For most people, figuring out how our credit score is calculated is a black box. Learning what impacts your credit score gives you flexibility to change it. Here are twenty ways you are ruining your credit.
Today’s guest is Steve Snyder. Steve is an author, speaker, and one of the top personal finance commentators in the country trained by the Fair Isaac Corporation, the firm that created the score that credit reporting agencies use to calculate a consumer’s credit worthiness. FICO Score is widely recognized as the industry standard for lenders. Steve has been quoted in the US News World Report, The Wall Street Journal, Newsweek, The Washington Post, and many others.“There is no communication with a co-borrower or co-signer but their credit will take a hit with a late or missed payment.” - Steve Snyder Click To Tweet
- [1:03] – Welcome to the podcast, Steve! Steve describes what he does in his career and what got him interested.
- [2:43] – Steve recovered from bankruptcy in less than eight months and realized that most people have no idea how to manage their credit.
- [3:34] – The biggest mistake is not knowing that you have three credit scores.
- [4:50] – The three scoring companies from Equifax, Experian, and TransUnion.
- [5:41] – Not all lenders report to your credit reports which is why scores can be different.
- [8:05] – There’s a system in place to correct things that are wrong with the large scoring companies.
- [9:01] – Most people purchase the wrong scores. Most of the scores you are bombarded with online are fake.
- [10:43] – Steve explains why the vantage score was created and why your FICO score is more important.
- [12:01] – Debts going to collections, late payments, judgments, liens, bankruptcies, high utilization, negatively impact your credit.
- [13:51] – Steve explains how shopping for cars and mortgages shows up as multiple inquiries on your credit.
- [15:50] – Most people don’t realize that they have a utilization sweet spot.
- [17:05] – No utilization can be bad for your credit score as well. You can have too much or too little.
- [19:01] – Having a credit card is the first step. Using it is the second.
- [21:45] – Your credit history goes back longer than just recent months and years.
- [23:35] – You never want to randomly close credit accounts even if it is an unused card that you’ve had for a long time.
- [24:40] – Never fight about your credit on your credit reports. If you have an issue, take it to small claims court.
- [27:41] – Most people do not understand how credit works because we are not prepared early in life.
- [29:21] – Steve is not going to ever risk his perfect credit scores by co-signing anything even with his own children.
- [32:00] – Co-signing student loans can be detrimental.
- [34:11] – It is wise to freeze your children’s credit until they are ready to use it.
- [35:26] – Steve explains the meaning of “thickening a thin credit file.”
- [37:46] – People think that because they make a lot of money that money will take care of everything else.
- [39:25] – Allowing collections to show on your credit is a huge mistake but is easily rectified.
- [40:51] – Steve explains the difference between a charge off and a settlement.
- [42:00] – Too many credit inquiries lowers your score but will also “spook lenders.”
- [43:16] – You could be paying off the wrong things. Your credit score is heavily weighted on your personal credit balance.
- [45:01] – Business and personal finances should be separate.
- [46:55] – No interest business credit cards are a great way to get started, but you have to be disciplined with a real business idea.
- [49:25] – The best time to apply for credit is when you don’t need it. Don’t wait for the emergency.
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- Credit After Bankruptcy by Steve Snyder
Can you give me and the audience a little bit of background about who you are and what you do?
Sure. For the last 23 years, I've been a credit expert. That also has to do with credit scoring. Back when I started, scores weren't really that popular. But now it's all come to the front where you have to know your scores well. That's what I've been doing is just really focusing on helping people increase their scores the right way.
What got you interested in becoming a credit expert? Was it just happened to be where you started working in finances and just interesting to you, or some other reason?
I filed for bankruptcy. When was that, 1998? I was just a young punk. I didn't know anything. All of a sudden, I was determined to recover from filing. I recovered in about eight months. Everybody was asking me, “Well, how did you do that? How did you get a brand new car?”
I said, “Well, I just went to the car dealer and I bought it.” They said, “Well, since you filed bankruptcy, I'm sure you had to pay some exorbitant rate.” I said, “2.9%.” “I bet you had to put this whole bunch of money down.” I said, “$500.” That kept happening no matter what I did.
