Click below to listen to Episode 63 – Master Your Credit Rating
Master Your Credit Rating
In this episode, Bob and Mary Jo discuss the importance of having an excellent credit rating. A credit rating is not only used when buying a car, home, or applying for a credit card, but it is also used by insurance companies determining rates, employers determining whether to hire you, landlords determining rent, and even utility companies determining a deposit.
Your credit score can be seen as an indicator of your reputation and trustworthiness. Many people have questions and misunderstandings when it comes to their credit score. This podcast bring clarity to the topic.
HOSTED BY: Bob Barber, CWS®, CKA® and Mary Jo Lyons, CFP®, CKA®
Mentioned In This Episode
Christian Financial Advisors
Bob Barber, CWS®, CKA®
Mary Jo Lyons, CFP®, CKA®
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Bob: Welcome to Christian Financial Perspectives, a weekly podcast where we talk about ways to integrate your faith with your finances. This is Bob Barber.
Mary Jo: And I’m Mary Jo Lyons.
Bob: Are you ready to learn how to apply biblical wisdom to everyday financial decisions?
Mary Jo: Join us as we look at integrating your faith with your finances. If it’s your first time listening, welcome to our podcast, and if you’re a returning listener, welcome back.
Bob: Proverbs 22:7, “Choose a good reputation over great riches. Being held in high esteem is better than silver or gold,” and 2 Kings 12:15, “No accounting of this money was required for the construction supervisors because they were honest and trustworthy men.” These two scriptures apply to today’s podcast because we’re going to be talking about the importance of having a good credit score. Even though in today’s society we believe that debt should not be used to create an inflated lifestyle, which is what many people have gotten caught up in because it can be dangerous, this is still a great subject. With all this being said, a good credit score can indicate you’re trustworthy and have a good reputation for paying your obligations.
Mary Jo: Bob, that’s so true. We want to have a good credit score, but managing the use of credit, it’s so important to do it wisely and carefully and thoughtfully and keeping with the Christian mindset and Christian principle. It’s a double message that we’re covering here today, but it’s an important one.
Bob: Yeah. You knew how difficult this was for me.
Mary Jo: I did. Yeah.
Bob: I’m not totally against debt. It’s so hard to buy a home today with cash.
Mary Jo: Absolutely.
Bob: And cars have gotten so expensive, too. So I want to be understanding of this, but there’s so much, you know, in the Christian community that you got to be debt free. You gotta be debt free, but that’s not the world we live in. Yeah.
Mary Jo: Our audience is very broad and we have a lot of younger listeners and a lot of older listeners and being debt free when you’re just starting out and we don’t want to rely on credit, but having a mortgage, maybe financing a car when you haven’t had years to build up that savings, that’s probably pretty reasonable in today’s world.
Bob: You know, my dad used to have this really cute saying he’d say, cause he was in real estate, and he would always say, “Whether you rent or whether you buy, you pay for the place you occupy.” And you remember, you know, we’ve shared in our last programs, my dad did believe definitely in debt, especially when it came to real estate. But it is kind of an interesting saying and you’re paying that rent so it does make sense to buy. You get the tax advantages and the advantages of appreciation in real estate and you have something tangible for it.
Mary Jo: You have something tangible that you could always sell in case of an emergency, so that one is reasonable. We just kind of wanted to start with that disclosure if you will. We know this is an important topic, but we also know how important it is to manage it very carefully. It also reminded me of a couple of memories from my past. Do you remember a board game called Life?
Bob: Big time! I loved it.
Mary Jo: It was one of my favorites along with Monopoly.
Bob: That was my favorite was Monopoly.
Mary Jo: We spent many a summer playing both of those, and when I think about life as in our life that we are living today, sometimes it does seem like it’s a board game or so maybe we wish it was a board game. So when it comes to the game of life, there’s nothing like that feeling of knowing the ball is in your court. You are the one pulling the strings for a change. And when you have a perfect credit score, that’s a pretty good indication that you are winning at the game of life. As a consumer with a top tier credit score, you have lenders lining up to offer you financing.
Bob: That doesn’t mean you should go take it all.
Mary Jo: That’s right, but they’re going to be after you and you’ll get the best interest rates offered by lenders, the lowest possible longterm mortgage, and the lowest possible loan cost of any consumer. Your auto insurance rates may be less, too. So how cool is that?
Bob: Mary Jo, you’re right. A credit score, it could say a lot about you. It’s important to have a high one even if you’re not going to borrow money because it’s used for so many other things today. I think they ought to call it not just a credit score, but a reputation score.
