Credit Score 101: The Basics, Misconceptions, and How To Build Credit

Let’s talk about credit! So what is a
credit score? A credit score is a number that tells lenders how profitable it is
likely to be if they lend to you. It is not a measure of financial
responsibility, though it often reflects that. It is not a measure of how much
money you have, though it may also reflect that. An extremely rich person
can have a terrible credit score and an extremely poor person can have a
fantastic credit score. It all depends on the individual pieces that make up your
credit score. So what does the number actually mean? A credit score ranges from
300 to 850 with the higher being better. If your credit is below 630, it’s really
unlikely that anyone will lend to you at all. 630 to 689 is fair credit, but you’re going to have higher interest rates. A good
credit score is 690 to 719 and the excellent range is 720 and above. What
makes up a credit score? Before we get into what actually makes the numbers of
a credit score, let’s talk about the different payments
that do or do not affect your credit score. Not all payments that you make are
going to affect your credit score. The positive things that make up your
payment history are only about things that you have borrowed. So that includes
credit cards, student loans, car payments, personal loans. Anytime that you’ve gone
to a lender and you have said “I would like access to money that I do not have.”
These are called lines of credit and lines of credit tend to fall into two
kinds of categories. The first category is called revolving credit and this is
generally just credit cards. There are some other types of revolving credit, but
they’re less common. Revolving credit is when you have access to a certain amount
and you can replenish that amount. So if you have a $500 credit card, that means
that at any time you can borrow $500. If you then pay off that $500, you have
access to that $500 again. That’s what it means by revolving, you have access to it
again in a circular motion. The other type is installment and this includes
almost everything else. Student loans, car loans, personal loans, basically any of
those are installment because once you have paid back part of it, you cannot
then re-borrow that. Now there are plenty of payments that you make every month
that won’t affect your credit positively, but they can affect your credit
negatively. Examples might be medical bills, rent, utilities, court fees… Any of
these things can negatively affect your credit if they go to collections or if
the company or person that you owe money to chooses to report that to the credit
bureau. Knowing all of that, what actually makes
the credit score? We actually know a lot more about it than we used to and things
have changed slightly so some of the things in here you might go “that’s not
what I was told” and that’s probably because the things have changed. 35% of
your credit score is made up of your payment history specifically to the
loans that we talked about. So every positive payment, that’s a good mark.
Every negative payment, that’s a bad mark. The next section is 30% of your credit
score is made up of credit utilization. Credit utilization means the percentage
of your credit that you are actually using and this is specifically about
revolving debts. So mostly credit cards. The less you use,
the better. People say to keep it around 30% and that’s a good number if you have
to use it, but if you can use none of it, use none of it. 15% of your credit score
is made up of the length of your credit history. Now this is really important
because a lot of people don’t realize that they need to start working on their
credit early and they also don’t realize that once you have a card, even if you’re
not using it, you should not cancel it. Its existence increases your average age
and that’s a positive thing. The next 10% is on new credit. This is specifically
marks based on whether you’ve applied for credit or not recently. Applying for
a lot of credit in a specific amount of time can be a pretty big red flag to
lenders that you might be looking for money because you’re having troubles. Applying for credit does negatively impact your credit score, but that’s not
necessarily a bad thing. It’s usually only going to be a few points. The last
10% is on credit mix. So this is the specific types of loans that you have.
It’s better to have a variety, but since this is only 10%, it’s not a huge deal if
you don’t have too much variety. But it shows to lenders that you can handle
different types of lending. So let’s go over a few misconceptions. The first is
that you do not necessarily start with a good credit score. People don’t start
with a perfect score and then go down, you start with no score which for a lot
of lenders is exactly as bad as a bad score. This means that if you put off
building credit until you need it, you’re not going to be able to use it when you
need it so the earlier the better. Next is you don’t actually need to use
your credit card. A lot of people think that you need to consistently be using
your credit card in order for you to get positive marks on your card (I meant credit) but this is
