You've probably heard that you need to build credit in order to make it in life. But what exactly does that mean and how do you go about doing it? Let's get into it. Let's start with why this matters.
SPEAKER_00Why is this an important topic? I think credit's very important because it affects all facets of life, I feel like, as far as renting, uh buying, uh, and anything. I feel like credit is involved nowadays.
SPEAKER_02Like you regularly have people talking about your credit score. You can get a free credit score, this or whatever, which means obviously people are pushing it. And if you're trying to get a loan for something like a car or a house, uh, even getting a credit card, uh, that's going to impact the details of that loan or whether or not you can even get it.
SPEAKER_00Yeah, very true. Very true. And I feel the younger people are introduced into credit, it benefits people. Um, comparing somebody to eight who is 18 rather than 21 starting their credit journey, those three years, they help. They matter. That three years of uh credit age, right, plays a factor into lending rates. Oh, yeah. So absolutely.
SPEAKER_02Like if somebody's looking at, say, repairing their credit uh down the line, how long should they typically be looking at that time? We talk about that three years matters. How long does it take to kind of build that or correct that when you're when you're looking at it different scenarios?
SPEAKER_00Correct correcting credit could be longer, right? Now, if you have anything derogatory, anything bad on there, typically they'll stay there if they're a closed account for about seven years.
SPEAKER_02Okay.
SPEAKER_00Um now again, that's not to say any time before that you cannot attempt to rebuild it, but it'll stay on there and it kind of drags your score down. But again, the longer you open or have open accounts, credit accounts, it helps your score tremendously, right? So if you're 18 and you open that credit card compared to 21 and you never close it, 10 years down the road, again, those three years start to add up. You know, they start to add up.
SPEAKER_02So starting early with good habits is going to put you in a better scenario, a better situation than uh having bad habits and attempting to correct those. Not that you can't, but you're just gonna have a better footing if you learn early what to do and how to use it.
SPEAKER_00Yes, absolutely. And I feel like when we introduce credit to even minors, right? Youth children, um, again, when you're 12, 13, 14 years old, you're not thinking about credit. That's probably the last thing on your mind. Um, but again, as you turn, you know, maybe 15, 16, 17, and you begin those summer jobs, you're understanding the importance of money and and budgeting, spending, and again, those good habits and maybe those bad habits, right? So, I mean, again, being introduced younger will help. And I feel like people who are or individuals who are younger and working start to grasp that concept younger because, hey, they're managing money.
SPEAKER_02So, how young is too young? Like, we're not getting a kid a credit card right out of the womb. They're in their bass and that baby's first credit card. Uh, we're not working on something like that. But how young is too young, or what what's like the first age that somebody can really start understanding and maybe maybe working on their credit score? I believe what is it?
SPEAKER_00Six 16 now is what you have to be to work, right? So 16, I feel like is a good age to at least introduce credit. Um now, some credit companies, depending on where you're at, right, will allow you to add an authorized user to somebody who is 12 years old, right? Okay, 14 years old. Um, and again, maybe you don't bring that up to them, right? Maybe you don't maybe you don't tell them that, hey, we're going to add you as an authorized user. Um, but again, it's it's 16, I feel like is a good age, or I feel like once a uh a child starts to work. Hey, once you start to manage money, now it's not a whole lot, but again, you're understanding the importance and how quickly it can actually disappear, right?
SPEAKER_02Start small, build up, no mega yachts right out of the game. Yes, yes. Those those levels of payments are not the type of thing we're working on today. Uh, we'll build up to that. Uh authorized user, you mentioned. I know I was probably one of those when I was growing up. My parents uh gave me a credit card with the specific purpose of putting gas in my car. Yes. Uh, that was the only thing I was supposed to use it for. And I guarantee you I bought a couple of Mountain Dews at the Minimart game station on that one. Sorry, mom and dad. Um, but what is that doing for a person when they're an authorized user? Authorized user is honestly something I I tend to what would I say?
SPEAKER_00I said I I tend to probably recommend authorized users more often than not. And the reason why is what you mentioned right there is actually receiving a physical card is good. It it could be good. It teaches you the importance of, hey, I'm only supposed to get gas. I mean, however, maybe these Red Bulls are on sale, so let's let's go, right? Um, and and it's it's it's really good because it allows you to start building credit history and you don't necessarily have to have a card. So I I tell people all the time if you would like to be an authorized user, you don't necessarily have to carry a physical card. Um you are more than welcome to get one or receive one because you are an authorized user. But again, uh I tell people, shoot, if your main goal is to build credit, shoot, why why even handle it? Why handle it, right? Maybe put it in a safe or again, you don't even necessarily need one issued to you.
SPEAKER_02So and in that case me. And in that case, uh, is it my usage of the card as an authorized user that is setting up my credit, or is it the overall account? Like, am I trusting mom and dad to not screw up my my credit history by making me an authorized user right out of the gate?
SPEAKER_00Yeah, I mean, yeah, good, good, good question and good point. It is very true. So your credit account, or I guess your credit history is going to tie back into the account that you're an authorized user on. So if mom and dad are very responsible and, you know, never carry a balance, pay it off every single month, you're going to do great. You're going to do great. Especially if they've had that credit card for shoot 18 years, right? That's going to be a very long reporting line of credit with good payment history. Um, and again, potentially a high limit. So, yeah, absolutely. If they manage the credit card responsibly, it could absolutely benefit you. Now, on the same token, if they negatively manage the credit card by either carrying balances, maybe going over limit, um, or even late payments, right? Yeah, those are also going to affect your credit score as well. Um I I feel like if you're going to be added as an authorized user, use it to your advantage. So if you're new to credit, if you're again 16, 17, 18 years old, you probably don't have any credit. Use it to your advantage. And then once you have an established credit score, then maybe you say you have that conversation and say, well, hey, maybe I'd like to be removed, right? But again, if it's doing no harm and they're managing that card responsibly, reap the benefits. Okay.
