Credit scores are everywhere these days. How did they get started and what are the important numbers that make them work? Learn what you need to know in this week’s show…
Also, would you like to watch this show instead of listening to it? We have begun to simulcast the show with a video stream that you can watch on YouTube. Here is the link.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
Click below to read the full transcript…
Announcer: Welcome to “Make It Last,” helping you keep your living ducks in a row and your nest egg secure. With your host, Victor Medina, an estate planning and elder law attorney and Certified Financial Planner™.
Victor J. Medina: Welcome back to Make It Last. I am your host, Victor Medina. I’m so happy that you can join us here for Saturday, February 2nd or 3rd. Anyway, we’re coming up on the first show of February.
I want to welcome everyone that is watching us here on Facebook Live. We are recording these in the middle of the week. We record them ahead of time, but we do put them up on the air so that you have them.
Not only here on the radio station, as you’re listening live on Saturday morning, but also available as a podcast so that you can go to iTunes at any time and listen to the show. I’m excited about today’s show because we’re going to be talking about credit scores.
We talk often about Equifax and the data breach that it had. A lot of questions have come up about why is it that this organization is one of the three rating organizations that gets to monitor your credit scores and have a history of your information.
Why did it have so much key information about individuals and not do anything about it to protect it? We’re going to go into that in a little bit. Spend the next two segments of the show talking about that. However, one of the things that we’re going to be doing first is talking about some upcoming seminars that I’m actually hosting and invite you to come and attend them.
These are free seminars. These seminars are available to the public, and there are educational opportunities to come and learn a little bit more about different subjects. We’ve got two that are coming up. We are on the heels of the one that’s going to be on Monday, February 5th.
If you are around on February 5th, either at 2:00 PM or at 5:00 PM, we’re going to have a couple of sessions for the Trump tax reform and what it means for you. We’re going to go into detail for that.
That’s actually a session that we’re hosting primarily for our existing clients, but we are opening it up to the public. If you’re interested in attending, I need you to register ahead of time, because we have a limited number of seats.
We can’t just make this like a show up type of deal. What you do is you go to Trumptaxreformtalk.eventbrite, which is E‑V‑E‑N‑T‑B‑R‑I‑T‑E, .com. If you go to that website, you’ll see there’s a place for you to register. Register one, two, three tickets, whatever you think is appropriate.
It’ll give you directions to the College of New Jersey where we’re hosting this in one of its classrooms. One of the actually nicer classrooms that it has. It’s got a whole kind of theater thing and two screens up on the front.
It’s a nice, nice facility, in any event. If you register and if you’re planning on coming, I do have to warn you, you got to show up early because there’s a lot of college kids on campus.
Parking isn’t the easiest thing, but I promise you that the presentation will be worthwhile. Now if you can’t for whatever reason, make that or if you’re not interested in the tax reform talk, I will tell you that we actually have another upcoming talk.
What we might call them more of a general orientation talk. Talking about estate planning, legal planning, specifically, asset protection planning. How to make sure that you don’t lose what you own to a nursing home, if you get sick.
We’re going to be hosting that on February 15th. That’s actually going to be a Thursday afternoon and evening. There’s one around lunchtime, and there’s one just starting around work time, around 5:00 PM. It’ll give you an opportunity to get out of the office a little bit early, if you’re working, and beat the traffic.
We didn’t want to do it at six o’clock because we didn’t want you to have to fight traffic there. That’s also going to be on the College of New Jersey campus in Ewing. That’s a nice facility for us to get to, and it’s easy to get off of the highway for that.
That’s one where we’re going to be talking about more general topics. We’re going to be talking about estate planning. What it is to have powers of attorney, wills. What are the core estate planning documents that you need and why? Then we’ll go into some of the asset protection techniques.
We’re not going to be spending a lot of time on the financial planning section of that. That’s a different talk for a different time. We’re mostly just going to be focusing on the legal planning side.
If you’re somebody that hasn’t taken care of their estate planning yet. Or you know that it might be old and you did it a while ago. You’ve heard about all of these tax changes and everything that’s come up. This would be a good talk for you.
This would be a good talk because it would give you an opportunity to get a general orientation to what’s important for planning. That’s the idea behind it. Again, free. Free to come up and talk.
Might be cookies and coffee. We’re not going to be feeding everybody, but we’ve got a little bit of refreshments there. Talks may be an hour and a half or so. Then you’re out the door. It’s pretty easy to get to and a good event. People have liked it.
If you’re a friend of the show, and you’ve already come to one of our events, this is a good opportunity to recommend this event to a friend.
The way that you actually register for the one on February 15th, you send an email to our office. We’ll talk you through the registration process because this is one that’s done solely online.