Mary Jo: Oh, that’s good.
Bob: Cause we find that there’s so many questions when it comes to your credit score and misunderstandings about it. And that’s why we’re really exploring this topic in more detail today on Christian Financial Perspectives because, as we all know, knowledge is power because lenders, insurance companies, and even employers today, look at your credit score in making important decisions that pertain to you. A FICO score is probably the most popular credit score that we see out there. It’s a scoring system developed by the Fair Isaac Corporation, and it’s pretty much the industry standard when it comes to credit ratings. So here’s some things that you may not know. 10 billion FICO scores are purchased every year, and that’s not all through banks. That’s through employers. That’s through insurance companies. 27 million are purchased every day. FICO scores have been an industry standard for 25 years, and they had the evaluated the credit worthiness of more than 190 million Americans.
Mary Jo: I like the FICO score because it’s fair. A credit rating score, such as your FICO score, is an unbiased way for lenders to determine risk. It uses scoring algorithms that do not consider age, education, your zip code, your employment history, your gender, marital status, race, or income to determine your ranking. The founders of Fair Isaac saw the potential to use mathematics to reduce the role of human judgment in lending and potentially helping businesses give more people access to credit. And this all came about due to the need to provide fair housing and lending practices in the past.
Bob: I did not know that. I’m learning things myself today in this research that you’ve done.
Mary Jo: Just kind of where it all came from. There was a period of time where lenders were very biased and you could look at neighborhoods. They wanted to keep certain people ou,t and that’s how they did it.
Bob: Just like I was saying earlier, I think all of us would be surprised how many times our credit worthiness is reviewed for reasons other than borrowing, like your insurance company. I know that my auto insurance, my home insurance, and even employers now, they’re doing credit checks as a part of their decision making process. Most credit card companies are now providing your credit score on their website. This makes for an easy way to track your credit rating and ensure that nothing has changed, and monitoring that credit score is a really good practice in this day of cyber security and identity theft, because a sudden dip in your score is often the first indicated or something brewing out there,
Mary Jo: Something not so good, probably.
Bob: Probably not.
Mary Jo: Some financial thought leaders say that utilizing credit is worldly and goes against biblical principles and there is some truth in that. After all, the Bible cautions us to avoid the use of debt, and Bob and I definitely support that thought. However, your credit score indicates more about how you manage your debt. It also reflects on your character and your worthiness as a customer. There is a difference in managing debt and managing credit. In today’s world, there are many situations where your credit rating comes into play that you might not even be aware of.
Bob: So we’re going to go into five major reasons that a good credit score is important. Number one, it’s important to employers. 47% of employers today pull credit reports as part of their background checks on potential employees, largely to prevent theft and embezzlement and to reduce legal liability for negligent hiring.
Mary Jo: That was very true in the companies that I’ve worked for, very true in financial services for example.
Bob: Oh, and we do it when somebody wants us to consider them. That’s the one of the first things we do. We want to see their credit. Auto dealers, of course, they care when negotiating finance and they look for red flags and use it to help determine lending rates and loan terms and possibly even how much you’re going to pay for the car. If you don’t own a home and you need to, rent landlords are going to use credit reports to help them determine whether to rent to you and how large a security deposit they may require from you. Auto insurance rates as well as the payment terms, if you don’t have good credit, they’re probably going to require you to pay all up front. But if you have good credit, they’ll let you pay by the month. Or as I say, pay as you go as you’re using that insurance. And of course home purchases, mortgages, it gives a good indication of who you are as a human being. And should they lend that money to you. Realtors today, they want to know if you have good credit before they even many times go show you a home. So you know it’s a catch 22. We’re told to avoid debt, but then we’re told to maximize our credit rating, so what’s a person to do? Managing your debt and credit wisely is really part of being a good steward. And while your credit rating is just one component, your credit report is also important.
Mary Jo: Credit reports provide a detailed history of a person’s current and past credit accounts and debt, third party collections, certain public records, and requests by lenders and other companies. These reports include dates accounts were open, loan amounts, current balances, and payment history including late payments or defaults. So they just want to see what patterns that you have and that you’ve performed in the past. So just like having a poor credit history can cost you so can not having a credit history. In fact, everyone should occasionally assess both their credit report and their credit score. Even non-working spouses should look to establish a strong credit history. You never know what the future holds. So ladies, if you don’t have a strong credit record of your own, it could pay down the road to take steps to improve it. Just pull your credit, see what it says, look at your credit score, and give that some thought.