SPEAKER_02So outside of an authorized user situation, what is typically baby's first credit card or credit score moment? What is it that somebody's gonna do at 16 to 18 where uh you can actually start to build your own credit? What are kind of those foundational aspects?
SPEAKER_00Those ones will, it's interesting because Hapo actually offers a youth credit card visa. So if you're between the ages of you know 16 and 17 and you're working, and and you know, whether you receive paper checks or direct deposit checks, Hapo has you, now you do have to have a parent, right? Or a parent or guardian on that account. Um, but it will allow you to, again, establishing a credit account with a small balance of or I'm sorry, a small limit of $300, maybe all the way up to $1,000. Um, when you're 16 or 17 years old, you're just establishing good habits. So again, if you're getting paid, you're only using that credit card for gas, that will allow you to get into the very good habit of, hey, gas paid off. Maybe that's just an automatic payment. Um again, maybe you put Spotify, Alpha Music, something that reoccurs monthly that you know you'll need, right? Yeah, those are teaching you the foundations of being responsible. Now, again, everybody has to learn I should say that, right? Everybody has to learn how to be responsible and manage their money. Um, so again, the younger you start, again, even if it's only a $500 card, you're understanding, hey, or you're attempting to gain the knowledge, like, hey, I don't have to spend all of this. And I feel like that's a big misconception is shoot, if you only need $25, it's all you need. Yeah, it's just as good.
SPEAKER_02Well, and I I think that the other thing that you mentioned there is building those foundational habits of actually banking your payment. Yes. So charging something on that card and paying it off. Uh, we've had episodes before we've talked about this where payment history is much more important than what it is that you paid off.
SPEAKER_00Yes, absolutely. Absolutely. And that's another reason why authorized users could potentially be very beneficial. Because again, if you have an adult or a parent that has a card for 18, 20 years with good payment history for all of that time, that reflects on your report, right? And it looks very good. Now, lenders, underwriters are definitely able to tell that's not your card, right? As a youth, as somebody who's 18, and whoa, you have a card that's you know 21 years old. They they can tell that it's not your card. But again, you're going to get a credit score that will be generated because that's the only thing that's reporting to your file or credit report. So it absolutely is beneficial.
SPEAKER_02Okay. So is there a range where the price of what we're paying off each month matters more or less than the fact that we paid each month?
SPEAKER_00Not necessarily. Um, let me say also if you carry a credit card balance, the minimum payment that you're making is still a good payment. It's reporting as a good payment. Um, however, if you have a substantial credit card balance, I would advise you to make more than the minimum payment. Yeah. Just because right of the interest, right? Um, but as far as it goes, no. As the minimum payment is the only thing that's necessary. And I even tell people when when hardships happen, right? Just attempt to make the minimum because that will do more than you than you can imagine, right? One mispayment is so detrimental, and it takes, again, years, like I mentioned earlier, at least I mean at least seven, right? For that to for it to fall off. Yeah. So that's that's quite quite a bit of time.
SPEAKER_02So setting up those automatic payments, meaning that you don't have to be like, oh, I was outside of uh on vacation when my payment date came by and I couldn't get to a computer, my my cell service was gone. Uh, having that automatic payment set up for the minimum is going to cover you and ensure that your credit score isn't taking a hit because of external circumstances. Oh, absolutely. Absolutely. Because we're assuming at this point that you're making that payment, you just couldn't get there.
SPEAKER_00Right? I mean, hey, it's it's it could be your first time, right? But again, credit agencies are very they're quick.
SPEAKER_02Starting at zero, we're 18, 19 years old, we're out of high school, going on to college. Uh, that's where I made my first credit card mistake buying something on a very first credit card that I opened uh as a college kid. Um, but what else are at this age are we doing that can help us build credit?
SPEAKER_00Well, let's see. I mean, at 18 and 19 years old, right, you're potentially maybe going to college, right? Student loans is another one that actually does report to your credit report. Okay. A lot of students, right, are on deferred payment plans because, again, we're going to school. We're getting the education right now. We haven't entered the workforce. Um, I would again, I would still advise advise you as long as they're on those deferred payments, if the minimum payment is not egregious, absolutely make those minimum payments, right? Because they they do report. Um at this age, legitimately, the authorized user will benefit you the most. Um, other than, like I said, student loans. Now, again, like you mentioned at 18, 19 years old, maybe this is a lot of people's first time being out of the home, being out of their parents' authority, right? So credit cards, I don't want to say are inevitable, but I mean, you will receive them in the mail frequently, right? And you don't have mom and dad there to kind of guide you. So credit cards is where I see a lot of younger individuals start their credit journey other than student loans. Um, credit cards are good potentially, right? Like you mentioned, you can't just go on a shopping spree and and and you know, and get brand new clues or shoes and wardrobes and $1,000 credit limit is not a thousand dollar spending spree.
SPEAKER_02Yes, yes, absolutely. I I feel like in this age there might be the potential of a car loan, and there's definitely the potential of rent.
