What’s your financial GPA?

Financially Inclined September 13, 2024 Transcript

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Yanely Espinal: What’s up, everybody! I’m Yanely Espinal, and welcome to Financially Inclined from Marketplace. We’re sharing money lessons for living life your own way. This episode is all about credit scores: what they are, why they’re important, and how you can improve yours, or start off on the right foot. Credit can seem like a game with complicated rules, but once you understand how to play, you can set yourself up for success. 

Today I’m talking to Jasmine Ramirez, a licensed clinical social worker who went to graduate school to become a financial therapist. Jasmine works with clients one on one and has a lot of experience helping people understand how the credit system works so that they can improve their credit scores. So… Let’s get into it!

[music]

Yanely:So if you were talking to somebody who never had a credit card or credit score or credit in their lives, how would you explain to them what a credit score is?

Jasmine Ramirez: A credit score is a number. I like to think of it kind of like your GPA: taking up all the classes that you have, it’s going to give you a score between 300 to 850. 850 is like A++; 300 we got some work to do. And really it’s telling potential loaners and people who are going to lend you credit, like, how good are you at managing that credit? Are you somebody that is good with credit and able to pay it on time, or somebody that you know takes a while, is going to take a long time, and so you’re riskier. So it’s really like your risk score for the loan provider.

Yanely Espinal: So if your credit score is kind of like your GPA for, like, borrowing money, what exactly is being graded like? What are you being graded on? In order to get this GPA?

Jasmine Ramirez: There’s a few components to it. So when you’re in class, you might be graded on, for instance, like your quizzes, your homework assignments, your attendance. Your credit score is made up of really five different factors. So it’s going to be graded on your payment history, ao if you’re making those payments on time. That’s like the highest percentage: it’s 35% of your score, so you really want to make sure that you’re paying on time. 

Credit utilization, so that’s 30% of your score. What credit utilization means is, like, based on the amount of credit that you have available to you, how much of it are you using? And typically you want to stay under that 30% rate, and that means that you’re actually doing good in that score. So credit utilization is the second highest.

And then we have the length of the credit history, so how long have you had credit? Are you somebody that just opened up a credit card or anything like that, and have access to credit, your score is going to be higher the longer that you have a longer credit history. 

And then new credit opens is another factor, or types of credit. So you know, if you’ve been opening up a lot of credit cards, maybe your score might go down a little bit for some time. 

But also if you have different types of credit that can also impact your score. So do you have a mortgage? Do you have a car loan? Do you have credit card? Revolving credit versus not revolving credit? So those are all of the factors that make up the score. 

Yanely Espinal: Now, why should you care about your credit score? Like, who is going to check it and for what? 

Jasmine Ramirez: There’s a few reasons why it would be really important to have a good credit score. So the first that comes to mind is access to favorable credit terms. So when you, you know, go to a place where you’re like, “Okay, I want to buy a home, or I want to get a car, or I need a loan for something,” it’s going to be really important to make sure that you have a good and a high credit score, to make sure that you’re getting, you know, a loan that actually has a lower interest rate or just better terms for you, in terms of being able to pay it off without having to pay extra money for it. Another reason why it’s really important to have a good credit score is it can actually affect, like, rental applications or, like, employment ramifications, right? So, like, if you’re actually applying to live somewhere, they’re going to check your credit score because they want to know that you’re going to pay their rent on time. And then even for employment too, like, if you’re working in banks or with a lot of money, you know they might run your credit score to make sure that you’re somebody that’s trustworthy with money in general. So all in all, very good to have a good credit score.

Yanely Espinal: That makes a lot of sense. What if, like, you’re somebody who just maybe never knew about these things, like, never heard of those specific things, areas that you’re being graded on, or you didn’t have access to it. Like, do you feel like that’s fair?

Jasmine Ramirez: Do I feel like it’s fair? No, it’s not fair. But there’s always a place for you to start from, right? Like, you can always learn about it. And there’s definitely tools out there, like, maybe looking into a secure credit card or something like that, where you can start to build credit little by little. But you can start from anywhere, right? Like you don’t have to be rich, like anybody can start having a credit – as long as you’re really above 18, there’s definitely opportunities to grow that. So definitely don’t feel like you’re behind the curve if you haven’t started it yet. This is just something to learn about and continue to add to your financial toolbox.