Bob: I’m a member, Mary Jo, of one of these credit monitoring programs and it gives me an update every month on my three different credit reports. As you probably know, there are three credit reporting agencies and each of these credit report agencies use a different version of the FICO score we were talking about earlier. In fact, there’s two major categories of scores within this. One’s called a base score and another is called a industry specific version. But there are different versions of these and each version looks at different credit components and uses different algorithms and tweaks to accommodate the type of credit the consumer is seeking. For example, auto lenders, credit card issuers, they use a FICO auto score or FICO bank card score, respectively, instead of base FICO scores. So insurance companies, employers, though, they look at it all.
Mary Jo: Different companies look at different components of credit or different categories to assess risk. Discover uses TransUnion, and Citibank uses Equifax. TransUnion considers the following five categories of information when calculating FICO scores and they are weighted more or less depending on the lender. So this was what was reported on my most recent credit card statement from Discover. And that’s one of those that I keep for business and I use and I pay it off regularly. But we also like to take advantage of the savings component in there. They pay one of the higher rates for cash savings. So we’re pretty loyal to Discover for that reason. But it has your payment history, which they weighed at 35% so that adds a lot to your credit rating; the amount you owe, this is weighted at 30%; the length of your credit history is at 15%; new credit that’s been opened 10%; and the types of credit you have is 10% weighted.
Bob: Wow. There’s a lot there to take in. If you have multiple cards and ever look at all these statements, you may have noticed some differences in these numbers reported and that’s because they’re using different versions of the FICO score. Each version weighs things differently. In fact, the length of credit history has a weighting of only 15% – less than some, but more than others. Payment history has the highest weighting of it all at 35%. So, make sure you’re making those payments on time. Good financial habits like consistently paying bills on time, keeping balances low, and only opening new credit cards when necessary can all have a positive effect on your financial health and, in turn, your FICO score. So review your credit scoreboard to see how you’re doing and keep in mind, poor financial habits like paying late can really harm your score.
Mary Jo: Something you’ve heard Bob and I say many times on this show, if it sounds too good to be true, it probably is too good to be true. So the next time you’re out at the department store and they say you can save an additional 15% if you open a credit card account today, don’t be fooled.
Bob: And they hate it when they asked me that because I tell them.
Mary Jo: I do, too. That poor girl in Target, you know, I haven’t been there in a long time.
Bob: She’s like, “All I was doing was asking you? I was like, “Do you know how much that could affect your credit and how bad that is?” And she said, “Oh no, I’m sorry I asked.”
Mary Jo: I know they don’t want to get me in their line, and those poor young clerks, they don’t have a clue what you’re talking about. This results in a change to your available credit of 15%. New credit opened is weighted at 10% and available credit if that is being tracked. So what seems like a good deal at the time can end up costing you a lot more in the long run. So just say, “No thank you.” Keep this in mind as we approach the holiday shopping season. Be sure you pass this wisdom onto the young adults in your world as well. Make sure that they know to say no and talk about this. We’re coming up on that time of year where everyone’s tempted and everybody spends black Friday and cyber Monday and all that time out there shopping. So just make sure you’re not tempted to succumb to any of those offers. Those younger people, they tend to be the ones that are swept into this the most. They’re tempted, they don’t understand the cost. Here’s what your score means to lenders. If you have an 800-900 score, that’s exceptional. Don’t we all want to be exceptional? I know I do.
Bob: Well, mine is.
Mary Jo: Mine is too, but it took me a long time to get there. And 740-799 that’s a very good score. 670-739, that’s a good score. 580-669, that is fair. 250-579, that’s risky.
Bob: So the goal is really to try to get that score over 800
Mary Jo: Absolutely.