Actually, one of the ones that we advertised almost exclusively on Facebook and this radio show. It’s hard to put the Facebook link onto the radio show. You can’t follow it all, too many letters and numbers.
If you’re interested in attending the one on February 15th, then what I need you to do is email our office. We’ll walk you through how to register, get you registered for the event. You tell us if you want the afternoon one, lunchtime one or the evening one.
Then that’s totally up to you. The email for that is info, I‑N‑F‑O, @medinalawgroup.com. If you email that firstname.lastname@example.org, it’ll give you an opportunity to get in touch with us. We’ll register you for that seminar.
We’re going to be doing a lot of those in the coming months. If you can’t make the February 15th, but you want one of the ones that are in the future ‑‑ next month, month after that ‑‑ go ahead and send us an email anyway.
We will keep you on our task list, to follow up and make sure that we register for an upcoming session.
Now one more topic before we get into the discussion about credit scores. I find this very interesting. A lot of people are unaware about the way they work around the world, not just here in the US.
I want to get into that but something had come out. It’s related to one of these topics that I think people overlook or they give too much credibility to large organizations, simply because they are large.
I can’t tell you how many times we’ve come across somebody who says, “Well, I like my money with Merrill Lynch, Morgan Stanley, or one of these large ones because they’re these big institutions.”
It has always struck me as giving false credibility to something because if you think about the mechanics about the way those businesses work, it’s expensive to get them up and running.
They don’t have a lot of economies of scale. You can imagine how inefficient a company that hires tens of thousands of people would be. Each one of them has these little outposts.
They’ve got these financial advisors at these little outposts. We look at them and say, “Couldn’t we do better for a client by driving down the costs and being able to keep things a little more in house? Our hands on it.”
We had this come to light. Recently, there was a report by MetLife. MetLife had, essentially, misplaced a number of people’s information about where to send death benefits and pensions. This is, essentially, life savings, people who are relying on these monies.
What’s unique about a company like MetLife is that it’s what we would call a captive insurance company. Essentially, what that means is that everybody that works for there only works for MetLife. They don’t work for anyone else.
That’s very different than an independent agent or an independent advisor. An independent advisor has the opportunity to go ahead and pick from any of the investments that are out there.
They serve as the liaison between you and the company, and can work on your behalf, especially somebody that has signed a fiduciary pledge.
This is just one of those warnings that we have to watch out because the people who you meet that are the frontline individuals for companies like this, they may not be around there for a long time.
They’re the folks that are, essentially, employees of the company. They’re employees at will, sometimes contractually on there where they can’t solicit or have relationships with people after they leave.
When something happens to your key person, the person that you talk to, and they’re gone. Who’s your contact with this big huge large company? That’s why we’ve always favored this idea of a smaller more independent advisor or relationship. We always think that it’s better for the client.
You want the person that knows you really, really well. That isn’t going anywhere. That stays in town and is going to be around as long as you are.
A little bit of a warning on there, especially if it ever comes up, obviously. If you are the people affected by it, not much you can do right now. If you’re thinking about like, “Who do I want to be affiliated with? Who do I want to be associated with going forward?”
Victor: Give some thought to whether or not that’s somebody that is with a large organization, or maybe wouldn’t it be better to work with somebody that’s a little bit more independent.
Anyway, when we come back, I’m going to start talking about credit scores. I know that’s not going to be interesting. I promise you, it is going to be interesting. I always found this topic to be fascinating. I’m going to try to make it fascinating for you too, as well.
A lot of the stuff with Equifax and data breach, I want to figure all of that out. We’ll be on that when we come back from this break. Stick with us on Make It Last.
Victor: All right, everybody. Welcome back to Make It Last. I’m so happy you can join us here to talk about credit scores. We’re going to be covering that subject.
As a reminder, we are now simulcasting this show as a video podcast or video show as well. If you’re interested in watching it as opposed to listening to it, you can go to our YouTube channel. The YouTube channel will have the link to watch the most recent show. In fact, all of the links to all of the shows are available at makeitlastradio.com.
I’ll say upfront it’s not a low production. It’s a pretty good camera. We didn’t have the whole studio on and it’s not a TV show, but it gives you an opportunity to see how we record the show, watch it a little bit.
If you’re somebody that’s home and just wants it playing on the iPad in the background, it’s a little better interactive way of doing it than just listening to the show.
The show’s available just about any way that you can consume it. If you want to watch it on YouTube, we talked to you about that. It’s available on Spotify, iTunes. It is on all of the major platforms.
Again, a great half an hour show just to pop it on the weekend or while you’re driving somewhere. No, don’t watch it while you’re driving but you follow along.
Let’s get to credit scores and then, specifically, talking about the ones here in the US and the different companies that create them.