old information and you no longer need to use it. You just have to keep it open.
Now a lot of credit card companies will close your card if you’re not using it
so a lot of people will recommend that you put something small on there such as a Netflix payment. Or a subscription to my patreon
account? And then you pay that off immediately after so you don’t accrue
any interest. You’re only going to accrue interest if you wait. If you have an old
card you’re no longer using, don’t close the card unless it has some sort of
yearly fee monthly fee, there’s no benefit to closing your card. In fact it
will likely hurt your credit score because you are lowering the average age
of your account. A lot of people get student loans when they aren’t really
thinking strongly about financials. This means that when they’re starting to look
closer at their financials, they are very scared of their student loans. But the
good news is that student loans are not going to hurt your credit unless you’re
not paying them on time. They actually help your credit because they are an
additional type of loan. But as always, you don’t want to have any negative
marks so make sure that you’re paying your loans on time.
Speaking of negative marks. The negative items do not stay on your credit forever.
Negative marks stay on your credit for up to 7 years. In the case of bankruptcy,
they can stay for up to 10 years. Bankruptcy is not necessarily a bad
thing. It is going to hurt your credit score. Things that hurt your credit score
are not always a bad thing, they can be something to help you later.
For example, bankruptcy can be a viable option if you don’t have any other way
to get out of things. A credit score is a lot like insurance; it only matters when
you need it. So if you’re in a place where you don’t need any new lines of
credit and you’re going to be doing something that’s going to have a
negative impact on your credit score, that can be just fine. Just plan
accordingly. And if you need financial advice, talk to a professional.
The last misconception is that your credit score is not going to be the same
for every place that pulls it. There are three different locations where credit
is reported and they will not always have the same numbers. Those small
differences are probably not going to make that big of an impact. And the last
section that I’m going to talk about is what to do to build up credit when you
don’t have any. Start by getting yourself a credit card. Now I know that sounds
scary, but the most important thing to remember is you do not need to use your
credit card. If you go to get a credit card and they have some sort of yearly
fee, don’t get that credit card. I recommend talking to your local credit
union as they are nonprofit organizations who are usually looking out
for your best interest. My credit union is fantastic because they helped me a
lot throughout the years in getting many different kinds of loans. And the
best thing about them is that they are very committed to not lending me things
that I can not afford. While it can be really
frustrating to be declined, it was ultimately the best thing for me. Next is
make your payments on time. Now this applies to your loans, but it’s also very
important for the other things that I mentioned that could negatively impact
you if they go to collections. Medical bills are huge in negatively impacting
people’s credit without them even realizing. Collections agencies basically
exist just to try to get anything from you so a lot of times they are willing
to make a deal and settle your account so don’t be scared of them. Talk to them,
tell them what you can afford, and they will often try to meet it. Start tracking
your credit today. There are lots of different ways that you can track your
credit but my personal favorite is the app called NerdWallet.
There’s also Credit Karma and Credit Sesame which are also great and tracking
your credit through these apps is not going to negatively impact your credit
score because it’s not a hard pull on your credit. But remember these apps
exist to make money so they will try to sell you things. Do not buy things that
you can’t afford which includes new lines of credit. Don’t open up a new
credit card just because they say it’s going to help you. My app advises that I
should have 23 lines of credit. I should not have 23 credit cards. That is a lot
of temptation that I personally do not need. Don’t go overboard in building your
credit. Start it slow. You don’t need to get five credit cards, you don’t need to
get two car loans, you don’t need to get a brand-new car. Take it slow, let it
build over time, and remember, be careful. Finances can be life or death so be
cautious. Just because you have that high limit on your credit card does not mean
you need to use all of it. That’s all I have feel, free to ask me questions or
give suggestions of future financial advice videos you’d like to see. I’ll put
a link in the description to the financial advice group that I have on
facebook if you’d like to join. And as always, thank you for watching feel free
to subscribe, bye! Wow I was not even recording.