SPEAKER_00Yes, absolutely. So auto loans and renting, right? So renting is a big one right now that I'm seeing, even for young adults who are again 21, 22. Um some rent some property managements, right, are using something along the lines of flex, is I believe is what it's called. Okay, it's allowing individuals who are paying rent to split their monthly payments up into two payments. And again, they will report those rent payments to the credit bureau or to a credit agency. Now it is specific to the bureau, whether that's Experian, Equifax, or TransUnion. Um, but with that being said, if rent is going to be probably your biggest Yeah, well, your biggest expense, right? Other than than your education, yeah. Um reoccurring monthly, yeah, it's going to be your most definitely your expense most re-expens. Oh my goodness. Your most expensive reoccurring um There you go. There you go. There it is. Now with that with that being said, right? Um Flex is is again different because it's reporting two payments. I've never used it. I have seen it at a few um apartment complexes that I've been at myself. And with that being said, I've looked at it. It's supposed to allow you to not only build credit, but again, free up some cash as well, because you're going to split your monthly payment up into two. Um, going back to what we mentioned in the beginning, though, if you're not already established in good spending habits, it could potentially be dangerous. But it also could potentially boost your credit score if you're using it correctly and to your advantage.
SPEAKER_02Okay. So taking and getting credit for making monthly rent payments, you've got to pay your rent one way or the other, or else you're looking for a different place to live. Uh, may as well find a way to build credit on this uh also. Because I know if later on in life you end up with a mortgage, that payment is definitely getting tracked and checked. Uh, but does every rental situation get reported to credit?
SPEAKER_00No, not necessarily. It actually depends on the, like I said, the property management.
SPEAKER_01Okay.
SPEAKER_00Um, now again, everybody is different, and there are different, I guess, apps that you can actually use that allow you to split up your payments. The only one that, or the one that I'm most familiar with, is Flex. And again, with the little bit of research that I've looked into, the other ones, they all potentially work the same. Your your rent payment will be split up into two payments that will allow you to make one rent payment. But again, it's going to report that one rent payment to the credit bureaus. Um, it's it's it's good. It is good.
SPEAKER_02Like I said, it's it's a tool that you might be able to utilize depending on where you're renting at to help build your credit for doing stuff that you're doing anyway. Yes. Uh, but I don't know if I would necessarily say that's the type of feature that I would be like, if I'm waffling between apartment A and apartment B and one of them reports and one of them doesn't, if there's no other other differences between the two rents the same, layouts the same, I'm probably taking the one that's reporting.
SPEAKER_00Oh, yeah.
SPEAKER_02As opposed to the one that's not, unless I think I'm gonna be skipping payments for some reason, in which case, don't report that for me. No, please don't please don't, right? Starting as a as a uh younger individual again, what are some other tools that are out there for building credit? So I don't have to go and open a 21% credit card somewhere just because I don't have a history. What are some other things that I can do to prove that I'm actually worth a better rate somewhere down the line?
SPEAKER_00So there is something there, there's a few different options that you can go in a few different routes. One of the first things that I like to offer is if the individual has a good savings, right? If you're young and you've been working since 16 and you've been saving those uh those funds, um potentially you could do a shared secured loan. And whether that is a loan from your savings account, from your I mean, yeah, from your certificate, right? If you have a CD, if you're investing that money or saving that money, um a shared secured, now again, it is a credit card or it could just be a loan. Okay. Um I think something that those younger individuals, you know, 18 to 21, that they would benefit from would probably be I should say this correctly, right? Certain companies allow you to report um your recurring expenses. So if you have like a recurring phone bill, right? And if that is actually set up to report to the credit bureaus, that could potentially be something that could get added to your credit phone.
SPEAKER_01Okay.
SPEAKER_00Now it's not anything that will be automatically done. That will be something that you have to investigate and explore, um, whether that's with, you know, your phone company or your phone provider, or whether that's again looking into the specific transunion experience, equifacts, looking into a specific bureau that will allow you to say, hey, well, I have a phone bill that needs to be paid every single month. Hey, I have, you know, internet. I would imagine everything is digital nowadays, right? So a lot of students will have a phone and an internet bill. And hey, if possible, look into it. Those recurring expenses could potentially be added to your report.
SPEAKER_02Yeah, you're paying them. You may as well get credit for them, especially in a credit score situation. Become uh a good foundation to set yourself up so that you can get better loans, better cards, better opportunities later on in your credit journey. Uh, share secured, uh, you mentioned as a look, I have this money in my account. Allow me to uh set up a card uh that is then secured because I have that set aside. Talk a bit about what those are, a bit more specifically, how that type of situation works before somebody goes out and you know gets the the American Express card or or some rewards card that might be a bit out of their range for an interest rate.
SPEAKER_00Yeah, absolutely. So shared secured card, I feel like is something that I like to offer if you're brand new, right? If you're trying to establish credit and you have good income, right? If you already have uh have established good good spending habits, good savings habits, um, if you have X amount, like specifically for Hapo, right? The shared secured loans that we offer, um, whether that's a credit card or again, like a loan, you can receive, um, let's say, for example, a shared secured credit card, if you wanted one at Hapo, um, you wanted a $500 limit, we would then secure $550, which is a hundred and ten percent of the value of that credit card in your account. Now, again, if you've already had that savings, if it's already in that account, no harm to you, right? You come in, we apply, and again, it's going to be the same process of you actually as you actually applying for a traditional credit card. We'll collect information, social address, employment. Um, but I guess that's another benefit of a shared secured card is potentially you don't have to be employed because it's your money, right? Okay. So again, we're trusting you to spend it wisely. Absolutely. Um, but again, it's it's it's I feel like it's a lot safer for individuals who are in being introduced to credit for the first time because in their mind they know, well, shoot, this is my money. It's not just necessarily the credit union's money, the bank's money, the credit company's money. Um, so I feel like a lot more people are decisive. They they're not just spending, you know.
