SARAH GONZALEZ, HOST:
This is NPR's LIFE KIT, and I'm Sarah Gonzalez. Usually, I'm with a different NPR podcast called Planet Money. We're an economics show, so we tell stories about, like, where credit cards came from or about the two brothers who basically created the credit score. It was in Brooklyn, N.Y., in 1874.
And today, I'm here with LIFE KIT to talk a little bit more about credit scores. We dig into some practical tips when it comes to our own financial situations 'cause our credit scores, they're not just something that tells lenders how reliable we are. It's a game.
TIFFANY ALICHE: You actually don't have to be as disciplined with credit. You just have to know the rules of the game and play within them. So when someone says, I'm good at everything else, but my credit is a hot mess, I'm like, woo-hoo. That's excellent because that's the one that you actually don't have to be Michael Jordan.
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GONZALEZ: That is Tiffany Aliche, better known as the Budgetnista. She teaches people how to be smart with their money. And here's the thing about the game of credit - the rules are not so easy to find. Like, you have probably heard conflicting ideas when it comes to your credit. Like, pay off your credit card in full every month and then, no, don't pay off your credit card in full every month. Leave a little balance. They like it. Tiffany says there are all kinds of mixed messages on purpose.
ALICHE: It's not in a creditor's best interest for you to know how to play the game because if you know how to play the game, then they don't make any money. It really is a game of the less you know, the more the person that you owe can earn from you.
GONZALEZ: But thankfully, Tiffany says the rules aren't that hard to follow once you know what they are. Out of all the basic financial tenets - debt, budgeting, investing, insurance - Tiffany says credit is the easiest to manipulate.
ALICHE: There are literally some tips and tricks and hacks that are totally legal that if you employ them, (laughter) your credit score can jump like Jordan.
GONZALEZ: So let's get those credit scores up, people. In this episode of LIFE KIT, the real rules of the credit score game. Hopefully, after listening, you'll be able to start boosting your credit score or at the very least, you'll be able to look at your credit score and know why it's that number.
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GONZALEZ: So let's just start at the very beginning. What is a credit score?
ALICHE: So your credit score is basically your GPA - remember high school and college, your grade point average - on your ability to pay someone back that you owe. Just like your GPA, it is an average. People will say, hey, Tiffany, if I pay off this credit card, what's my credit score going to be? And I always say, I don't know because it's like asking me, if I get an A in Spanish, what's my GPA going to be? I don't know because what did you get in Spanish last year? What did you get in math? What did you get in science? Do you see? It's a collection of your financial grades, especially those over the last two years.
GONZALEZ: I got my first credit card when I was 26 years old - very, very late. And I just kept thinking that I was doing the responsible thing. I was spending the money that I had. I wasn't going over. I wasn't borrowing. I was just, like, so responsible. And then when I did finally get my first credit card, I very quickly realized the perks of having a credit card and how, like, not having a credit card for all those years was actually hurting me in a lot of ways.
ALICHE: Well, I'll say this. I rather someone not take out credit than to severely abuse it because the abuse of it is way more detrimental than, hey, your credit score is a little thin, so we're going to have to have other ways for you to prove you can pay us back than someone who was like, I owe $300,000 in credit card debt. I don't even know what I bought.
ALICHE: Credit is not good or bad. Credit is a tool. Think about what a hammer is able to do, build and destroy. Credit can be used certainly to help to build your financial life. But you can just as easily destroy your financial life with credit. So you didn't really start late. You started when you were meant to.
GONZALEZ: So if you don't have that much credit because you're young, only take out a credit card if you know you won't abuse it because, otherwise, it can really hurt you long term. When should you start building your credit, though?
ALICHE: If you are fortunate that you have, say, a parent that is fairly responsible, you can start as young as, you know, 18 years old. A parent, a grandma can put you on as an authorized user. And so that's how I started my credit journey. My dad had a credit card that he paid off every month in full. He added me on as an authorized user.