If I bought a house, which I did, credit card, the whole bit, and I was fully recovered in less than eight months. Everybody said, “Well, you should write a book about that.” I said, “Well, this is just common sense, right? I mean, everybody knows how to do this.” I found out, no, they don't. That's been one of my superpowers is just figuring out how to do it the right way.That's been one of my superpowers is just figuring out how to do it the right way. -Steve Snyder, Credit Expert Click To Tweet
There definitely are a ton of misconceptions when it comes to the US credit system.
So many, so many.
Let's talk about all the things that people are doing wrong.
We've got this list and it's huge. We're going to scream through this list, through the many of these things that many of us, if not all of us, have done, I'm sure, probably at least 10 of these things on this list. But there's probably a bunch of things on here that we don't know that not everybody knows about. So let's start at the top. What is the number one thing that we're doing wrong with our credit?
Not knowing you have three credit scores. This is something that just shocks me. But when I ask people what their credit scores are, they usually come back and say, “Well, my credit score is around 600, 700, or whatever it is.” I said, “Well, that's a good start, but you have three. You have three primary credit scores and it makes a difference.”
I just dealt with a gentleman just the other day. He had an 800+ credit score from Equifax and his other scores were in the low 600s.
That's a pretty big difference.
Very big difference. I said, “OK, well, for you, you need to focus on lenders that use Equifax.” All of a sudden, lights went off on his head and he's going, “Oh, now I get it.” I say, “Yeah, it's important to know all three of your scores so you can always leverage your highest score, because that's how you're going to get the lowest rates, the best terms, and in some cases, that's how you're going to get actually approved.
What are the three major credit-scoring agencies?
You have Equifax, which is based in Atlanta, Georgia. You have good old Experian, which is based on the West Coast, I think in Orange, California, if I'm not mistaken.
They're down here in Southern California. I've seen several buildings belonging to them.
Yeah, and they're huge. Then you've got good old TransUnion, which is based in Illinois. Those are the big three. It's really important to understand that you have three FICO credit scores, and knowing that they each could be different. It's very, very important to know.
Why would they be different? If they're based on the same data, shouldn't they all be exactly the same?
Very, very good question. The actual reason is not all lenders report to your credit reports. For instance, credit unions are usually one of the most guilty parties. Most credit unions do not report to all three. Some report to three, some report to two, most report to one. Just in that situation alone, you can quickly see how there can be a difference.
Got you. I can see how that would lead you to different methodologies for starting to make your credit better.
You said the big three credit agencies. Are there other ones that are smaller that are supportive or just different?
Technically, there are only three, but there were some changes made to how judgments and liens actually reported to people's credit reports just a year or two ago. This is forcing some lenders to look at another repository called LexisNexis. This just happened to me. I have 800 credit scores on all three of my reports—perfect. Getting ready to get into some more real estate investing, and then all of a sudden, my mortgage gal says, “Did you know you've got something on your LexisNexis?” I said, “No. What are you looking at that for?”
Well, ever since… Now I've got a LexisNexis issue that I've got to get cleaned up, but those are the only three. Right now, LexisNexis is really being used heavily more with mortgages than anything else, but I have a feeling that that could change.
Yes, LexisNexis has been around for at least a few decades, if not longer.
Yeah, and they have a memory. I'll tell you, it's not easy to clean it up.
Is that something different with the Equifax, TransUnion, and Experian that they only look back a certain period of time, and someone like LexisNexis, you seem to imply that they look back a little bit longer?
It's not so much looking back longer. There's a system in place to correct things that are wrong with the big three credit reporting agencies, but LexisNexis—it’s a new kid on the block as far as a consumer having to care about them. Figuring out how to correct wrongs has been something I've been working on for the last little bit.
Got you. We talked about the credit scores being different. How do we even figure out what our credit scores are? Do we just call them up and say, “Hey, what's my score,” or what?
First of all, before I answer that question, we have to address—there’s another more pressing question and that is most people purchase the wrong scores. So you have to understand that most of the scores that you are bombarded with—especially on the internet, in apps, and other all these various things—most of them are fake. Most of them are not the scores that you should be paying attention to. The only real score that you should be really paying attention to is your FICO Score.
