Credit score, that thing that was created to determine whether you are a high risk or lower risk when it comes to making purchases (think house, car), getting a credit card and/or getting a loan approved. Julie Verhage, co-founder of FinTech Today walks through it all with us. When you’re getting divorced and are financially independent, you need to know how to make your credit work for you.
- Credit scores can be complicated
- Understanding how a credit score can help you and hurt is important
OUR GUEST – JULIE VERHAGE-GREENBERG
Welcome to another episode of the exEXPERTS Podcast where we give you all kinds of information and tips on everything divorce. Why? We’ve lived it, so we get it! We’re Jessica and T.H.
Jessica: Welcome to today’s podcast. We have back with us now, Julie VerHage, the founder of FinTech Today. She’s going to be talking to us all about credit score, which is one of the most important pieces of your financial profile that you need to have. It’s any time in your life really, but particularly after going through a divorce, this is something that you really want to have in tip top shape. Julie’s going to talk to us all about that today. Thanks for coming back Julie.
Julie: You’re welcome. Thanks for having me back.
TH: Welcome back.
Jessica: For people who really don’t understand, let’s literally break it down to the basics. What is a credit score and why does it matter?
Julie: Yeah, so credit score, there are different bureaus that will report certain numbers for you. You might know a score above 800 is really, really good, and typically you want to keep it above 650/700 and higher than that, but it’s an input of a bunch of different things. Remember when you’re growing up and you try to apply for your first credit card and it has to be like this card that has a $500 limit, and it’s just a credit builder thing and stuff like that. It just keeps going on from there. Other things that will account for it are personal loans, if you buy a car, if you buy a house, or if you open other credit cards. All these different things start to get taken into account. There are a lot of different pieces of that formula as well. We don’t need to get into all the intricacies of it, but we can share some tips and whatnot that can help you improve that score if you need to as well.
TH: Why do I need to improve my credit score?
Julie: There are different reasons. If you have a low credit score you might have trouble applying for a new credit card. You might have a higher interest rate on things that you apply for. Let’s say you need to buy a new car, they’re probably not going to offer you the lowest interest rate possible if you have a crappy credit score. They might even decline you from buying the car if you have a really bad credit score, because in their minds you’re less likely to pay that loan back, and that’s a big risk for them to take as well. If you have a high credit score, in their mind you’re a good risk and they can offer you a lower interest rate because of that.
Jessica: That also applies if you want to buy an apartment, you want to rent an apartment, or you want to get a new credit card in and of itself. All of these things that someone who’s getting divorced now has to take these steps on their own, everything really just comes back to the credit score. Talk to us a little bit about some things that people might not know that could actually negatively affect your credit score, because it’s not just about paying your credit card bills off in full.
Julie: Mmhmm, totally, so I’ll give you a good example. I have a very good credit score, knock on wood that it stays that way, [congratulations] and my husband does too, but he’s less of a good credit risk, because he’s only applied for two credit cards in his entire life. He didn’t take out student loans or personal loans or anything like that before, whereas me, I’ve always paid off my credit cards, but I’ve also had a number of them throughout. Back when I was little and I shopped at Kohl’s a lot, I got a Kohl’s card, and I think I had an American Eagle credit card at some point because they were like, save $50 today if you apply for the credit card. When we went to buy a car earlier last year, we did it on his and my credit went through right away, and his was a little bit more of like back and forth because while his score is good, he’s not taken out that many loans or anything before, so it’s still a little bit tricky for that bank to approve it. They eventually did, but that’s a good example of in his mind he thought that the reason that his score was good, he’s only ever had one credit card, he’s always paid it off, so I must be a fantastic credit risk. Whereas me, I’ve had like 10 credit cards before and I’ve always paid all of them off, so I’m the even better credit risk, because I’ve completed all of those. Multiple times I’ve taken out loans in some form and easily paid them back without any late payments or anything.
Jessica: Just a quick follow up, if someone is in the process of thinking about getting divorced, or they’re like just starting the process, but they’re not divorced yet, maybe a good tip would be apply for a credit card now while you’re still in your relationship. Then you can start your credit history and charge a couple of things a month just so that you can pay it off. Then that can help build your credit score so you’re not stranded when you’re alone after the divorce, no?
Julie: Totally, totally. Yeah, that’s a very good point. The other thing you have to keep in mind is a piece of your credit score is your credit utilization. Whatever your credit limit is combined on all of your credit cards or whatever loans you have, the percent that you’re actually using of that each month has a big impact on your credit score as well. If you’re using most of that every single month, that’s going to lower your credit score. If you’re only using a small portion of it that betters your credit score. Having a few credit cards is actually a good thing vs. having one as well.