And authorized user just means I am authorizing that my daughter can also use the card, although he did not issue me the card, which is a good idea. But what it meant was that as he used the card responsibly, it looked like we both used the card responsibly. But the caveat is, if he was irresponsible, then it also looked like we're both irresponsible.
GONZALEZ: Wow. I didn't realize you could just, like, inherit your parents'...
GONZALEZ: ...Good credit history like that.
ALICHE: But yes, you can inherit the good behavior, but you can also inherit the bad. So you want to make sure that you are an authorized user on someone who pays off every month in full.
GONZALEZ: Wow. This is the hack.
ALICHE: Yes. So we're using it in a hack-y (ph) way. But really, the point of an authorized user was to give kind of like younger folks access to a card that they would not normally have access to. But we're not using it like that. We're just using it to boost their credit score. So you could give them a card. But like I said, I don't suggest that.
GONZALEZ: I mean, this is a way to just, like, hand it down. I'm going to add a bunch of people to my credit cards.
ALICHE: Just be mindful.
GONZALEZ: OK, so this is - brings us to another good question, which is just, like, what is the best way to build your credit? If you are young and you're trying to build your credit, are there, like, one or two things that you should absolutely do or not do? Like, what is the best way to to build your credit?
ALICHE: I'll say this. One, let's focus on your FICO score. There are so many scores. There's, like, the VantageScore, the this score. But if you have a decent FICO score, which is the typical score most lenders use, then your scores will probably be good no matter what credit score system someone's using. FICO score ranges from 300, which is an F-minus-minus-minus to 850, which is an A-plus-plus-plus-plus.
And there are five components to your FICO score. Payment history is the biggest component, and that's 35%. Your payment history is, do you pay the people what they owe? Do you pay the minimum or more? So when you're paying off in full every single month, your credit history is really getting a boost.
GONZALEZ: And is that just, like, a rule, like, always? Is it never good to keep a small balance? Do credit cards or credit bureaus not like that? I remember - I feel like I was taught that the credit bureaus like you to have a small balance.
ALICHE: You know who likes you to have small balance and who put that out there? They're so good at marketing - the credit card companies.
ALICHE: Little - oh, Sarah, just keep a little balance. Why? Because they want you to pay interest. It literally does not help to have a balance. If you can pay off your credit card in full every month, that's magical and amazing. Only the credit card companies want you to keep a balance because if you don't keep a balance, what are they going to charge you? There's no fees when you pay off in full.
GONZALEZ: Wow, did they pull one over on us.
ALICHE: Yes (laughter).
GONZALEZ: OK, so payment history, that's one component of your credit score - it's 35% of it. Back to the other components.
ALICHE: Another 10% of your credit score is credit mix. That just means that you have some revolving debt, some installment loans. They just like to see that you have a mix. You don't need to do anything for that component 'cause it's only 10%. It's just the longer you live, the more of a mixture you'll have naturally. Fifteen percent of your score is a length of credit history. I tell people, look; if you have a credit card that you've been paying off, especially every month in full, keep your oldest credit card open. The longer you've had credit, the stronger this part of your credit score will be because they just like to see that you've had some history behind this, so that's 15%.
Ten percent - new credit. That means every time you open up or you apply for a loan or new credit card, that's 10% of your score is affected. You can lose points just by applying. You will almost likely lose points if you apply even if you get denied. So you want to save those losing-points opportunity for times when you really need the thing. You need - you want to - you really need a car, you really want to get that house, you really want to - I don't know - get that apartment and they have to run your credit score. Understandable.
GONZALEZ: And here's the last big component of your credit score.
ALICHE: Thirty percent is amounts owed. That's something called utilization. So what is your limit versus what is your balance? You never want your balance to be more than 30% of your limit. So if you have $100 limit on your card, you don't want to swipe more than $30. You don't want to have a balance of more than $30 on that card. So utilization is your credit cards collectively but also individually.