Generally speaking, the credit score is some form of a numerical expression based on information that people can get on different credit files that represents the credit worthiness of that individual. It is based almost exclusively on the information sourced by credit bureaus.
This information is used in lots of different ways. Lenders ‑‑ people that are banks, credit card companies, auto loan companies which are forms of banks ‑‑ they use the credit scores to evaluate the risk or the potential risk of lending money to a consumer.
They do that to try to drive down their losses for bad debt. They don’t want to loan money to people that aren’t going to pay it.
When you use the credit score, you’re helping to determine ‑‑ if you’re a lender or a bank ‑‑ what kind of deal you want in return for lending the money. People who have a high credit score, essentially, can qualify for lower rates because the bet on behalf of the bank is they’re a little more confident.
They are more confident that it’ll actually work out in their benefit because you are credit worthy.
The people with lower credit, it’s not as though they won’t ever lend you the money, but they might increase the interest rate so that they’re being compensated for the additional risk that they’re taking. They’re also going to limit the amount of credit that you get. Somebody with a lower credit score may not get as much that they can borrow.
They’re also looking at that to try to figure out who’s going to bring in the most revenue. The way that that’s done ‑‑ because that’s not always a function of the interest rate ‑‑ is that it’s a sweet spot.
You want to give credit to people who will borrow money, but not pay it off entirely all at once because that’s almost no revenue for the company that is lending that money. They want to make interest on it.
They’re looking for somebody in a sweet spot ‑‑ borrowing money, creditworthy to pay their bills on time but not necessarily paying them all off at once ‑‑ that’s how the banks are looking for this information.
Credit scores are not limited to just banks and lending. There are all kinds of other companies that use credit scores to assess whether or not somebody is a good person to do business with. You might look at credit scores being used with mobile phone or cellular companies. You might see them on insurance companies. Insurance companies will use credit scores.
The landlords, a big, big area, a lot of discussion and controversy on the use of credit scores in the world of giving somebody an apartment, and all kinds of historical data on the way that it’s been used in government. The apartments use that.
Credit scoring has a lot to do with data mining, and more and more our information is readily available. Privacy is super low these days and there is even reports of people using social media as another determinant factor within creditworthiness. This is not anything that’s been implemented quite yet, but they’re talking about this in terms of behavioral modeling.
What they do is they take the information that’s available publicly. They incorporate it into the way that they develop credit scores so that you figure out if somebody is creditworthy, not only by the financial information that is available, but also by this other information that’s done socially.
It’s interesting to note that our US‑centric view on credit scores is not the norm across the world. I’ll give a compare and contrast.
Credit scoring in the United Kingdom is very different than to the US. There’s no thing as a universal credit score or a credit rating in the UK. Every lender will assess a potential borrower based on their internal criteria, many of which their algorithms are trade secrets.
If you think about it from the perspective of banks in the UK, what they’re saying is that “Our method of evaluating who is a good risk to lend money to is actually a business advantage.
“If we can determine who are good risk‑takers and we can reduce the amount of bad debt, we can actually make more money than the other banks. We’re going to keep that algorithm as a proprietary information.”
Now, if you compare that with the way the US works, the US works by creating a credit score by taking information by one of three major credit bureaus. We’re going to get into the US‑centric stuff when we come back from the break, but realize that it’s vastly different in a place like the UK versus the United States.
For instance, if you’re denied in the UK, there’s no obligation on behalf of the lender to reveal the exact reason why. We don’t have the same rights in the UK as we do in the US. You don’t have a right to see your credit score once a year.
From that perspective, they are doing things differently, and it makes it difficult for borrowers to know in advance whether or not they have a good chance of being accepted.
A situation like what they have in the UK is different because they don’t know ahead of time what are their chances. That’s one of the benefits of having our credit score information available is we can see how likely we are.
Victor: I’m going to turn that around and talk to you about some systems we have in the US and why that information might cut against you but realize that there’s a difference.
When we come back from the break, I’m going to talk to you about credit scores in the US, what the major ones are, and what you can do to help protect yourself in terms of reviewing what there and challenging it. We’ll go into that when get right back on Make It Last.
Victor: Welcome back to Make It Last. I’m so happy that you’re joining us here today. We’re talking about credit scores. We spoke a little bit historically about what credit scores are and how they differ in other parts of the world. I’m going to talk to you now in this last segment about how they work here in the US.
In the US, we take credit scores, essentially, by information based on credit reports by credit bureaus. The three ones that most people are aware of are Experian, TransUnion, and Equifax. What’s interesting is that income and employment history are not considered by the three major credit bureaus when calculating the credit scores.
They’re, essentially, relying on the information, the data that they can mine on historical lending, creditworthiness, public records, and things like that to arrive at a score. There are different ways of calculating the score. The most famous of which is what is called FICO.