TH: What if you’ve never worked? You were in a marriage and now you’re getting a divorce, and fine, you took out a credit card while you were married, but that’s still just one credit card. What are some tips that you could give someone in that situation so they can build credit, so they can rent an apartment, and they can lease a car? Then the second part of that is what else would they be checking your credit for, for living expenses?
Julie: Right. I would highly recommend going to something like Credit Karma, which can help you figure out which credit cards you would be approved for. Because if you apply for a credit card and get denied, that can ding your credit score, so you don’t want that to happen. Someone like that giving you a 90% certainty that you’ll actually get approved is really helpful. What I would keep in mind is you’re probably not going to get a very high credit limit or your APR or the interest rate that they charge you is probably going to be pretty high. Make sure you’re not using up most of your credit every month, and you’re paying that off each month, because that can quickly impact your credit score in a good way. Other things that you would apply for that you would need would be, like I said, a loan, an apartment, a mortgage, or a car. You guys might know too. I’ve never even bought an apartment before, obviously I’m still fairly young in New York City, but what other things come to your mind just trying to apply and needing it?
Jessica: I think that what you’re talking about probably pretty much covers the gamut. But I feel like some things that people really need to be aware of are things that you may have almost forgotten about or that you blew off at some point. I remember a long time ago, and thankfully it didn’t hit my credit score, I have a good credit score, but one time I randomly had gotten, I don’t know if it was like a doctor’s bill or just like something, and it was really small, it was literally probably less than $50, but somehow it tracked me down from someplace else that I had lived or whatever. It was like the red notice on it: we’ve submitted this to the credit agency, because it was an unpaid bill for an extended period of time. I feel this is the conversation to tell people. Now is not the time to not pay bills and to not necessarily call and try to see if you can negotiate some sort of a payment plan. If you feel like you don’t have the cash or the funds to take care of what your expenses are right now, you need to call different places and try to get on some kind of a plan in order to do that, because once someone submits a bill to a credit agency, that’s no good.
Julie: Mmhmm, totally. Credit Karma can also help with that actually too, because anytime there’s a ding on your credit history, or if you apply for a new credit card, you’ll almost instantly get an email from Credit Karma if you’re a user saying, did you apply for this? If not, go file a dispute or check that there’s no identity theft right away. It’s also an awesome tool for something like that too, because obviously, if someone steals your identity or anything that could really mess up your credit score.
TH: Doesn’t your credit also go down if multiple places check your credit? [I was just wondering that] What if I’m buying a house and leasing a car at the same time, so I have a few different people checking my credit score at the same time? Why does that hurt me if I’m venturing into an opportunity to have good credit risk and be an even better credit person for you? Why are you going to hurt my credit score for that?
Julie: Yeah, well, the good news is usually it’ll ding it for a few weeks, and then it’ll come back up usually. I think when my husband got the car it dinged it by like 30 points or something like that. Then you check it a month later and it comes back up again. It’s just that it doesn’t want you applying for five different things at once. Usually whenever there’s a hard credit check, there’s a little bit of a ding, but it’ll come back later assuming you don’t miss payments and stuff like that in the meantime too. I don’t know exactly why it dings right away. I think it is just purely because they don’t want you applying for a bunch of different things. Knowing that hard credit check can ding it prevents you from wanting to apply for a bunch of different things. I would assume the reasoning, but there might be some other math behind it too that I’m not thinking of.
Jessica: You just brought up a phrase that I’ve heard before and other people may have also and not be sure what it is: a hard credit check vs. a soft credit check. Can you tell us a little about the difference?
Julie: Yeah, so a soft credit check would be something like when I log into Credit Karma and they’re just telling me my credit score. They’re never doing a hard credit check. But if you apply for something like a car or a mortgage or something where they’re going to do a deep dive into it, that’s a hard credit check and that will ding it. A soft credit check never dings your credit score.
Jessica: What should someone be keeping track of in order to make sure that they have the most ideal credit score? Are there a preferred number of credit cards that you should have or a preferred number of things like that, that are in that sweet spot?
TH: What is the perfect portfolio for getting good credit?
Jessica: That’s right, a perfect portfolio.