GONZALEZ: OK, spending limits is a big one. This is basically, like, even though your credit card company saying, here, your spending limit is $100 - that's how much you can spend and can have and can borrow - you actually shouldn't borrow that full amount. You shouldn't get even close to the limit. You should borrow much less - 30%, as you said - because if you do spend close to your limit, if you spend 90 or 100, that hurts your credit. Why? Like, why do they do this to us? Why do they say, here's your limit, but don't get anywhere near it?
ALICHE: Credit card companies have, like, this internal mechanism when they're like, oh, Sarah over here, she got 90% use on this card, another 90% here. They have this little trigger that says beep, beep - danger, danger, danger. She's using too much of her card; she must be in financial trauma, in turmoil. And so that's why they punish you by bringing down your score because if your score is low, guess what? You can't qualify for more debt. You see? They're literally slowing you down. It's the emergency brake for credit card companies and lenders. Thirty percent is a new 100% if you want to just maintain - like, my credit score's in the 800s, so I can have around 30 and be good. If you want to increase your score, you actually have to use less than 30%. You're looking at losing, like, 20%, 15%, 10%.
GONZALEZ: Wow. So if you want to maintain your current decent credit score, you can use 30% of your credit card limit. If you want to try to get that number to go up, you want to use 20%, 10%, 15%, something like that. So $15 of your $100-spending limit?
ALICHE: I know. And so there's some hacks to that. So let's just say, like, you're buying a couch. And you're like, I know I'm going to have - I get paid next week. And I'm going to put this $300 couch on my $500 card. Fine. Pay off that couch in full before the statement date. The statement date is the date that they tell the credit bureaus, hey, Sarah used her card. So if you can beat them to the punch and pay off the card before it's reported being used, then you can certainly use more than the 30%. Do understand?
GONZALEZ: OK, what if you have your $100 spending limit and you use that full $100, but you pay off the full balance before your payment is due?
ALICHE: Well, it's not just...
GONZALEZ: Then, it doesn't affect your credit score?
ALICHE: No, not necessarily because...
ALICHE: ...If you just wait to the due date, the due date and the statement date are two separate dates. The due date is when your payment is due. The statement date is the day that they've told the credit bureaus, basically, Sarah used her card.
ALICHE: So your due date might be, say, the 20, but the statement date might be, say, the 11. So...
GONZALEZ: I had no idea that these dates were different.
ALICHE: So a statement date is the date that they are acknowledging you used your card. So if you could pay it off before the statement date, then they won't even know you used your card.
GONZALEZ: It doesn't hurt you, but it also doesn't necessarily reward you either.
ALICHE: Exactly. It won't - it will show - 'cause I remember that I was trying to show, look at me, I'm so good at paying off my card. So I put my Netflix on it, and then I paid it off. Like, I would - like, Netflix would charge me, say, the 15, and I would pay it off on the 16. And I remember my score wasn't moving. And I called. I was like, how come my score's not moving? She's like, 'cause you're paying it off so quickly that we never got a chance to say you used your card. I was like, oh. So I found out - let me pay - Netflix charges my card on the 15. My statement date is the 20. So I started paying it off on the 21. So it's like, tell the people I used my card then I paid it off. You see? So if you don't want them to know, pay it off before. If you do want them to know, pay it off after the statement date. But always, always, always by the due date.
GONZALEZ: Oh. OK, OK, OK. So if you do want the credit bureau to know that you swiped your credit card, then you buy whatever you want to buy. You stay within your limit, or you, like, hit your limit, you pay it off before your statement date.
GONZALEZ: But if you want to try to increase your credit score, you need to wait until at least a day after your statement date.
ALICHE: Yes - because paying off a debt in full every single month is like fairy dust on your credit score. It's like you paid off a mortgage. It's like you paid off a car note. Even though it was only $25, the amount didn't matter. It's the habit.
GONZALEZ: OK. I mean, can we talk about how unfair the credit score system is...
