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.