27 comments on “Credit Score 101: The Basics, Misconceptions, and How To Build Credit”

  1. Brian Young says:

    825 here.. I'm good to go…lol. I'm going to watch your video anyway just because I love how you put them together. 😁

  2. Rogue Ranger says:

    CASH IS KING!! Key being to Live Within Your Means.. Great to see a Video Promoting Responsibility when there is already Too-much Entitlement Mentality. 👍

  3. SWINDLE HILL says:

    You get high sore on your hair

  4. maurice taylor says:

    Thank you…. Moe in canada

  5. matt says:

    none of this info is useful to me right now but understanding it can be helpful when i (hopefully) move to the us in the future!

  6. Michael Irwin says:

    An offbeat comment, but I really missed you and your great videos!! Keep posting many more! I'll be watching and enjoying your ideas and insights on whatever you love to post, my friend!!

  7. Mason Mitch says:

    So if you get a secured credit card where you have to put money up front. And you decide to cancel the card do they give you back the money you put up front to get the card?

  8. Ruben Rodriguez says:

    Just checked mines 2 days ago and its 802😁

  9. ranger02 smith says:

    Credit is for people who really do not need it. A good credit score is a goal for everyone. Good advice -Thanks for posting !

  10. Brian Joslyn says:

    It does involve financial responsibility. I'm living proof of this from years ago. I now have a bill that I've not been the one paying and I have an education loan from my '04 to '06 course I took. My education loan has only a few(ish) payments on it and deferments for several years and now for the past couple or so years I've had to use another option. I use Credit Karma which currently shows a good rating and improving.

    It's… 300-579, 588-639, 640 is the minimum fair rating and 750+ is excellent. (It'd be nice, quite possibly better, if they used a percentage instead of a number. Especially a number starting at anything over 0. It simply makes more sense.)

    Applying for credit several times close together can actually be good. One way to improve credit rating is to take out a small loan, pay it off and take out another and pay it off – this is to be repeated a certain number of times.

    Paying off a cc to avoid interest is actually not smart.

    Just getting a cc isn't smart. Some can't just get a cc. They need to start with secured cc, meaning they have to send in a deposit which usually becomes their credit limit. Some companies will double it or maybe triple. You then use the cc to borrow from yourself, although interest paid goes to the company. Additional money can be sent to raise the credit limit of a secured cc. By getting a secured cc and using it, you build credit.

    Collection agencies are a rip off scam.

    Getting a new vehicle, as opposed to a used, can be a good thing. If one is able to, as per credit and income, as well as other expenses, then there's no reason to not go for that new vehicle. Some do need two vehicles and some need more. Those deciding to purchase a Tesla, for example… it's (currently) best to get a new one. Especially as a new owner of an all electric vehicle. EVs is the future – it's estimated that by 2030 all new vehicles sold will be EVs and by 2050 ICE vehicles will be illegal. It's not too early to become familiar with EVs.

  11. The Gent says:

    Good to see you back lovely one!

  12. David B. says:

    I did not need to watch as I have maintained great credit my entire life; skills learned while growing up. I do find your videos very entertaining and always watch when you post something new. Thank you!

  13. Uber DC says:

    Very good Video, I hope, I can only hope others will see this and learn. I wonder what Trumps credit score is. lol

  14. Minitruck Matt says:

    Excellent content as usual . I am not one to use credit much anymore but the advice and education you have given was significantly better than what was given to me long ago.

  15. rj says:

    Credit karma doesn't give the true scores, my FICO is the only 1 that provides the true scores

  16. lostintime86 says:

    Credit card companies pay fees to the credit reporting services. That is how they make money. It is better to have a CC with capital one then with kolhs. Capital One checks scores more often, pay more fee and is viewed as the better card to have. Sometimes it's okay to pay a yearly fee just to get the better card/score. Nothing good is free. But after 1 year they will waive the fee is asked. American Express always has a fee.

  17. Rickbearcat says:

    This is excellent and more importantly, accurate advice.

  18. Cameron H says:

    You look so diff.

  19. 864038swimmer says:

    Good to see you back, like seeing an old friend

  20. Siko says:

    Great and very useful information, thank you.

  21. Robert Tucker says:

    Great video! I just have to say it just because it caught my eye and I found it a little humorous. Around the 1:20 mark, you spelt revolving as revovling. Always try to have revovling credit, but only as little as necessary, lol.

  22. MannyGSX says:

    Ong why did you cut ur hair??! 😭😭

  23. jydaflyest says:

    I've been working on rebuilding my credit for a while now. When I was finally able to get a lender for a car loan, I made sure to get that car paid off within a year. It gave a huge boost to my score, and I got a credit card which I use for Uber-related expenses just so it's easier to keep track when it comes time to file taxes, and I pay off the balance ASAP. My credit score isn't where I'd like for it to be, but it sure looks better now than it did a couple of years ago.

    As always, thanks for the amazing content.

  24. Tijo Mathew says:

    Wow , your presentation skill is awesome 👏 Good information

  25. Zubair Khan says:

    Please. A new video. It's been 1 month

  26. Zubair Khan says:

    Please add new videos

  27. Normal Larry says:

    Hey munchkyn, just want to say thanks for your videos on Uber when I first started 1.5 years. I was nervous as but your videos prepared me for drive mentally. Specifically the video about items to have for your car to prepare for a night of driving. As a second job, it has funded my family with extra income, money into projects like buying my first investment property and looking to buy another property in the near future and also I was able to buy a cheaper end sports car. Yours was one of the first vids I watched that convinced me to get into Ubering with your positive attitude. Thanks!

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