Yanely Espinal: So even if, like, you’re late to the game, it doesn’t mean that you can’t participate. It just means that you kind of have to start a little bit later, but you can still develop a good credit score with a certain amount of time.

Jasmine Ramirez: 100%, yeah.

Yanely Espinal: What are some of the things that you would recommend to, like, stay away from doing these things, because they actually make your credit score drop?

Jasmine Ramirez: There’s a few ways that you can get your credit score to drop. So going back to the things that we talked about that are you’re being graded on, the things that we want to be really, really mindful of is that we’re making on time payments. So what I would say is, make sure that you’re signing up for autopay, so that way you don’t have to really think about it. If you forget it, it’s like something that’s always there, and it’s an easy way to make sure that your credit continues to go up. You can lose, like, up to 100 points just by, like, being 30 days late. So we definitely don’t want that to happen. There’s a lot of ways to, like, lose points, but that’s definitely one of them. 

And the other thing is maxing it out. So you get a credit card, I know it’s so exciting, you’re like: “Okay, got $1,000 here to spend. What am I gonna do? I’m gonna swipe, swipe, swipe!” But like, we want to be really mindful. We gotta use our math skills and think, “Okay, $1,000 how much do I have to stay under that in order to keep a good credit utilization?”

Yanely Espinal: Yeah, and it’s like fighting temptations too, because you kind of have to, like, you’re gonna get the urge to use the credit card to buy this and that and all the things, and you have to be like, “No, I’m not gonna do that, because I know if I go too much, if I max out the card, it will hurt my credit score.” So it’s like, a little bit of, like, self control there, too. 

Jasmine Ramirez: Yeah, yeah, totally, totally, knowing what you’re gonna spend on the credit card, right? Like, have a game plan. I wouldn’t say, get a credit card just for everything, but just, like, think about as you’re starting off, like, I’m gonna use it for groceries, or I’m gonna use it for, you know, when I go to Starbucks and pay it off, so that way it’s manageable, and you get into the habit of paying it off regularly, and you know that you’re good with it. 

Yanely Espinal: So let’s do, like, the flip side of that: what is something that like anybody, really, anybody who has a credit score, could do to make their credit score go up?

Jasmine Ramirez: So to make the credit score go up, it’s kind of like the same thing, right? We want to make sure that our stuff is on autopay. That’s like one of the things, again, to avoid those late payments. We want to make sure that the credit card company is aware that we’re actually spending it, so we want to actually wait until after the payment, the statement date is due, and then pay it. Because if not, then it’s not going to be reported to the bureaus, and so they’re not going to know that we’re actually using it responsibly, and so we want to give ourselves a little bit of time for them to recognize, “Okay, they’re using it, they’re paying it. Everything’s good to go.” And that’s what I would say that’s like one of those things that we want to be mindful of. 

Yanely Espinal: So you said, like, all the bureaus are not going to, you know, see the payment until after the statement date. So wait. Like, how would you explain credit bureaus to a teen? 

Jasmine Ramirez: So credit bureaus is essentially, there’s three main ones, and they are agencies that collect your personal information when it comes to how you are doing with your credit. So I like to think of credit bureaus as your report card. They have all of the information, right? They’re seeing how you’re doing, and they are the ones that are actually providing this information so that you can actually come up with a score that will then be your GPA.

Yanely Espinal: So are there any, like, credit score myths and you wish you could just, like, erase, erase these myths forever?

Jasmine Ramirez: Yes, a myth that I receive right now is that paying interest is a good thing. I have heard, like, that it’s like, it’s like, “Oh, I’m showing that I’m paying it, so I’m gonna carry a balance month after month, and I’ll just pay the minimum so that they know that I’m actually, you know, staying on top of my payments.” Paying the minimum is part of those like debt traps. We don’t want to pay the minimum, we want to pay it off! 

