May 5, 2004 Transcript
David explains what your credit score is and how it can affect you?
Bill: It's called your credit risk score. If you are applying for a loan or mortgage or any other line of credit, lich up. Someone has been calculating your score. David Bach, author of "The Automatic Millionaire" calls it your financial GPA. He's here to walk through it with us today. I like that title, too, your financial GPA. I got to think most people don't know what a credit report is. What about a credit score?
David: Most don't know these credit scores exist. When a company goes to loan you money, a bank, credit cards, even if you lease an apartment, they want to know, will you pay us back and will you pay us on time. They go to a company and the main company that does it is Fair Isaac. They pull your credit score. The credit score is given to you. They determine whether or not to loan you money and what interest rate they're going to charge you. Now this is really important because knowing the interest rate and knowing your credit score if you can improve your credit score, which means you'll get a lower interest rate, it's like giving yourself a raise. We've got a chart we can show you that comes off today's website. At myfico.com, the top is 720 to 850, your interest rate or 30-year mortgage would be 5.48%. What if you have a bad credit score? There at the bottom of the chart 560, you'd be paying 8.5%, almost $1157. So you can see right there, a person with bad credit scores is literally paying $300, or $400 more a month. The cost of their home is up 30% 40%, 50% because of the credit score. You have to know what you can do to get it fixed.
Bill: On the screen, credit account.
David: First thing you'll notice is they have all the accounts you've ever opened listed. They go back 10 years. So let's say you open accounts back when you are in college. They may show all those accounts still being open. Sometimes having a lot of accounts open is okay. If you have $25,000, let's say 10 accounts and you are only using one card. The credit score can be high. A lot of times people close down a bunch of credit cards at once and put a lot of debt on one credit card. Let's say you have a $20,000 limit and are using almost all $20,000. That actually lowers your credit score. People think if i close all my accounts, that will raise my credit score. It can lower your score.
Bill: What about payment history?
David: They want to see if you've been paying on time. If you make one late payment, that's not the end of the world. But make two months in a row, the credit card company shows that. Your score may be lower. If you make payments on time for just six months-- you become well behaved and pay everything on time for six months, your score can go up as much as 50 points and save you hundreds of dollars.
Bill: What do we need to know about credit usage?
David: How much credit are you using? They'll look at everything. Do you have a mortgage? Do you have a car loan? Student loans? Credit card loans? It's okay to have a lot of loans out there, but they don't want to see you using all of your debt. If you have access to $20,000 in credit card debt, are you using it all? They don't want you to use it all because that's a warning sign.
Bill: You can go to a baseball game and fill out an application for a credit card. What is your advice about credit applications?
David: First of all, be careful. You don't want to open up 10 credit card accounts. I recommend no more than three. You maintain those. A lot of people try to make good habits. They cut up their credit cards. As soon as those credit cards expire, they mail them back to you and people start using them again.
Bill: Good advice. And well noted. David Bach is the host of a nationally syndicated radio show that airs Saturdays on Sirius Satellite Radio and catch him every Wednesday here on tips on how to improve your own financial life.