SPEAKER_02Yeah, it's not just free money sitting out there somewhere, like you know that it's there, you know that when you spend this on the card, you can afford to pay that off when that comes around. Absolutely. And it's a great way to build early credit. Um this does make me think of a different credit scenario. Uh, somebody like my mother-in-law, um, who spent her entire life paying everything with cash, owned a home, went through all this, came about, and realized they really didn't have a credit score because they'd only ever really process things in cash. Yes. Had more than enough assets to cover what they needed, but it almost doesn't exist on the credit score. What should somebody like that be concerned about? Uh, and how would they handle that type of a scenario?
SPEAKER_00So unfortunately, like you mentioned, right? I feel like this is a little more common than not. Um, we have a whole generation that legitimately was raised on hey, if you have cash, pay for it cash. Yeah, you know, credit didn't get established until you know the 1980s, right? So again, we have a whole generation of people who they just know cash. Um shared secured is something that I would offer them because more often than not, cash is something or cash on hand is something that they are they have. They probably have quite a bit of cash on hand. So those shared secured loans are something that I'll push for just because it'll establish, it'll allow them to establish a credit account. Um, something else that Papo used to offer and we no longer offer would be something like a credit builder loan, which in a sense would be a loan that you are applying for, and you are going to again do a credit application, and as you make your monthly payments, those funds will become available for you to spend. Now, again, a little bit different than the share secured in the sense that. Hey, if you don't have the liquidity, if you do not have the cash or the assets to actually do that, this potentially could allow you to build credit. Okay. And also save, right? Because you don't feel like you're just paying a loan because again, you're paying yourself.
SPEAKER_02Yeah. You're basically agreeing to put X number of dollars into your savings account monthly and get credit for it as a loan. Yes. And then you just get access to that chunk of money that you've been setting aside when the loan term has expired.
SPEAKER_00Yes, absolutely. And and again, it reports to your credit. So that again, I would imagine we're making good payments because it's your money, right? So as you're making those payments, the re the payment history is reporting. That length of the account being open is reporting. So it is absolutely beneficial.
SPEAKER_02All right. So let's let's step back a bit to our student situation. They've graduated, we're moving on, young adult, out in the workforce, hopefully. Uh not back in mom and dad's basement, uh, unless it's a really nice basement. Um where are we at in our credit journey at this point in time? We've been smart, we've been getting our regular payments reported, we've gotten our our credit card and we've been responsible with auto pay, making sure that we're covering at least our minimums. Where are we going from here in our credit journey?
SPEAKER_00So an auto loan could actually be something that is great. Now we're assuming at this point, maybe you've been in the credit game since, you know, 16, 17, even 18, right? Um you should potentially be getting those really good interest rates. So if you go to a uh a dealership, a car dealership, right? The interest rates should not be now again. I know the time we're in. Rates are kind of high, right? They are kind of high across the board. Um, but with that being said, right, it's not going to be anything egregious. It won't be 16, 17, 18%. Um, you'll be more along the lines of four, five, six percent. Yeah. But again, we don't want you to overextend yourself. We would imagine at this time you've got a good, good habit, a good routine of of how cash flow should work. Um, so that that auto loan would might be your next step.
SPEAKER_02So we're used to rent. We're we're already we're already used to that from our our days on campus, uh, or in particular off campus. Uh we're back in, we've got our job, we've got our rent still going, we're still paying our internet. Uh we're gonna go get that that car loan. We've we built a solid credit score, so we should be at the low end of whatever that car loan window is as far as interest rates. And because we've got a job, we've probably just gotten a major factor in credit scores, which would be our debt to income ratio. Yes.
SPEAKER_00Because now we actually have income. Yes, absolutely, right. And so now at this point, right, again, we've been very responsible. We might we might still be an authorized user on somebody else's account, right? So, hey, maybe potentially you can ask to be removed. Now, again, you don't have to, but again, the reason I bring this up is as we're progressing in our credit journey, eventually you're going to start to, you know, look at homes, look at mortgages. Um and again, authorized users, maybe if they're starting to carry a balance, right? If mom and dad, maybe they're vacationing, right? Maybe, maybe they're they're out of the country. Um that potentially could be something that you want to have a conversation about because an additional thing that the lenders will look for, specifically when it comes to mortgages, um, they call it what what what what is being discussed as is like your FICO score. But there's also a new thing that has been released as of I believe May of this year, and they call it Ultra FICO. And what that's going to be is more so your money management is what Hapo calls it, but your cash flow is into your checking account. So it'll be really all of the automatic bills, the automatic payments, maybe even automatic deposits at this point, right? It'll allowing a lender, specifically a mortgage lender, to look at kind of your spending habits. It's another tool that could could potentially be used to boost your score. Okay.
SPEAKER_02So looking at those things now, in this in this conversation, mom and dad have been super help helpful and kept us around as an authorized uh user. And we're we're thinking maybe it's time to go out on our own. The other side of this could be that mom and dad are at that point where like, you're 18, we're breaking your dinner plate, uh, you're on your own kids. Uh, and we should just be ready to be able to go do this on our own as well. Uh, one way or the other, we're probably looking at separating out to basically have our own credit journey at this point in time. Oh, yeah. Um, so we're we're prepping now to head out on our own, starting our own credit journey. What is gonna happen, if anything, when we're removed as an authorized user?
