Credit Score Myths | Upgrade My Credit
Hi Everybody, my name is Karen Highland. Together
with my husband Chris and our son Brandon Highland, we are real estate agents in Central
Maryland. And this is part of a series of videos that
we’re going to be doing, concerning your credit score.
Today we have with us Blair Warner, who is the founder and credit specialist at Upgrade
My Credit. Blair, why don’t you tell us a little about
yourself and your business. Well, you already said my title, I am the
founder and senior credit consultant, credit specialist, whatever you want to call me,
related to helping people who have credit problems and debt problems. The reason you
and I are talking is because 80% of my clients come to me because they want to buy a house.
That’s the biggest purchase, and the biggest motivator for someone to get their credit
in shape. I come from a mortgage background, so I have had my hands in various parts of
the whole real estate industry. I’m just glad to be here and work with people like you to
help your clients get into homes. Great, as a matter of fact, today we’re going
to be talking about Credit Myths. I did a little internet search recently. I was bombarded
with a lot of myths out there that are perpetrated over and over again.
So, I wanted to talk to you about it, today, some of these things that I see and hear.
The first one is, the kind of thought that a person has, “I pay cash for everything,
I don’t even use credit, so my credit score should be fine.” What would you say about
that? Well, of course that’s a myth or a misconception.
There’s a lot of teaching out there, and I won’t say his name, but probably a particular
name comes to people’s mind. But there is a lot of teaching out there that tells everybody
to just pay cash for everything. And it would be nice, to be honest with you, if we were
able in our society, to do that, and pay cash. But, that’s not the way our society is built
right now. I’m not against credit, of course, I’m in the credit industry, but the responsible
use of debt and credit is really what we should be looking at, rather than telling everyone
to pay cash for everything and not worry about credit. There are still some items that you
just have to have a credit score for. If you want to buy a house, you can’t buy a house
without credit. Most of the time people, there first car or two they’re going to need credit.
My latest cars I’ve been able to pay cash, but my first couple of cars I had to buy with
a loan, and the catch-22 is that you can’t get credit without credit. You have to have
some credit to get more credit. When you go in and you get ready to buy a house, if you
don’t have any credit, then you’re not going to be able to buy a house. And you can’t start
overnight. Credit is something you have to build up gradually. So if you’ve been paying
cash all these years and you haven’t done any credit, and you want to buy a house, it’s
going to be another 2 or 3 years, if you’re starting from zero, its going to be a 2 or
3 year process before you’re going to be able to buy a house and have a good enough credit
score to do that. The definition of credit is of course, borrowing money and paying it
back. so, if you pay cash for everything, and you’re not borrowing money, you’re not
building up a credit score. Right, good. Alright. Another question that
I have, A lot of people think having lower credit limits on their credit accounts is
a good thing. It will keep them from spending as much, and it doesn’t matter to their credit
score. That’s a very good question. I don’t even
know if I could have answered that years ago before I got into the whole mortgage-credit
industry. Again, there’s a difference between debt management and building your credit score
and building your credit profile. If you have a problem spending on credit cards and over-spending
and you need some sort of self-imposed control over using credit cards, and you’re not wanting
to buy a house or a car any time in the near future, then yes, it would be ok to lower
your limits so you’ve put that self-imposed control on your spending habits. but that’s
not going to help you build your credit as well as if you have higher limits and then
you just use a smaller portion of those higher limits. So, if you are the type of person
that has self-control, it would be better to have a $5000 credit card and never go over
a thousand or two on your spending balance, then to have a $2000 credit limit card, because
you’re trying to curtail your spending, but yet you always max it out to 2,000. But FICO
is going to look at a ratio of your available limit and how much you’ve used of that each
month. So, the higher you have, of course, it’s easier for you to stay at a lower ratio.
Right. So self-control has still got to fit in there. Yeah, its got to fit in there. And
see, lenders like that, because they want to know that you have self-control. If you’re
getting ready to buy a house, and they’re going to loan you $150,000 dollars to buy
a house, I’m in Texas so that will buy a good house, but…
Yeah, that will buy a condo, maybe, up here. Yeah, there you go.
But, they’re getting ready to lend you a lot of money to buy a house, they want to know
that you have self-control. Yeah, so self-control has always got to be in there.