To answer your question, “Where do you get that?” There's only one place to get your real scores, your FICO Scores, and that's through myfico.com. Now, having said that, there's a lot of confusion because most consumers say, “Well, but I get my credit scores free from Discover, I get my free credit scores from my bank, or I just got a car loan and the auto dealer shared my scores.” I said, “Well, that's nice, but those aren't your real scores.” They say, “Now I'm really confused.”
How I answered that is, if I asked a thousand people what version of Microsoft Excel they're using, I would get hundreds of different versions. That's similar to what's going on there. Not only are there different versions being used, but there are different score manufacturers. For instance, the big three credit reporting agencies got tired of FICO being the big gorilla and they formed their own partnership to create the VantageScore.
There are a few lenders that use the VantageScore, but let's underline the word few. Most lenders—over 90% of the lenders in the United States use a FICO Score. So why even mess with something that isn't really used? Now you've got all these FinTech companies from California that are creating a whole different model. Synchrony Bank, Firm.com, all these other companies are creating their own systems for scoring people.
It's kind of confusing, but at the end of the day, it's about sticking with your FICO Score and knowing you have three FICO Scores, knowing you can go to myFICO and get your real scores, and then knowing what to do with them would be the next step.
What are some of the things that affect the FICO Score in a bad way?
In a bad way, I would say the first thing would be collections. When somebody allows a debt to go to collection, that is a serious scar. Easily fixed, but a scar. You've got any kind of negative account, a 30-day late, 60-day late, 90-day late, 120-day late, whatever it is.
You've got judgments and liens, which don't really report as much as they used to. Those now go to LexisNexis, but still, they can report in some situations. You've got bankruptcy. You've got high utilization. That's a fancy word for, you owe too much on your personal credit cards.
We'll talk about utilization later because I have questions about that one.
I remember the days where people used to talk about like, “Oh, you don't want to be applying for a car loan or a whole bunch of different places because it creates all these inquiries.” Do those things impact your credit?
Not necessarily because when you apply for a car loan and a mortgage, you can have 1000 credit inquiries within a 45-day period. FICO's smart enough to know, “Hey, Steve is shopping for a new car.” So they're only going to group all those 1000 inquiries for a car as one inquiry, and that's the same for a mortgage. Having said that, I am not one to just loosely go into a car dealer and say, “Hey, mister finance manager of the car dealership, why don't you shotgun my credit app to as many lenders as you can?”
No, I don't want to do that because now when a banker or somebody looks at your credit reports, they see this plethora of inquiries. An astute person, an underwriter, could look at that and say, “OK, these are all car inquiries.” And then say, “OK, fine. But you've got to be prepared for the dullest crane in the box.”
I always teach my students to say, “Hey, look, we've got to clean this up here. This is just way too many.” You have 45 credit inquiries and although they're all car-related or mortgage-related, it's still not a good thing. But from a scoring standpoint, as long as they're made within a 45-day window, car and mortgage inquiries do not lower your scores more than just one inquiry.As long as they're made within a 45-day window, car and mortgage inquiries don’t lower your scores more than just one inquiry. -Steve Snyder Click To Tweet
You seem to be caveating that to auto and home loans. Does that mean that when it comes to credit cards and furniture—I think that's probably all technically the same thing—but if you're applying for credit at Target, at the furniture store, your bank, and I don't know what other places but the electronic store?
Yeah, those are all individual credit inquiries. Those will get you in trouble faster, yes.
Got you. Those are the things we need to watch out for. What other things do we need to watch out for and make sure that we're not doing?
There are just so many things. Let me just try to pare it down here. I would say probably one of the biggest things that I see is most folks don't realize that they probably have a utilization sweet spot. What that means is that most people either maxed out their credit cards or they have them all paid off. That's usually most people that I see.
Very few have anything in between. But the way that bankers look at it is when you have a 30% or lower utilization, you are considered average. If your utilization is 20% or lower than that, you are above average. But if you really want to dial it in, you need to be less than 7%. That's when most people—not all people—but most people will have your highest possible credit scores by carrying the proper amount of utilization.
Zero utilization is potentially just as bad as a very high utilization.
Yeah. In theory, yes. Honestly, no, because I just worked on some of these scores today and they had $85,000 in personal credit card debt. Compare that to having a 0% utilization on your credit cards, it's much easier to go spend 6% of your utilization than it is to say, “OK, how can we pay this at $85,000 down?” The point you're trying to make is actually correct and that is you have to be careful.