SPEAKER_00Now, like I mentioned in the beginning, right? A big portion of credit in general is average age. So again, we're assuming mom and dad has had this card for at this point, maybe 25 years, right? You being removed from that account again is going to get your name taken off an account that has been established for 25 years. That in return could potentially affect your score negatively, right? Now, again, it's all subjective, right? It is very all subjective and depends on the situation at hand. Um, if mom and dad are carrying a significant balance at this point, that's maybe where the conversation shifts into well, hey, maybe I do want to get off of this this credit card because you're starting to notice your score dip. And again, not by anything wrong that you're doing, right? That authorized user helped you for all of these years, but now, right? Hey, mom and dad are again traveling, doing, exploring.
SPEAKER_02I've got an income now, but the the debt that's being carried, the actual debt to income ratio is being impacted by mom and dad on their authorized card. Yes, absolutely. Okay. So we have the potential for that card to really have helped us and give us a history to build from initially. And then we have the potential that if they're carrying a large balance, that that's actually also affecting our debt balance that we're carrying, even though it's not really ours.
SPEAKER_00Yes, absolutely. And again, lenders can see that, right? But again, it will skew your credit score, right? So again, if you were a 720, which is really good, but then now there's a balance, a significant balance, or you know, a late payment, something derogatory like that. Again, that's affecting your credit report as well. So again, maybe you're sitting there one day, hey, I'm I'm almost there to 750. And then now you're down to 690, 680, right? And now we're discouraged and we're trying to figure out what is going on. But there it is, right? It's it's that other side of, and again, that could also happen if you're removed. If you're removed and that's your longest account, I would imagine it is your longest account. Um, don't be alarmed when you do have a drop in points, right? Because again, you're losing that credit account.
SPEAKER_02So at this point, then the next question becomes what what are the things that we need to avoid? So we're going out on our own, we're striking out. We don't have mom and dad's history to help or hinder us anymore. What are the pitfalls that we need to watch out for?
SPEAKER_00So, at least at this point, right, I would like to assume that we have a good score. Even if it drops a little bit, right? Hey, I would imagine we're still doing very good. Um excuse me. Okay.
SPEAKER_02I've done the same thing.
SPEAKER_00Um, at this point, one thing that we're going to want to be very aware of is going to be adding newer accounts that are unnecessary, right? Okay. Excuse me. There it is. Okay. And okay, so adding newer accounts that are unnecessary. And what I mean by that, um, again, I would imagine we're we're a little bit older and we're getting into our credit journey. Something that you're going to see a lot now is those buy now pay later, right? Whether that's a firm, Klarna, yeah, anything like that, those potentially could be something that I don't want to say avoid, but again, be mindful about them. Because again, I haven't used them myself a lot, but from what I've read and my understanding, some of them allow you to do zero interest loans. Now, hey, that could potentially be really good, right? If hey, you have plane tickets and you need to fly in, right? From or go to the East Coast or something like that, and you split up those payments and they're interest free, that's good. That is really good, right? However, the downside to that is like we mentioned before, a new account added to your credit account could drop your credit score. So that would be something that I would advise you to be mindful about.
SPEAKER_02Not to say don't use them. And are you looking at how your budget is impacted by I'm not spending a thousand dollars now, but I'm spending two fifty. But then next month I'm spending two fifty, and the month after that I'm spending two fifty, and the month after that, and then that account is closed and goes away.
SPEAKER_00Absolutely. And that's I feel like uh is a thing that's not spoken about. Um, again, it's not to say don't use them, but again, if they're something that I tell a lot of my members is if they're using your social, if they're getting information that as far as your social security, your address, your employers, typically it's going to be reported on some type of credit bureau. Okay. That's where you have to have the discussion and ask, hey, what credit bureau is this reporting to? TransUnion, Equifax, Experian, just so you're aware of where to look of to see where this is being reported.
SPEAKER_02Yeah, when you pull that free credit report, yes, uh, what the tools out there uh that you can see, okay, now I see where that's coming from. Now I see that this is happening. Uh, I believe those will also let you know like, hey, what are the what are the pseudo-red flags that this person has? Like they have too many credit accounts that are open, they have too many new accounts that have been opened recently. Uh that that's kind of where we're getting to with these. Where if you're using those over and over, that's an account that's opened and then closed, and another one that's opened and then closed.
SPEAKER_00And again, like you mentioned before, the the debt to income, right, is is at the time, maybe the debt to income is is insignificant. The debt to income ratio is is insignificant because, hey, you know, it's 250 here, 250 there. Um, but again, as you start to add up, hey, 250, I mean, yeah, you'll turn into a thousand dollars before you know it, you know?
SPEAKER_02Well, especially if you keep convincing yourself I'm only paying 25%, I can afford this this type of time. Absolutely. Absolutely. Uh is that gonna be the same with longer running accounts that are open? Like, do I need to be concerned about having three or four or five different credit cards? Do I need to pick one for air miles, one for hotel points, all the different rewards so that I can, you know, pick and choose what I'm trying to earn on and just have all these accounts open forever? Or is that actually a bad thing as well?
