture and just take it piece by piece.
Paula
Yeah, so sometimes it's as simple as just to take the smallest balance and getting that paid off, cut that card up, pay off the smallest balance, then work on the next one and the next one and just reward yourself along the way, when you're doing a good job. Or the other option is to pay off the one with the highest interest rate and get that paid off first. There's a PDF you can download on my website, Paying off debt, and it has a bunch of different strategies in there, talks about the different methods of getting out of debt. It has a worksheet for you that you can figure out what your debt is and some calculators that you can use to help you.
Jon
This seems like an appropriate time, Paula for you to promote your website and your email and how our listeners can reach you if they need help with credit stuff, debt stuff or anything related to their finances.
Paula
If you have any questions, you can email me at paulachristine.com. If you want to go and get that paying off debt PDF, it's at paulachristine.com. While you're there, download the budget worksheet because you're going to need to do that if you want to get out of debt. You're going to start by creating a budget.
Jon
Well that is good stuff as always and we appreciate your insight and we will talk to you next week. Thanks Paula.
Paula
You're welcome. Take care, Jon.