Right. Ok, then what about… “I’ve always been able to get credit whenever
I wanted it, so my credit should be good.” That’s something that could come back to bite
you, that kind of thinking. First of all, if you haven’t checked your credit in a while,
and you don’t know what it looks like, you know, let’s say its been a year or 2 years
or 3 since you’ve done anything on credit, and you just think that you’re credit is the
same credit score as it was 2 or 3 years ago, but you haven’t checked it? Chances are it’s
probably not. Because first of all, there can be errors on credit reports, we all know
that. It’s a big national issue right now. Even in legislation about how our credit system
is crippled and there are flaws in it. So, errors can be reported. Second of all, sometimes
we think we made a payment on time and we didn’t. I’ve had people come to me that said,
they made their payment on the 29th, and it was due the first. They made their payment,
whatever, and they thought that it was going to get there in time, but by the time it got
recorded, it was recorded late. Well, if that was a year ago when that happened and you
haven’t monitored your credit score, how are you going to know that until now. You check
your credit and that would have caused your score to go down. And so your score is not
going to always be high because you used to get credit in the past. You have to stay on
top of it and watch it. Right, now, are some lines of credit easier
to get than others? Could that be a part of the equation? yes, there is, your right. I
would say that probably, credit cards are … high interest rate credit cards are easier
to get than low interest rate credit cards. Someone might go and apply for a card and
they get accepted but it’s a higher interest rate. Auto loans are easier to get than credit
cards, so you might think you have a score in the 700’s but really, to get an auto loan
all you have to have is about 620 or above at most dealerships. And 620 is not considered
a great score. It’s just kind of a so-so score. In fact it came up the other day, someone
said, “I don’t know why I didn’t get approved for a mortgage, just a couple of months ago
I went in and said I wanted that car and I got approved and drove out of the parking
lot with a car. How come I can’t get a mortgage?” And I said, “well, because their criteria
is different than a mortgage.” So, that’s a very good question.
Well, and as you say that, I’m thinking that a car is a lot easier to repossess than a
house. Yes. so. That’s right, absolutely. Hence the standards.
That’s right. Very good point. Ok, so, what about… Oh you hear this a lot:
“I need to raise my credit score, so I’m going to cancel a bunch of my credit lines and my
credit cards.” Oh yeah, in fact, not only do you hear that
a lot, people actually do that a lot. A lot of people go out and start cutting up their
credit cards after listening to certain seminars and certain speakers, and let me tell you
very clearly why you don’t want to do that. One of the factors of FICO, everybody knows,
FICO is the company that makes the most popular credit score. There’s a couple other scores
out there, but the one that most lenders use is FICO. Maybe you haven’t thought about it,
but FICO has this elaborate algorithm, this calculation that they use. They put all your
data in, and all your history and all these different things. And BOP, this score comes
out. What the algorithm includes is, we don’t know everything that it includes, it’s kind
of in lock and key somewhere in the corporate headquarters of FICO. But, we do know some
of the main things that are involved in their calculations. One of the things that they
look at is how long you’ve had credit. That’s why you’ll find somebody that’s 50 years old
with an 800 score, and somebody that’s 23 years old with just a 620 or something, because
they are going to look at how long you’ve had credit in general. And they’re also going
to look at how long each item or each trade line has been open. so if you have a credit
card that you got 20 years ago and you’re still using the exact same card with the same
number, nothing’s changed, that’s going to help your score, it will boost your score
more than if you just have a bunch of new cards that you just got the last couple years.
So what happens if you go start cutting up a bunch of cards and you cut up the wrong
ones? You cut up the older ones? You’ve taken away that history. Now when FICO runs your
score again, the next cycle, for next month, it’s going to cause your score to drop. It
will drop pretty drastically if you cut up several cards at once. So you don’t want to
do that. If you do think you have too many cards, and you went on a card-frenzy and got
all these 7 or 8 different cards, there is a strategic way of doing it. It would be something
that, you know I would give some advice like that for free. Be careful about that.
Ok, so good. What about the opposite extreme, “I can never cut up a card, ever again.”