SPEAKER_00Now it it if it depends, right? And the reason I say it depends is because opening up different credit cards for insignificant reasons, such as, well, hey, if I open up this credit card at the the store right at the mall, I'll get 20% off this purchase. Yeah. I feel like that's pretty insignificant, right? And the reason why is you're going to not only have a new account being reported, uh, more often than not, if it's a store credit card, they're typically very predatory, unfortunately, right? The interest rate is very high. Um, and again, in your mind, you're it's being offset by hey, 20% off at this purchase right now. Um, I'd probably advise against those. Now, like you mentioned before, when you start to get into this realm, I I would imagine everybody is reaching out, right? And Max, everybody wants you at this point. Um, if you're getting a rewards card, I would still want you to do the exact same things that we have been doing, right? Be responsible. Um, don't just go on a spending spree, a flying spree just to get those miles. Don't attempt to justify every purchase for the rewards. Um, that being said, to get back to your question, is it necessary or is it good, bad, and different? Everybody is going to be different. Somebody that has opened an account at 18 and that credit card has been open and nothing but good payments since they were 18. Yeah, shoot, go ahead, right? Go ahead, right? Um, and the reason why is your average credit age will dip, right? If you've had that for 18 and we're 28 now, it'll come down just a little bit. Um, but again, if you're somebody who's currently in the credit journey at 18 to 21, that's building your credit score. I would advise against maybe getting a rewards card, maybe getting a miles card and getting a low rate platinum card, right? Or a cashback card. And the reason is is because at that point, you're also still trying to manage your money, get into good spending habits. Um, somebody who's a little bit older in their credit journey understands at this point. I would like to assume they understand, right? Um, they understand that, hey, if I'm going to get this credit card for Sky Miles or for rewards or cash back, again, in their mind, hey, I'm only going to use this when it's beneficial. So, hey, if I need to travel internationally, right? It's good to have a card that maybe has a no international fee. Yeah. If you travel frequently. I mean, if we're only going on one trip.
SPEAKER_02How much are we paying in fees if we're going to swipe a card that has that fee versus how much are we going to actually save if we get this new line of credit that's going to hit our credit score? It's going to impact some other things. And that's people justifying it, right?
SPEAKER_00Like, so that's where it gets good and bad, right? If you're very responsible, which uh we we've have been at this point, absolutely. Go for it. Of course. Go for it.
SPEAKER_02Uh opening up a new line of credit. So getting a whole new credit card, let's say we end up with a $10,000 credit limit. Is that going to change our credit utilization? Because we haven't swiped it yet, but now all of a sudden we have $10,000 more dollars of credit that we're not using.
SPEAKER_00Yeah, absolutely. So it absolutely will, right? Whether that is a limit increase or a brand new card that we are going to have. In this example, a new credit card with a new limit absolutely boosts our credit score. And the reason why is the utilization rate then will lower, right? Because we're not carrying a balance. But again, the overall availability of credit improves. $10,000 is going to be a significant jump. So that's kind of where it's it goes hand in hand on it. Depends on the individual. If you've had that account established, again, losing a couple of points due to that new account will be insignificant. Um, again, if you're 18 and or 21 and you're opening up four or five different credit cards, that's where you're kind of running into doing more harm than good.
SPEAKER_02Uh, what are some of the other pitfalls? I know that's kind of where we started. We were looking at like whether or not having multiple accounts that you're opening, closing, a lot that you've opened all at once, kind of the red flags that can get reported. What are some of those other traps that people need to at this point make sure that they're avoiding?
SPEAKER_00I feel like a big one is going to be like I mentioned before, store cards. I I don't feel like you have to get them. Um, one thing that I've even seen now, especially um we're going into the change of season, right? It's going to be fall right now, or you know, potentially winter here soon. Um and I feel like another thing that people are going to be introduced to would be those charge accounts, whether that's somewhere um like a tire shop, Les Schwab, right? Yeah, they also offer, you know, you to build credit using them. Um you can get a Leshwab account, put some tires on there, and continue to make those payments. Um, but again, at this point, I just want people to be very aware of what their interest rate is, right? That's going to be the biggest deciding factor because again, hey, if you can pay it off cash, if you can pay it, absolutely pay it. But again, if we're wanting to build that credit, hey, hopefully at this time we have a low interest card. Yeah. And if we carry a balance, it's not significant, opposed to again, maybe opening up store accounts or charge accounts that will allow you to reap some benefits in the moment, but again, pay for it in the in the end.
SPEAKER_02Yeah. I know uh for everybody listening, I've mentioned it multiple times. I have an American Express card. I use it for hotel points. I travel a lot, or at least I try to. Uh, and we take full advantage of that when we can, paying that thing off, putting putting things on there. Uh, but my wife and I are very good about making those payments on time and kind of being able to reap the benefits of those. Having gone through a number of these building steps myself in my career, uh, I believe that they are absolutely worth it. Reward yourself if you can and could and control those. But one of the things that I was thinking about with this one was like, if I didn't trust my wife with these things, then it would probably be a different story. Yeah. What is the uh potential with co-signing for somebody else?
SPEAKER_00Yeah, so very, very, very good point, right? Whether that is going to be a co-borrower on a credit card or a co-signer for an auto loan, right? Um, you're you're you guys are both responsible for that, right? So again, as a as a co as a joint, shoot, there's no difference. Now, again, lenders and underwriters can absolutely tell the difference of who's, you know, the primary and who's the joint. But at the end of the day, it still is insignificant because two individuals signed that contract.
SPEAKER_02Yeah, I'm trusting you to make your payment on this thing, and you decide not to make that payment, that's gonna hit both of us. Both of us, right.
SPEAKER_00And again, and you can see this in examples of again, maybe parents co-signing for their children on an auto loan. Yeah, and again, they're they're anticipating that they're going to continue to make those good payments um because not only does it hurt them, but it'll hurt mom and dad as well.
SPEAKER_02Yeah, exactly. And I feel like mom and dad have a little bit of leeway or leverage uh at this point. Like, if you don't make your auto payment, you're grounded. Yeah, hey, I'm 25.