You can have too much or you can have too little. If you want to make sure that your scores are the highest at all times—and this is really important for business people because business people need to have high scores, especially if you're applying for business credit. Business credit cards look at your personal credit reports and your personal credit scores most of the time. This is really important to always maintain high scores, especially in our current virus economy when things aren't normal. They're a little bit more risky and you have to be a little bit more careful.
When they're looking at utilization, it's this perception of, “This person has the ability to manage their finances well.” It's one thing, obviously, if you're maxed out—you’re probably not managing your finances well, but I guess they look at zero utilization the same way. They have a card but they've shown no ability to charge and pay it off.
Correct. Having credit is the first step. Using it is the second step because just having it helps, of course. After I filed for bankruptcy, I went on a tear to get two high-limit secured bank cards, and the first card that I got, my scores jumped 64 points. The second one, it jumped 40-some points. That's important.
Having the right amount of credit is important, but that utilization is so important because by having the right utilization, your scores are always going to be high. But also, by having the right utilization, the lenders that look at you will look at you differently. If you're 85% utilized, a banker is going to say, “Can't really help you.” But if you're under that 30% and the lower you are, you just look better and less risky to a banker.
I guess that's the point that we should be talking about. The credit agencies are not there as you and I being the customer. The bank is the customer. They're assessing the bank's risk on doing business with us versus there to make sure that we have access to credit.
Right. As long as you know what the bank wants, it's pretty easy to get them to say yes. One of the other mistakes that I've seen is people think—I actually had a client that just filed bankruptcy four months ago. He couldn't understand why his bank wouldn't give him a loan. I said, “Are you serious right now?” Come on. This is the time for some tough love. “You just filed for bankruptcy. You have a scarlet letter around your neck now for the next 10 years. You've got to do things a little differently. Going in and asking a banker for an unsecured bank loan with a bankruptcy that's recent, are you kidding me? No.”
It was the, “I've just proven that I'm not capable of managing my finances. Can you give me some more credit?”
Right. His comments to me were like, “Well, OK, but I don't have any more debt and I'm currently on my car payment.” I said, “No, no, no, no, credit history is your credit history. It's not just what happened in the last 24 hours, it's history.” I'm saying it with a tone of sarcasm or whatever, but certainly, I was a lot more respectful. I'm just trying to be playful here today.
I had to explain that there are things that you can do once you have a bankruptcy that's recent. You can get a car loan. It's pretty easy to do at a single-digit rate. You can get a mortgage in two years. If you can fog a mirror, FHA will give you a mortgage two years after your discharge bankruptcy. There are things that you can do, but walking into a bank asking for an unsecured loan right now, no, no. We’ve got to do it a different way.
I remember when I was looking to get my first mortgage. My wife and I, over the course of the several years prior to that, we had to pay off all of our debt. We had money for a down payment. I was talking to a friend of mine who'd been in real estate. I said, “Well, we're going to go through it and close the Target account, the Macy's account. We got those paid off, we don't need those.”
We were going to just close down everything that we had paid off with the exception of that one credit card that we're just using for the day-to-day expenses. He's like, “Oh, my gosh, no, no, no, no, don't do anything right now.” Is that something that is legit advice or is that erroneous?
That's very good advice. You never want to randomly start closing credit accounts, especially accounts that you've had for a long time. Because one of the markers that FICO is looking for is how long you've had credit. The longer you've had credit, the better. If you analyze people that have high 800 credit scores, they've had credit for more than a year.One of the markers that FICO is looking for is how long you've had credit. The longer you've had credit, the better. -Steve Snyder Click To Tweet
That's the goal. That was very good advice. Whoever told you that, that was very good advice to give and it was very good advice to listen to. You just never want to randomly close accounts. I ran into people that they ran into a disagreement with their creditor about a late payment, it was their mistake, they take these things up on principle, and then they don't pay. They do all these crazy things.
I said, “Look, you never want to fight about your credit on your credit reports. If you have an issue, take them to small claims court, settle it with an attorney, but don't allow your credit report to become where they put late payments, liens, judgments, and all these kinds of things because it's much more difficult to clean up. It takes time. It's a very, very lethargic process. You're better off just keeping it separate. Does that make sense?