Bob: So let’s look at several healthy credit behaviors. Number one, pay on time, get current and always stay current. If you’ve been paying on time for several months and then you find your risk of being late one month or this month, call and get forgiveness before that payment is due. That way you’re not likely to get that onto your credit report because you made arrangements in advance with the lender. Be proactive and take control of your payment history, light payments as well as collections. They stay on your report for seven years, a long time. Keep the balances low. Use your credit wisely. You know Mary Jo, we were just talking about this yesterday cause I’m building my home and I’m building that with cash. I used my credit cards and I had some high charges on Lowe’s and home Depot. The place that, I hope there’s some of those in heaven,
Mary Jo: that’s a band for you, but
Bob: It started to affect my credit even though I paid it completely off. So, you don’t want to get too high on that. So using a large portion of your available credit can have a negative impact on your score. Be careful about closing credit cards in an attempt to just raise your score. The longer your credit history, the better. So if you have a long relationship with the provider, don’t close that account, use it occasionally and pay it off immediately. If you’re worried about identity theft by keeping them open, just keep your unused cards in a safe or a locked drawer. Know where they are and keep them secure, just don’t close the account. Shop rates. If you’re rate shopping though, do so in a short period of time, because scores look at that and they can distinguish between shopping for car loans or mortgages based on how many recent inquiries you might have. So, dragging this out over time can definitely negatively impact your score.
Mary Jo: When you are shopping for a home with a new mortgage or car loan, that’s easily explainable, but it’s when this happens repeatedly that there’s a pattern. In our research, one of the techniques we discovered on how to build and repair your credit is to have a mixture of credit – credit cards, installment loans. Those are recurring level payments such as a mortgage or revolving credit like department store credit, there’s mortgage loans, auto loans, student loans, et cetera. However, here on Christian Financial Perspectives, we don’t encourage the use of installment loans or revolving credit. One of the biblical principles we support and we agree with is to avoid relying on debt. So here in the Christian community, we strive to live a credit free lifestyle and utilize cash whenever possible, and that’s what we really want to encourage.
Bob: Mary Jo, an interesting fact in all this is that the national average credit score has actually up in the last few years and is over 700 now. It’s at 706, and I think this is because that financial crisis we had back in ’08. It really got people aware of it, and consumer education on how important it is to monitor your score for potential errors and dispute those errors immediately if they occur has helped.
Mary Jo: How does pulling your credit score impact your credit rating? There is what is known as soft pulls and hard pulls. A so-called hard inquiry, when you apply for a new credit card, can knick your score for up to six months. A soft pull, also known as an involuntary inquiry, occurs when creditors want to send you pre-approved offers, and boy do I get those. That credit card solicitation you received in the mail was probably the result of a soft pull on your credit. Potential employers may check your credit, as do your existing credit card accounts. Both of those are soft pools, and if you check your own credit score, this is also considered a soft pool. The key is that a soft pull happens when you aren’t actively seeking out credit, so it has no effect on your credit score.
Bob: I have noticed, too, since I have put a freeze on all my credit, I have a permanent freeze on it, and if anybody wants to check on my credit, then I have to go in and I can open it up for a few days and then it will go back to that permanent freeze. I’ve noticed since I put my permanent freeze on my credit report, I’m not getting near as many solicitations for credit cards now.
Mary Jo: You know something? That is so true, Bob. We did the exact same thing. I hadn’t even thought about that. So you just mentioned it, but I never gave that a thought. But I guess that’s true. We’re not getting them either.
Bob: So remember that FICO scores are just one type of credit score. You can have multiple versions of a FICO score. FICO 8 introduced in 2009 is the most widely used, while FICO 9 is the newest. Maybe that’s more information than you wanted to know, but now you know it. Mortgage lenders typically use much older FICO score versions. So if you’re monitoring your score and comparing it month to month, be sure you’re comparing the same score type.
Mary Jo: That’s what we were talking about earlier. There’s two credit cards that I look at that put the score in there each month, and they use different systems so they’re both slightly different than each other. That’s why you’re seeing that and I didn’t know that. Staying on top of your credit score will not only help you avoid surprises, it’s also a great way to get your financial life back on track. Do you recall from our earlier podcast when we talked about our money history? This is one of the things that really helped motivate my husband and I when we’re working so hard to dig out of our debt load and improve our financial health. We watched our credit score double in a few short years, so just like it’s human nature to enjoy seeing your savings account balance grow, it’s also a great feeling to see your credit score improve.
Bob: Maybe that’s because it’s a good reputation, like we started off in the beginning.
Mary Jo: There you go.
Bob: So that’s going to do it today for Christian Financial Perspectives, and we hope you have learned how to master your credit score.
Mary Jo: You’ve been listening to Christian Financial Perspectives. Join us next week as we explore more about how to apply biblical wisdom to your financial situations.
Bob: To make sure you don’t miss any of our podcasts, you can subscribe to Christian Financial Perspectives on iTunes, Google Play, or Stitcher. To learn more about integrating your faith with your finances, visit out website at ciswealth.com or call 830-609-6986.
Mary Jo: That’s all for now until next week.
Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor.