Episode 14 Recap: Discussing Credit Scores with Liz Pulliam Weston
Recap by: Brian of Building Wealth Together
Liz Pulliam Weston joined hosts JD and Jim on the Personal Finance Hour this week to discuss a very important topic that affects every American adult, their credit scores. Weston writes for MSN twice a week and is an author of three books including Your Credit Score. She writes on a myriad of topics, but often comes back to debt and credit scores making her an exceptional guest to discuss this weeks’ topic.
Weston stated throughout the show that credit scores were built to discover the likelihood of a borrower to default. It is a tool designed by creditors specifically for creditors. The one thing that echoed throughout the episode was if you handled your revolving credit well (credit cards), you are likely to have a good credit score.
Credit Score Myths
The show started by discussing the myths of credit scores. The first myth Weston discussed is the notion that closing an account will help someone’s credit score. People tend to think that they have too much credit and thus it is impacting their score negatively. This is not correct and is usually the opposite. Closing an account will likely negatively affect your credit score because your credit utilization will go in the wrong direction and your credit history with that institution will be lost. She went as far as to say, if you are in credit score improvement mode, your best bet is to leave your current accounts as is (don’t close them).
How Scores Are Calculated
Weston then started to break down how credit scores are calculated. 35% of your credit score is your payment history (do you pay your bills on time?). The next most significant aspect of your credit score is your credit utilization (the amount of credit you have used compared to the amount of credit you possess). Having a high balance on your credit cards can knock your score around. It’s important to note that your credit utilization is looked at each month when your statement closes. This means that if you maxed out your card one month and still plan on paying it off on-time and in full, you can still expect your credit score to take a hit.
Another thing that can really take your score down (as much as 100 points) is a missed payment. This does not include late fees or late payments when you pay a bill a few days late. This is specifically targeted at bills that don’t get paid before being reported to the credit bureaus 30 days after the missed payment.
Impact of Mortgage Inquiries
In the next segment, Jim brought up an interesting point about applying for mortgages. When you apply for a mortgage or are “shopping for credit” your score can be negatively impacted. Weston discussed that checking your credit score yourself will not negatively impact you, but having a friend pull your score at a bank or another institution can have a negative impact as it will look like you are shopping around for credit. The tip that Weston gives to prevent these dings is two-fold. One, applying for credit within a two week span will lump all of the inquiries together and will impact your credit less. Two, inquires won’t show up on your credit report for 30 days, which means you want to do your credit shopping within that time frame to compare apples to apples on interest rates, instead of letting the process drag out over a month’s time.
How To Improve Your Score
Liz said that the best way to get your score up is to pay off your credit cards. It also helps to check your credit report to make sure there are no collections that you owe (library fees, past medical bills, etc.) and that all the accounts on your credit report are yours (be careful of identity theft or of human error that puts someone else’s accounts onto your report).
JD followed the above thought by asking Liz how long it takes for a collection ding to fall off of your credit report. Weston said that its 180 days plus 7 years before it comes completely off of your credit report.
Jim, JD and Liz then fielded a question from the chat room. Green Panda asked why her credit score only went up a handful of points after she paid off the installment loan on her vehicle. Weston stated that you don’t get much bang for your buck with your credit score in regards to paying off an installment loan. However, paying off your credit card is where you will see the major improvement in your score.
The topic of the show eventually shifted to rehabilitating credit scores. Getting approved for an installment loan is a step in the right direction as most creditors do their due diligence before giving out installments loans (present economic crisis excluded). However, you want to have both installment loans and revolving credit to balance your credit report and become more attractive to creditors. Another way to rehabilitate your credit is to sign up for a secured credit card. A secured card can help rebuild credit as it shows you are reliable and able to handle credit properly. One important thing Weston made note of was that credit bureaus are unable to judge you if you stop using credit. This means that forgoing credit cards, loans, etc. for an extended period will not help your credit score. You need to use credit and use it smartly to improve your score.
Listener Calls & Questions
Green Panda in the chat room asked another very good question. What is the optimal number of credit cards to have? The typical adult that has at least one credit card typically has four or five. Weston stated, if you have 12 it’s probably enough, but there are benefits to having more than one card especially as some companies are making efforts to cut limits in these troubled times.
JD asked if credit or debit cards are looked at in the same way by credit bureaus. Weston said no, debit cards often don’t report to the credit bureaus and therefore cannot help your credit score.
The last question from the chat room came from Moneymonk. He asked how long a bankruptcy will affect your credit score and how long it could take to recover from a personal bankruptcy. Weston says that typically it takes ten years for it to be removed from your report depending on which chapter of bankruptcy you file. Weston then followed and said that you would be able to start rebuilding your credit from day one after a bankruptcy; however it may take 5-7 years in this state of our credit crisis to get back to having very good credit. She followed this question with a very moving anecdote about a couple she met and how they struggled prior to declaring bankruptcy. This story is worth listening to.
The lone caller of the program was Andy, who also works with credit scores and has his own website (videocreditscore.comt). Andy mentioned that the people with the highest scores tend to have several paid off installment loans. Even if one installment loan doesn’t help your credit score much, several paid off installment loans can help your credit score. Andy brought up an interesting point that age isn’t looked at by credit bureaus, but credit history is, and you typically have to be 18 in order to get revolving or installment credit. This means people who have had a longer history are likely to have better credit scores, even if you manage your credit perfectly from day one.
Andy finished his call with a fun story where he detailed the activity for his third date with his future wife. He was concerned knowing she was credit card debt, so he had her pull her credit score. This put his mind at ease to see that her score was decent and he felt that they were a better match. Andy mentioned the telling statistic that 80% of all divorces are because of money issues. While this is an odd example of a credit score being put to use, this further stresses the practical implications of your credit report.
The show concluded with a brief discussion about the future of credit scores and what changes we may see in the future. This episode, in particular, offered an opportunity for every listener from every walk of life to take something away about how their credit score is calculated and tactical tips on how to improve their scores.
Next Week’s Episode: JD and Jim will discuss Home Improvement – Do It Yourself or Pay Other People to Remodel Your Home!