That makes perfect sense to me. I listen to a radio lawyer on the weekend who offers marginal legal advice. Every now and then, he'll have someone call in and say, “Hey”—again, on principle—“my credit card company got this wrong and so I'm refusing to pay it. Now they're dinging my credit.” He's like, “Are you nuts? Pay it and then dispute it afterward. You've now got this huge black mark. Your credit got a black eye because of your principles.”
Correct. You're correct. That's exactly it. As a matter of fact, there was a guy that I helped. He was living in Florida, he was an attorney, and he was going to build a home in the mountains of Colorado. He came to me and he said, “Help, my bank of 17 years just turned me down.” I said, “Well, I can't help you right now, I'm on deadline to do a new book. But if we can do this via email, I can help you.” He said, “Sure, sure.”
That's how we did it. I just helped him via email. To make a long story short, he only used his American Express card. He had no credit cards—none. He only had a charge card, and that wasn't even reporting on his personal reports. I said, “OK, we’ve got to fix that. We've got to get some new cards.”
Then he had an AT&T situation, standing on principle. It was a couple of $100, but it turned into a collection or charge-off. I can't remember what it was, but it was a dark stain. I said, “Doug, what are you doing, man? You're an attorney. You don't fight this stuff on your reports.” He goes, “All right, but it's the principle of assets.” Screw the principle.
You need to settle it, you need to get it deleted, and then if you have a problem, you can take it up. That's what we did and within 47 days, he had three 800+ credit scores. From that 47-day timeframe that we really honed in to get his scores high, he learned so much that he didn't know. Trust me, this was a smart guy. This was a smart guy, an attorney, one of the top asset protection attorneys in the country, and he didn't know this stuff. Most people don't know this stuff.
It's not like we have a credit 101 in college.
Right, or even high school. We're thrown into this world to learn about credit and most of us stumble.
By trial and error.
Right, and it really shouldn't be that way. It really should be high school seniors understanding how credit works. I would love to teach a class for students like that to get them prepared for the real world so they don't make the same mistakes. In 47 days, he had 800+ credit scores. But the cool thing about this, Chris, was he was so excited about knowing he had control of his scores now. All the things that I showed him, he then took to his wife and got her scores in the 800s. Two of them were in the 800s. The other one was just below 800. Then their kids, the same thing.
This whole little 47-day timeframe turned into revolutionizing how all of them use and manage the credit. It's just a beautiful thing to see.
That's awesome. Are there other things that we can do that put us at big risk? One of the things I always think of is co-signing for staff . To me, even parents co-signing for their kids on their first card seems sketchy.
It's very sketchy. Before anybody accuses me of being an unloving father, listen, I have two little boys. I look forward to the day when I can help them, but co-signing will not be one of them. There's no way that I'm going to risk my perfect credit scores if my sons decide, “Oops, I forgot to make a payment.” That's not going to happen.
I will show them how to build their own credit. Again, getting loans—especially secured—a car is a secured loan. If you don't pay the payment, they come and repo the car. That's an easier loan to get than an unsecured bank line of credit. I will help them build their credit mix and their credit profile so they can, themselves, walk in, apply, and get approved. But co-signing, never. I've just seen too many people have their credit ruined because their kids—God love them—didn’t appreciate or even understand how damaging a late payment or two could be.
Just clarify this for me because I think I understand this. Let's say you co-sign for your kid’s loan and your kid, he's late with a payment. He spent too much money on burgers and made his car payment late. That doesn't just affect your kid's credit, that late shows up on your credit as well.
I assume the challenge is, in most cases, the lender is not going to call the parent, the co-signer, and say, “Hey, just so you know, we haven't received the payment yet. Can you make this payment?”
Correct. I have started to see some new products coming out in the form of credit cards that allow that kind of thing. But that's a very new thing, so new that I can't even really talk about it intelligently because I don't know the names, but I've started to see this kind of thing start to come up. For most of us, you nailed it. There is no communication with a co-borrower or the co-signer.
Unfortunately, you could get really, really screwed. That's also true with student loans. Student loans are probably even worse because the only way out of a student loan is to refinance.
I was going to say either death or paying it off.