Julie: [Laughs] A perfect portfolio, I wish I knew the exact answer to that. I’m sure there is some weird math around it based on how much you’re spending each month and whatnot, but I would say have more than one credit card ever. Maybe at a time you only need to have like two but don’t only keep those two forever, keep them for a while. Don’t open one and then close it six months later and open a different one and then just keep recurring that. That’s not going to help you either, because the life of your credit also has an impact to it. Other things would be again, like I mentioned, the credit card utilization, so the percent of your credit limit that you’re using each month. Keep that below 10% which should be pretty good. There are going to be some months where if you’re moving and you buy furniture, or you bought that car, and you paid a lot of it off all at once, something like that can make you go higher one month, but one month out of a 12 month year isn’t going to make much of a difference. It’s those other months where you’re consistently only spending 4, 5, or 6% of that credit limit that’s really going to help. Then having like two to three credit cards at a time and spending a little bit on them, I mean, you can maximize it for rewards and stuff too if you want. One might be really good for travel, one might be really good for groceries, and one might be really good for entertainment. Sort of keeping that in mind too, because not only can that help your credit limit, but that can help you earn a few extra bucks and rewards and stuff too.
TH: I love my Amazon rewards, because [I do too] that’s become my worst credit card, best for credit and worst for me. It’s like $10, $20, $50, and then I look at my credit card and I’m like, holy crap, that’s hundreds of dollars. Then I get $56 back, which I enjoy even though it’s only $56. Same thing with my Amex, I like that I can check off because I used to use the points for travel, but it doesn’t work anymore.
I mean, it doesn’t make sense, so I’d rather cancel out a few hundred bucks on my credit card bill than wait around for a trip in 10 years. But does that hurt your credit at all, the cashback stuff?
Julie: No. No, that won’t impact it.
Jessica: What about, you had mentioned before, when you used to frequently shop at Kohl’s or other stores. Every store has their own credit card part of their loyalty program or whatever it is, what’s your take on that, applying for those kinds of cards, GAP and department stores and things like that?
Julie: Don’t do it all the time, but do it once every couple years when you get a good deal, and you know it’s going to be a place that you’re going to be shopping, feel free to do that. The only thing I would say to keep in mind is sometimes they’ll do that and there might be an annual fee. For instance, American Express has a deal with Delta where you get the first year free and like $200 off your flight. Then after that year, it’s a $100 annual fee or something like that. Just make a little notification in your calendar to make sure that if you do want to close it after a year you can. That’s also why I say don’t do that a bunch, because the life of your credit history is really important too. If you’re constantly just closing things after having it for a year, that’s not a great idea.
Jessica: What’s your take on when someone really can’t pay their bills off in full every month? Is there a particular sweet spot in terms of what percentage or how much of it? It’s like maybe you owe $3,000, and it’s like the minimum payment is $30. Can you really get away with paying $30 or is there a specific amount that you should really be aiming for every month in order to keep your credit score as high as possible?
Julie: Yeah, another option would be putting it all into a personal loan too. Someone like Credit Karma or Tally can help you with that. Tally is an app that can basically consolidate all your debt and pays off your credit cards for you in a priority list where your higher APR is going to get paid off first. Essentially, it makes it so you don’t have to do the math in your head and it’s going to make sure you end up paying the least amount possible. They consolidate it and give you a personal loan on the back end instead, even though you can keep using your credit cards and whatnot in the meantime.
TH: Yeah, but then you have a personal loan and then you owe somebody else money?
Julie: Yeah. There’s probably some sort of check there, but they’re paying it off for you instantly and the right model. They’re never going to make it so they forget to pay it off and you have a fee because you forgot to pay it off or didn’t make the minimum payment. They’re doing all that math for you. Credit Karma, like I said too, can give you a recommendation. Sometimes it’s like, you shouldn’t apply for another credit card, but have you thought of a personal loan to consolidate your credit cards into one payment that is smaller in terms of the interest rate that you pay instead of having to pay off like two or three credit cards instead?
TH: Is it better to cancel a credit card you don’t use or just let it kind of fade off into the distance because I, like you at Kohl’s, must have gone into Dick’s Sporting Goods and they gave me $50 off, so I have a lot of those that I only used once, maybe twice, and they’re just kind of hanging out there. Am I better off closing it or just letting it sit empty?
Julie: I would let it sit for a little bit just so you weren’t closing it after three to six months. But if you’ve had it for 1, 2, 3, 4 years, you can go ahead and close that and that’s not going to hurt you.
Jessica: All right, excellent. Well, I feel like as always, there’s so much more to conquer, but this has been chock full of such great information. It’s really basic and relatable and understandable for anybody listening who really has to be doing that kind of work on their credit score. Thank you so much for sharing all of that with the ExExperts community. For anyone who wants to see what you’re up to and get more information on all the FinTech stuff, what are the best ways for them to find you?
Julie: Yes, we have a website FinTech Today, just Google it, it’ll take you to there. We have social media like Twitter and we have a newsletter that goes out too so you can stay on top of little tips and tricks in this space as well as just general news on what’s happening too.
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