GONZALEZ: ...And can be? Like, I mean basically, a credit score is supposed to determine how trustworthy you are. But there's a long history of factoring in gender and race in a way that hurts people of color, Black people. Also, it's just like, you know, if you had parents who put you on to to their credit card...
GONZALEZ: ...So that you could start establishing your credit history when you're 18 and 19 and 20 versus if you didn't.
ALICHE: Yes. In so many neighborhoods that adhere to people of color, you will see, instead of banks, check-cashing places. And there is not this emphasis on credit, you know - or on building good credit. And there are predatory companies like Rent-A-Center. I remember they were sued because of their predatory practices against people of color in the neighborhoods that they lived in. I don't - I think people think, well, if you just would work harder - that's [expletive]. Sorry for my language - but not sorry. It's not just about working harder because we know that women are paid less. How much harder do women have to work?
GONZALEZ: Mmm hmm, right.
What about asking for a credit limit increase? Is it good? Is it bad? Does it hurt you? Does it help you to ask to increase your credit card limit?
ALICHE: So when you ask for a credit card increase, it can be a hard inquiry. A hard inquiry is when you give someone permission to look at your credit to see if you are worthy - credit worthy to be lent to. You want to ask that beforehand. I want to inquire about getting a credit card increase. Is this a hard inquiry? Not every - it's not a hard inquiry for everyone. And so many times, it is. And so you have to ask yourself, is it worth the potential score hit?
Now, here's the thing. They get to decide how much the increase is going to be. You could certainly request. And there's no way to know for certain that you're going to get a yes. If your credit score is decent - and the beginning of perfect credit is 740. So 740 or better and you're likely to get a yes on most things that you ask for when it comes to your credit.
GONZALEZ: How many lines of credit should you have? Is there a sweet spot? Can you have too many credit cards? Can you have too little?
ALICHE: Typically, if you're looking to buy a home, they're usually looking for about three lines of credit. So I guess if there was a sweet spot, it's that.
GONZALEZ: Three lines of credit. So that would be, like, a car payment, a credit card, student loans. Does that count as three lines of credit?
GONZALEZ: OK. And if you have, like, five, is that bad?
ALICHE: It's not necessarily bad if you're managing them well. To me, between three and 10 is probably best. But honestly, what do you need more with five, if you ask me.
GONZALEZ: Tiffany, oh, my gosh. It has been so awesome talking to you. Thank you for all of the tips.
ALICHE: Thank you, Sarah, for having me.
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GONZALEZ: So let's recap. Here is what you need to remember. Credit isn't good or bad - it's a tool. And take credit out when you know you won't abuse it. There are five components to your credit score.
ALICHE: New credit, 10%; length of credit history, 15%; credit mix, 10%; amounts owed, 30%; payment history, 35%.
GONZALEZ: The beginning of perfect credit is 740. So if your credit score is 740 or above, you really don't need to worry about getting it any higher. You're basically perfect. If you want to raise your credit score, though, ask someone with good credit to add you on to their credit card. Just make sure that that person makes all of their payments on time, or it will hurt you. And if you can - this is the magical pixie dust - pay off your own credit card in full every month.
ALICHE: After the statement date and before the due date.
GONZALEZ: You should actually call your credit card company and ask them what the official statement date is because it's not often spelled out. And last but not least...
ALICHE: Credit is mostly a game. And it is a game that you can win once you know the rules, and now you know the rules.
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GONZALEZ: For more episodes of LIFE KIT, go to npr.org/lifekit. We have episodes on all sorts of topics, from how to eat healthy on a budget to how to start a creative habit - plus tons of other episodes on personal finance, parenting, health. If you love LIFE KIT and want more, subscribe to our newsletter, npr.org/lifekitnewsletter. Also, we want to hear your tips. Leave us a voicemail at 202-216-9823, or email us at email@example.com. This episode was produced by Clare Marie Schneider. Meghan Keane is the managing producer, and Beth Donovan is the senior editor. I'm Sarah Gonzalez. Thanks for listening.
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