Yeah. Death, paying it off, or actually refinancing. Those are your three options. I guess there's another option: you could become a teacher in an urban area, or there are certain occupations where you can get it actually forgiven over a period of time. But for the most part, I've seen that just mess up families. My motto has always been: if you have kids, give them money, loan them money, don't loan them your credit.My motto has always been: if you have kids, give them money, loan them money, don't loan them your credit. -Steve Snyder Click To Tweet
Yeah, it's almost like you take out a loan, get some line of credit to give to your kid, and then your kid pays you back as opposed to the kid paying the bank back.
Right. I am a brand new father. I had my first child at 51 and we had our second child—he’s turning 18 months next month, so I'm a pretty new dad, right? But I can't wait to get them ready to make sure that they're on their own. That they can apply for credit and know how to use it properly. That's a whole new book.
I'm going to put you on the spot here. Some of it is a little bit of my lack of knowledge, but I'm also going to put you on the spot.
If your kids already have Social Security numbers, have you frozen their credit?
My kids? Do they have Social Security numbers? I think they have Social Security numbers. I think that was part of the deal.
I'm not a parent, so I don't know.
- I think they do. My wife is here somewhere, and she says “Yes.”
Have you frozen their credit, though?
I have not.
That's my action item for you from our discussion today. Freeze their credit.
I guess that would make sense because they won't be using it for a while. That would make sense. All right.
That way, no one can come along and start using their credits and interacting with their credit profile, so to speak.
I heard that from an identity theft expert. We interviewed Adam Levin, an identity theft expert. That was one of the things that he talked about. As soon as your kids have a Social Security number, freeze the credit.
That actually makes a lot of sense. Now if they're 17 and they're getting ready to get their new car, whatever, that's a whole different story. But right now, he's not going to do anything for a while. So that does make sense.
He better not be doing anything like that.
We talked about co-signing. The last credit card I got was, “Do you want to put another person on the account?” They called it an authorized user, I think. Does that have any pros or cons for credit?
Back in the '80s, even ‘90s, that was a technique to thicken a thin credit file. Let me explain because that's kind of jargon. When you go into a bank and you have an auto loan and you have one credit card. In most cases, depending on what you're applying for, we aren't talking about cars or mortgages. Those are easy to get because they're actually secured assets. But anything else, a banker could look at that and say, “Chris has got a thin file; I don't think we're going to bite on this.”
Just not enough history. I don't feel comfortable. I don't have that warm fuzzy. How do you fix that? You actually thicken your file. In the ‘80s and ‘90s, what was popular was to do a lot of these authorized user accounts. You go to mom, you go to dad, you go to grandpa, and grandma, whoever you get, and they would add all these accounts, and that actually worked.
But then FICO cracked down on this. They said, “Nope, not going to work anymore.” And it doesn't. This is something that I can say with actual fact because I see this every day. People think that they have these authorized user accounts and they're benefiting them. But what actually it's doing is it's not helping their utilization, it's not helping their time and file.
It's only creating a question mark for the banker. As in, “OK, well, what's this guy hiding? Why does he need a crutch? What happened here?” Then it just brings out the magnifying glass. We don't want bankers to bring out the magnifying glass.
It's not inherently a bad thing, but it makes a banker ask, “Well, why?”
Exactly, and that's something that we don't want to do.
Got you. Let's move into the lightning round because I think we've gone through about 10 things. You and I talked about that there's probably another 25 things that we do. Let's go through a lightning round here of a bunch of other things that we can do that people are doing to damage their credit. What do you got next?
One that isn't on the list that I sent you, I would say—I'm trying to think of a better way of saying this. People think that because they make a lot of money, that money will take care of everything else. I can tell you that I've got several very wealthy clients who have a housekeeper who can get a better rate on their car than them. It's a combination, I think, of having great credit scores, but also having an income.
I see this probably a little too much. People think that cash is king. Because I make a lot of money that I should be able to get whatever. No, no, no. It doesn't work like that. There are some things that it does work for: mortgages. There are non-prime lenders that will take bank statements, things like this. So there are ways to do it, but for a lot of things, it just doesn't work that way.
Money does not cover a multitude of sins.