SPEAKER_00It doesn't matter, you're still grounded. We're taking we're taking you off as an authorized user, right? This is what we're doing. Um but it's very true because signing or co-signing, you're you're trusting that individual to make those payments. Um, so those are conversations, hard conversations that have to be had prior to doing anything. Because again, once once it's been signed, everybody's well, those two individuals are responsible, right?
SPEAKER_02And I know that's actually a thing that has come up in a number of people that I know that have uh ended up getting a divorce on something that as a married couple they went in on, and then they're like, oh, well, we've got this car loan together, but it's your car. Uh she gets the car, I get this car, but we're still making payments. And one of them decided that it just wasn't that important anymore. Yep. And now you've got uh a whole nother situation of people dealing with uh somebody else, maybe even maliciously, yeah, uh not making payments on something.
SPEAKER_00Yeah, and it's very unfortunate, right? I feel I feel like they're not uncommon, which is which is unfortunate. But again, when people are doing things out of spite, right? Maybe in the moment, hey, I just I'm not going to pay that, right, to spite that individual. But again, it stays on both reports. Yeah. So you're kind of stuck with that, and again, for seven years. And so when that loan closes, hopefully it gets paid off, right? We're not we're not we're not wishing that it gets repo'd, right? Exactly. But if it gets paid off, right, and it's closed, it'll still report and you'll still see those delinquencies for seven years. So that's something that, like, hey, yes, it has to be said. So co-signing, you have to be very sure, very trusting of that individual.
SPEAKER_02Um well, and in a in a situation like this one, you can absolutely have trusted that person when that that was signed and when that was done. Oh, yeah. But I feel like uh one of the things that people could consider in that situation, obviously, if if that is a thing that's inevitable in your relationship, things are breaking off, maybe look at refinancing that and get your name or their name off of it so that you no longer have that dependency upon that other person to do the right thing.
SPEAKER_00Absolutely. The sooner the better, right? I I feel like if if things are heading in that direction, right? Maybe that has to be one of the first things that are discussed. Like, hey, we have to discuss a refinance, right? And again, that's assuming still somewhat cordial. Um, because yes, that would be the first thing that you would have to do is refinance to get your name unassociated with that particular loan. Yeah. A little bit different for a credit card. And the reason why is if uh you and your wife are on a credit card, right? Or me and you are on a credit card, Scott, if if both of you guys, if both of us are on a credit card together, we have to close that credit card down together. So again, that's going to affect both of our credit scores.
SPEAKER_02Okay, so one of the other things that I hear people talk about at some point in time is that if you've got a good credit score that you are really good with money, you're financially healthy, is that a true equivalence or is there some wiggle room there?
SPEAKER_00Not well, not necessarily, right? Because again, if you're an individual who does not have much credit history um and you're just added as an authorized user, you potentially could have a really good and a really high credit score, and you might not even be working. Um true. So at that point, right, you're you have a good score, but it doesn't the score will not tell you the full story.
SPEAKER_02I feel like that's also kind of the exact opposite in the case of someone like my mother-in-law, who had very little uh reported to a credit agency at all. So I guarantee you her credit score was probably non-existent or terrible. I shouldn't say terrible, but probably not great. Yeah. And she was a a very functional, uh, financially healthy individual.
SPEAKER_00Yes. And well, and that's the thing, too, right? Is it doesn't tell the full story in general at all, right? Somebody who's being their score potentially could be manipulated or fluffed up, right? That's an authorized user. Um, but again, you also will have those individuals who, again, we've had a whole generation who never needed credit. So if they've never needed that credit, cash will always be king. And and at that point, having that liquid cash or that asset, that might take you further than the credit score will, right? Because you have liquid on hand, you have cash on hand. Um, and so it will never tell the full story. When when individuals do credit applications, your savings account typically isn't included at all, right? Okay. Now you can do again like a shared secured loan, and yes, your assets are being involved. But traditionally, if you're doing a credit application, shoot, you can have one hundred thousand in the account and it's still insignificant to the credit application. So absolutely.
SPEAKER_02So a a person that has a high high seven hundreds credit score could. Still only have like $500 in their actual bank account. They could have a bunch of credit utilization on uh credit cards that they have. They might have a high income, and therefore their income to debt ratio looks solid, but they're living a lifestyle of eating $30 burrito lunches uh every day out at like their favorite restaurants and paying for those things, but living basically right at their means of their incomes, they could look like they have a fantastic credit setup and still be effectively living paycheck to paycheck.
SPEAKER_00Oh, yeah, very true, right? And I feel like that's going back to one of the other episodes that you and I have discussed, lifestyle creep, right? Oh, yeah. If you're if you're earning a high wage and a high income, yeah, absolutely, right? At this point, you probably have high credit card limits, you probably have a higher auto loan or a mortgage payment. So you do have those higher payments. Um, and again, as lifestyle creep or lifestyle inflation starts to hit you, yes, you might notice, well, hey, my score is high 700, 750. However, maybe you don't have any emergency funds, maybe you don't have any savings, right? Because all of the income that you're receiving is immediately tied up into obligations. Um, again, maybe compared to somebody who has a 650 because they're new to the credit card journey, and again, they have one credit card or one auto loan. Um, but again, they also have liquidity. So they have cash to fall back on. If this individual who has that lifestyle creep, if anything were to hit the fan, right, and they don't have the liquid on hand to get themselves out of an emergency, it's still an emergency at the end of the day. Yeah. Right. So this other person, this other individual who maybe is a 650, if their credit card is maxed out, they still know in their mind, well, hey, I still have cash. We could not only pay the credit card off, but we can take care of the emergency. Maybe a car repair, something major, right? Engine replacement, head gasket replacement, right? Um, hey, do you have $7,000 cash on hand?