Yanely Espinal: Yeah, that’s a big one. When you pay the interest fees, that doesn’t do anything to boost up your credit score. 

Jasmine Ramirez: It does nothing to boost up your credit score, and it does nothing to boost up your bank account, because you’re just spending money, like, without, without really the need for it, you know? So, like, you can definitely play the game and play it smart. We want to play the game smart.

Yanely Espinal: Thank you so much, Jasmine. I really appreciate you making time. 

Jasmine Ramirez: Bye! Thank you, thank you! 

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Yanely: Jasmine had some great tips about how to get a good credit score… so money lenders know they can trust you, if and when it comes time to borrow money for a car, college tuition, or buying a home. The most important thing she shared is to pay your bills on time and in full, every month. I know this topic can be a little confusing, so I wanna talk about why we even need a system like this…

My first experience with credit was back when I was a little girl, and I would run errands for my parents, like I would go to the bodega or the corner store and pick up things like eggs and bread and milk, but my dad would be at work, and so we didn’t really have money until he would come back. But the owner of the bodega, he did know my parents, and he trusted us, so he let me take all the food without having to pay for it, but he would write down in a notebook like exactly what I took and how much it cost, so that later on, my dad would come to the bodega and pay him back. 

But what if that bodega owner didn’t know you, or didn’t know your parents, right? So he couldn’t trust you and maybe wouldn’t extend credit to you, or maybe he got into an argument with my dad and stopped giving us credit. Or maybe he discriminated against somebody because of their skin color. So you could see how a system like this could get really unfair really quickly, and this was just my local bodega, right? Imagine huge companies and huge corporations. How are they supposed to have personal relationships with every customer so they can know which customers to trust and which ones not to trust? Right, that’s just not realistic. So this is where the strong need came from, for this system that would standardize who gets to borrow credit, how much and for what. 

So later in the 1800s credit bureaus started to be created and collect information about people’s debts and whether they repaid their debts or not. And then they would use this data to sell it to landlords, employers and stores, to help them know if they could trust you or not. So in theory, this was solving a problem. Right? Instead of judging people based on personal feelings about these people, they now had to use an objective number calculated with all the data from the credit bureaus, right? So the idea was, “numbers don’t lie.” 

But the numbers kind of still did lie, because there was a lot of discrimination built into those early credit scoring formulas. So for example, it was really hard for Black Americans to get loans to get a home or to start a business, because they would get less points just for being Black. Now, since then, there have been major changes to reform the credit scoring system in America just to try to make it more fair. For example, The Equal Credit Opportunity Act of 1974 made this type of discrimination illegal. So the credit bureaus and other companies out there, they’re not allowed to count your race, your sex or your marital status when it comes to calculating your credit score or deciding whether or not they’re going to lend you money. So basically, our current credit scoring system is still not perfect by any means, but it is a whole lot better and way more fair than what came before it.

Okay that’s all for today. If you have any questions for us, or wanna share your own credit story, you can email us at: financially inclined@marketplace.org 

Alright, you got this. I’ll catch you next time!

Financially Inclined is brought to you by Marketplace from American Public Media, in collaboration with Next Gen Personal Finance. I’m your host, Yanely Espinal. Our Senior Producer is Zoë Saunders. Our Video Editor is Francesca Manto, and our Graphics Artist is Mallory Brangan. Our producer is Hannah Harris Green. And our intern is Marika Proctor. The podcast was edited by Courtney Bergsieker. Gary O’Keefe is our Sound engineer. Bridget Bodnar is the Director of Podcasts. Caitlin Esch is Supervising Producer. Francesca Levy is the Executive Director. Neal Scarbrough is the VP & General Manager of Marketplace. Our theme music is by Wonderly. Catch you next time!

Financially Inclined is funded in part by the Sy Syms Foundation, partnering with organizations and people working for a better and more just future since 1985. And special thanks to the Ranzetta Family Charitable Fund and Next Gen Personal Finance for continuing to support Marketplace in its work to make younger audiences smarter about the economy.