Right. That would be one of them. I would also say that allowing an actual collection to appear on your credit reports—big mistake. Fortunately, they're probably one of the easiest to rectify, but now you're going to have to invest some time into righting that wrong. Then, of course, if you still neglect it, it turns into a charge-off. Now you're in a situation where most people think that a charge off is going to benefit them, but they don't realize that a charge-off can come back and bite you in the butt for the next seven years. Now they're playing the whack-a-mole game.
Remember whack-a-mole at Chuck E. Cheese's? That's how some of these people do. They've got 19 charge-offs and they sail, they'll fall off, and said, no, not all of them . Sure enough, a mole pops up, and they want money. Then they settle that one, another mole pops up, and they're just playing whack-a-mole for seven years. It's not cool. It's not a way to get a good sleep at night, I guess.
A charge-off, for clarity, is when you and the bank—or more likely, the bank—agrees that “We're not going to try to get money from you anymore to pay your rent,” or you've made some sort of settlement. The bank says you owe them $1000. You say, “Hey, I’ve got $500, let's make this go away.” That becomes a charge-off.
That's a settlement. A charge-off is, let's say, I owe you $10,000 and you tried to collect. It's now an actual collection on my account or on my credit reports. I ignore that and eventually, you, as a lender, charge that off for your books, for your taxes, for all those things. But that lender can still say, “Hey, I think we're going to come after Chris and sue him directly in court.” And then, of course, everything gets times two, or they just decide to sell it off to a natural collection agency and they're going to come after you.
You have an opportunity to settle collections. I always recommend people—it’s one of the easiest things to settle and get resolved. It's in their best interest to do so. Another thing, having too many credit inquiries. I was probably the first one to break this 10, 15 years ago. It was, “Hey, credit inquiries lower your credit scores.”
That's pretty common knowledge now, for the most part. But having too many inquiries does something else: it spooks lenders, especially in questionable lending periods like we find ourselves now. Having too many inquiries. Like I have one client—54 inquiries.But having too many inquiries does something else: it spooks lenders, especially in questionable lending periods. -Steve Snyder Click To Tweet
Why do they need money so bad?
Exactly. That's exactly what a banker is going to say. OK, when are you filing bankruptcy? You can't even get your foot in the door when you have too many inquiries. Usually having four or more gets lenders smirky. Having credit inquiries lowers your scores, but also too many can be an instant “no” to a lender. Let's see, what else?
What about some things that are counterintuitive? I've got a car loan, I’ve got some inheritance, and I just want to pay off the car loan. Let me just pay these things off overnight.
Yeah, and that's a big mistake because your credit scores are heavily weighted on your personal credit card balances. They're not heavily weighted on installment loans. It's very possible that if you have that kind of money that you want to clean up things with, you could very well lower your credit scores because you're paying off or paying down the wrong things.Your credit scores are heavily weighted on your personal credit card balances, not on installment loans. -Steve Snyder Click To Tweet
With installment loans, it's best to carry them as long as possible. There really should be no rush to pay off those kinds of things, but there is a rush to always pay down your personal credit cards. This is something that most people just don't get and it really comes down to this: FICO, in all of their wisdom, heavily weighs your scores on your personal credit card utilization, the balances that you carry on your personal cards.
There are many people that don't realize that and then all of a sudden, they're using their personal credit cards for their business. All of a sudden, they're nearly maxed out and they think, “OK, well, when I get my first job, my first gig, or whatever, they're going to pay it off.” OK, fine. But in the meantime, they become unbankable because their utilization is so high, their scores tank, and now they can't do anything. So the only option they have is to come up with the money to pay them off.
Using your personal credit card for your business puts you in jeopardy of mixing your money, which the government does not like.
The government doesn't like it and your accountant doesn't like it. There's a lot of people that don't like it. But the bigger issue is if you take the time to properly set up your business for business credit, it's very easy to get business credit cards. That's a much better source because what most people don't understand is most business credit cards don't report to your personal credit reports, which means you can have business credit cards, you can max those suckers out, and it's not going to tank your scores. There are much better ways to carry debt long-term than personal credit cards.
What about balance-transfer options? Like, “Hey, my card is 18%, someone's offering me something at zero interest for the next year, and then it jumps up to something hideous, but at least I buy that one year.”