SPEAKER_02Or the other individual, right? Well, I have a credit card. I got enough credit utilization I can swipe here. That is actually another thing because there is a generalized uh credit utilization percentage that people are are advised to stick around. What is that number?
SPEAKER_00So you'll always hear 30%, right? 30% will always be what you're hearing as far as a utilization rate. Again, that's not to say it's it's bad to carry a balance or it's good to carry a balance. However, anything over 30% utilization, you'll start to hinder your account.
SPEAKER_02Now, going back to our previous scenarios, somebody that only has one low thousand dollar limit credit card could have three hundred dollars in credit card debt because of that. And they're utilizing thirty percent. Yeah. And our other person could have three thousand dollars in credit card debt because they've got a ten thousand dollar limit, or even worse, if they've got a really good uh credit uh rating from previously and they manage to get a number of rate increases, they could be sitting up in like thirty thousand dollars worth of credit card debt and still only be sitting at 30% utilization.
SPEAKER_00Yeah, absolutely. And that's uh that's also where excuse me.
unknownGod dang.
SPEAKER_02I know we're getting it all.
SPEAKER_00Oh, well, that's also to go to go back into that, right? That's also where you will see um the start. Oh gosh, where was I going with that, right? Oh my gosh.
SPEAKER_02I was gonna ask you, uh credit utilization in and of itself can't be the whole picture.
SPEAKER_00Yes. Yes. There we go. So yes, um, the individual who has right higher income, right, higher disposable income will have that higher credit availability, right? Yeah. Now, with that being said, they are oblig and they're not obligated, but they're able to carry a higher bounce than somebody that has, you know, a thousand dollar credit card limit. Um, with that being said, though, right, at the end of the day, the way that these underwriters are looking at it is again the debt to income ratio. So again, at one point, I'm sorry, at some point, right, that that income was was so much higher, so much significantly higher. And then again, maybe if it slows down right now, well, oh my gosh, I'm starting to again be uncomfortable because now I have a significant amount of credit card debt compared to that individual who only had a limit of a thousand dollars, right? Even if they're capped out, they know they can almost bail themselves out. Um, this other individual who was relying on that high income, like we mentioned before, they might have a high auto loan payment, a high mortgage payment. And so as their lifestyle increase or lifestyle creeps up on them, right? And they're utilizing that credit card more, oh yeah, you'll you'll you'll significantly notice that, well, maybe living in your means or below your means is a lot more beneficial because of an emergency, if an emergency were to occur.
SPEAKER_02And that emergency could easily be a loss of that income that uh got you all of this potential debt. This uh the this uh uh what was the word that you just used for that? Um it's not the utilization, credit availability. Yes, yes, uh that that income got you that credit availability, and now it's gone. That debt to income ratio has completely flipped over, and you still have access to that availability. It's not often that or at all that a credit card company is gonna come be like, yeah, we're gonna take that back from you now.
SPEAKER_00No, no, legitimately not, right? Now, again, there are certain instances where like American Express, because I used them as well, right? They're different, right? I feel like people don't understand the difference between a charge account and a credit card. Yeah. Because a charge account is going to be in line with your normal spending habits. So again, if you had very high income and you know, it was it was normal, right, for you to carry a balance of $3,000 and then just pay it off. Um, and then hey, something happens. Lifestyle, you know, job changes or something happens. Again, emergency happens. Well, oh my gosh, if you start to spend out of whack, maybe that charge card is is is looking at you like, well, what is going on? Yeah, hold us, hold us out of your normal spending habits, right?
SPEAKER_02Yeah. And then yes. And we just had uh an episode where we're talking about how people go about retiring and that first aspect. When you mentioned it, the first thing that I that I thought about was like, oh yeah, that that's a very easy way for that income to suddenly drop is to retire. Yes. Uh, where now you're looking at social security, you're looking at pulling from your investment accounts, uh, or even just one spouse uh or one person and a couple retiring uh and all of a sudden needing to realize that, oh, we've got to change that lifestyle limit. Yes. All of a sudden we can't be running $3,000 up on a credit card and pay it off monthly. We've got to start cutting into that and and readjusting how we live our lives.
SPEAKER_00Yeah, absolutely. And it's so true, right? Retirement's a big one. Um, again, when's when when that happens, right, maybe we're not able to withdraw from whether we have our IRA or investment accounts without a significant penalty. Um, so it's something to be mindful of because again, the individual that always lives below their means will always come out on top, you know. Credit, like I said, credit will never tell the full story. That 780 could also be inflated or fluffed up if you're 18, if you're 19. Um, so you have to have more. You have to have more of the bigger picture. You have to see the whole picture.
SPEAKER_02Okay. Jacob, thank you so much for joining us to talk about the credit journey today. Before we sign off, last piece of advice for young folks, baby's first credit card. Uh, what should they be looking to do right out of the gate?
SPEAKER_00So, right out of the gate, I would advise you to set up an automatic payment. Um again, live below your means, right? Put something on there that's reoccurring monthly that you know you need gas, music, something like that. Internet. Yes. And then again, don't be enticed. Don't feel like you have to spend or utilize the whole availability. It's it's a limit for a reason. Um, and shoot, $25 is more than significant.
SPEAKER_02Yeah. Any payment counts as a good payment when it's made on time. Absolutely. Perfect. Jacob, thank you so much. And as always, this has been Dollars and Scents, half of the Community Credit Union's financial literacy podcast. Until next time.