Yeah, that’s the opposite extreme. Some advice that I would give to people, because that’s
also a myth. It’s ok if you have 7 credit cards and you just say, you know, I’m tired
of carrying so many around, I’m tired of having so many cards that I have to worry about,
then you could go ahead and eliminate a couple of them. I still think somewhere between 2
and 5 lines of credit is good, you need to maintain 2 to 5 lines of credit. Two is a
minimum, five is probably just about right. So let’s say you have 7 or 8 and you want
to get rid of 2 or 3 of them. Then, you have to go in there and you have to look at the
newest ones. Some people will go in there and will close out the ones with the highest
interest rates. But, what if the ones with the highest interest rates are the ones you’ve
had longer? Then that’s not going to help your score. It’s going to make your score
go down. so I would go in there and close out the ones that are the newest. the youngest
credit cards. Good advice. Alright then, next question.
consolidating my credit will help raise my score.
That’s another thing that a lot of people do. Again, it’s funny how we keep going back
to this same scenario. But again, loan consolidation could be good in certain situations for debt
management, but not for credit score boosting, or credit score management. I know that there
are people who may not have the same level of self-discipline, and it would be easier
for them just to make one payment. you know, on one consolidated loan every month than
to make seven payments on seven different accounts. For debt management purposes I can
see that. However, you’re running into the same situation, that if you start consolidating
loans, what is going to happen to those seven old loans when you consolidate into one? You’re
closing them out. What if some of those have longer history? Now you’ve lost all that history.
FICO just sees one loan, and it’s a new loan. A current loan. and it’s no longer calculating
in that history of the older loans. and so you’re losing that. Now, I’m not saying that’s
bad, I don’t want to give that impression. If you’re not going to buy a house for the
next couple of years, or a car, you’re not going to do anything on credit, and you really
think you need to consolidate to lower your interest rate, to help your debt management,
it can be a positive thing to do. And then you know you have a couple of years to build
up your credit score again. But don’t do that if you’re going to buy a house in the next
12 months. Right, so it depends on your goals. Yeah, it really does depend on your goals.
And there are different goals that don’t always line up with a best credit score, and vice
versa. I can see that. Right, and I’m glad that we’re addressing this, because we don’t
want to give the impression, since you’re in real estate, and I’m in credit repair,
that we don’t care about people’s bigger goals and the bigger picture. And we do, and so
again, if we know their goals, we’ll be able to advise them accordingly. There’s no set
cookie cutter plan. That’s why these are myths, a lot of these are called myths because every
myth has a little truth if you’ve ever thought about it. So, there’s some truth in it, but
you have to depend on the person’s goals and circumstances.
Right. good. Here’s one that I personally, maybe it’s my personal favorite. “We just
got approved for a mortgage, so I’m going to go out and charge up my furniture, get
a new car, etc. etc.” Yeah, go out and get new furniture, figure
out how their going to paint the house or, sometimes they get new appliances, all kinds
of stuff. Well the problem you’re going to run into, and that’s what a lot of people
do just because you were pre-approved. If you were pre-approved it has a date on it.
If you were pre-approved on November first, then that was a pre-approval for that date.
Now more than likely, nothing would happen in 30 days, but what if you don’t find the
house? See the average person goes out and get’s pre-approved and then they start looking
for houses. What if they don’t find the house for 60 days? Well, then in that 60 days, one,
your credit score could change. And it could go up or down. Most lenders are going to probably
pull your credit again. So, between pre-approval and the
time you put a contract on a house, but it could be pulled again between the time you put a contract on the house and closing if between pre-approval, getting a contract and actual closing, it goes down one point, to even 239, you won’t be able to qualify, so don’t do anything new on credit, because every time you apply for credit, and every time credit is granted to you, your score is going to go down. Because every time FICO sees your credit pulled, they see that you might have new debt. Along those lines, there are a lot of myths about checking your credit score, inquiries, about other companies checking your score. What is the truth about that. That’s probably one of the biggest issues that there are myths around. Because, I wouldn’t have known this if I wasn’t in the industry, and that’s why there are myths, because you can’t trust everything you read on the internet. As far as inquiries, it’s not a tit for tat kind of thing. FICO doesn’t have somewhere in their algorithm a system where you get your credit score pulled, woops, your score goes down. Credit pull – score goes down. It doesn’t work like that. The way it works, one, if you pull your own credit, it’s a consumer pull. Sometimes called a soft pull. That doesn’t affect your credit. It’s only when a lender pulls your credit, like at a car dealership, only when a lender pulls it is it counted as an inquiry. But even then, FICO doesn’t ding your credit every time it’s pulled. What they look at is how many times your credit has been pulled in a twelve-month period of time. And particularly if one weekend you went car shopping and your credit was pulled 10 times.