There's a lot of these new gurus now on social media. The only social media that I'm on is Instagram because that's usually where I buy most of the clothes, shoes. That's where I buy stuff now, which is totally weird to me, but when I'm on that app, I see these gurus pitching 0% financing with business credit cards. Honestly, it's true.
There are several really good 0% business credit cards. If you're disciplined, if you have a business idea that is real, and it has a history of making money, that could be a really good way of getting the cash you need to do what you want to do. Unfortunately, in my experience, most people that go after those kinds of things are not the people that should be doing it. They have no business experience whatsoever, they have a startup.
I'm not trying to be negative here. I think it was Mark Cuban that said—what did he say about borrowing money to start a business? He said, “People that borrow money to start a business are morons.” That's Mark Cuban, that's not me. I kind of agree with him because it's one thing to have a history of doing something and knowing that it's going to work. Then you throw all the money at it and you just light it on fire. But if you've never done it before, and you're going out there and get these 0% cards, and you're rolling the dice to see if it works, you got a pair of brass ones there.
Yup. That was a perspective I've always had with my business. If I can't afford it, then I'm not going to finance it, I'm not going to do this. Let me try this new thing with debt financing. No, no, I'm not going to try anything unless I've got the cash that I can afford to lose.
See, that's smart and I wish I had learned that a little sooner. I still struggle with that every now and again. I have a friend, Brian, and this is a guy that bought his house for cash, pays cash for his cars, has cash, and doesn't have any debt. In some ways, that's cool, but then at the end of the year, when I look at his taxes, I'm saying, “Dude, you're not playing the game.” You need to know how to play the game. There are certain things you need to do to get write-offs. You pay everything. So there's a balance, there's certainly a balance. There are so many things, Chris.
Oh, gosh, not that I would want to tell people. I guess, credit is good for emergencies, but waiting until your end of the emergency to apply for credit is probably also a problem.
It is, it is.
Like that timing, you want to apply for credit when you don't need it.The best time to apply for credit is when you don’t need it. Because when you need it, you’re desperate. -Steve Snyder Click To Tweet
The best time to apply for credit is when you don't need it. That's exactly right. That's exactly right. There's not much more I can say on that because exactly, that's what it is. If you don't need credit, now's the time to apply. Because when you need it, you're desperate, it shows on your reports, it shows on your scores, it shows your utilization, it shows all these different places, and it just becomes a challenge like pushing a snowball up a hill in the middle of July.
That also leads to something else that I think is important. I also see a lot of credit reports lately that have these low credit limits. They have what I call a crapital one credit card with a $2000 limit, a $300 limit, a $500 limit, or a $1000 limit. I asked them what they want and they want to get a line of credit for $100,000.
I said, “OK, all right, I'm a banker, you're coming to me for an unsecured line of credit. The most that you have demonstrated that you can manage properly is a $300 crapital one credit card. Why in God's name would I lend you unsecured $100,000? You haven't demonstrated to me that you can manage your property.”
One of the key things is to always increase your limits. You may not need it, but always increase your limits because the higher the limits, you've demonstrated now that you can manage that properly, and you're setting yourself up for higher limits, lower rates, the whole nine yards.
I suspect the rule applies to ask for credit limits when you don't need them as opposed to when you do need them.
What are the trigger points for asking for an increase in line of credit, like pay raises, or just random, periodically?
It doesn't really matter, honestly, because what they're going to look at is they're going to look at your scores, or to be more accurate, one of your scores. The only lender that looks at all three of your scores at the same time is a mortgage lender. Most other lenders just pull one of your scores. Knowing which one they pull is kind of cool. It's kind of a keen thing to know.
Knowing that you have the right score is important—the higher the better. Then, making sure your utilization is within range. Anything less than 30% is acceptable. Obviously, the less the better. Then making sure that you can prove that you make money. Those are the biggies. Those are the big rocks that you want to make sure that you can handle.
Those make perfect sense. I think we are at a good stopping point to wrap up here. We definitely could probably go for another hour with another 60 things that you absolutely shouldn't be doing. We'll stop, look, and add up that number of things that we said you shouldn't be doing.
All right, deal.
Steve, if people want to find you online, and we know you're only on Instagram, but I'm sure you have a website and a way for people to contact you.
Yeah. The best way to reach me is to send me an old-fashioned email, believe it or not, and you can reach me at [email protected].