FICO is a credit score. It’s known before as the Fair Isaac Corporation. As of 2018, there are 29 different versions of FICO scores that are used in the United States. They change based on industry‑specific concerns.
What, essentially, that means is that if you’re looking to borrow money to buy a car versus a credit card or a mortgage, you’re going to have a different FICO score that has been calculated based on the information provided by the credit bureaus.
The reason why they tweaked that is that different lenders and different industries are interested in different things. If you take, for instance, the information that a auto lender is looking for, consumer with several paid‑in‑full car loans, but no credit card history will generally have a higher score on their FICO auto industry score than they would on their credit card score.
It means that they’re a better risk and probably more likely to get a car loan at a favorable rate because FICO has given a score that is specific to the auto industry. That’s important to realize is that the fact that you didn’t have a lot of credit cards or have a lot of credit history won’t impact your loan for a car.
That’s exactly what you would expect because you developed great credit history for the car. They do divide these up into different industry‑specific numbers, but there’s 29 different of them and it’s difficult to know what they all are. They’re all going to range though from 250 to 900 and that’s on the industry‑specific numbers.
General‑purpose scores, when we say what’s your credit score and you give a number, that score typically ranges from 300 to 850. It’s important to know what those numbers represent when you’re there. You have the opportunity to look this up on your own. You can get your credit report once a year. That’s at Free Credit Report, which is a government agency.
That’s not going to provide for you your FICO score because your FICO score is a calculation that is proprietary to FICO in terms of looking at the calculation and algorithms for the information that they’re bringing on.
The way that you get your score is to actually subscribe to FICO. You go to myfico.com and you sign up and you pay money. Then you can see what the actual scores are, including the scores that are industry‑specific. Right now, the major general‑purpose one is score eight.
Score eight is, essentially, how people, when they think of that’s my credit score, that’s the number that they’re thinking of. No matter where your number is, you have to figure out what it relates to for general ranges.
If you look at different scoring methodology, they’ll give you ranges on what they think is good scores for creditworthiness. They’re just using arbitrary words for good and fair. If you want to examine where you’re at, first of all, there’s another way for you to get it for free. That is, some credit card companies will actually provide for you your FICO credit score for free.
Discover does this, Chase does this. If you have credit cards with them, you can dive in and see what your credit score is on it. If you look at where credit scores range and what the different ranges are, on the scale of 300 to 850, exceptional credit score is somewhere between 800 and 850.
If you’re north of 800, you have a fantastic, fantastic credit score. In fact, one that actually very few people have. It’s a very small percentage. The majority of folks have scores somewhere between 740 and 799, 740 and about 800. We would call that very good.
The next range or the next band is somewhere between 670 and 740. You see that’s the 60‑70 band. If your score is below 670, you’re in the fair to poor number. It means that when you go ahead and apply for credit, you find that it’s unlikely that you are going to get a great score.
I actually misquoted the website. If you want your credit report, you have to go to Annual Credit Report, not Free Credit Report. Annualcreditreport.com and that will give you your information.
It’s important to realize that your score is this calculation that FICO does, but FICO is not the only provider of the score. You can actually get another form of a score that is specific to one of the credit bureaus.
In the past, Equifax and Experian used to calculate their own, but now what we see is that the only one left is TransUnion. TransUnion, essentially, is their vantage score. Their vantage score is TransUnion’s calculation of what the information’s there.
What’s important is that is the score that’s provided by a company like Credit Karma that tells you get your free credit score and monitor it. Credit Karma is taking the vantage score from TransUnion.
What’s important is that that number, first of all, is not the FICO number. It’s only based on the information the TransUnion has. If you’re looking to figure out what your score is, I would recommend that you get the score either through the credit card company that’s FICO or pay for the FICO score.
Just because you have the score that you have, doesn’t mean that you’re stuck with it forever. There are different factors that go into creating the credit score. Your payment history is one of them, the length of your credit history, different mix of credits that you have, the amount of debt that you have relative to the available credit.
You want to try to keep that to, at least, 50 percent. You don’t want to be carrying a lot of debt. Listen, as a financial planner, I don’t want you carrying a lot of debt anyway, especially consumer debt.
Generally speaking, you want to keep that number to about 50 percent if you want it to positively affect your credit score. If you can get your utilization of credit down to 30 percent of it, then it’s even better. Then, the amount of new credit that you’re getting on a regular basis and that you have been granted.
Those five factors are not equal. The biggest ones are in payment history and the amount of debt that you have. Your length of your credit history and the credit mix and the new credit, those are lower amounts.
In fact, they barely amount to 30 percent of it. The other 70 percent is on the basis of this payment history, how good of a person that you’ve had and what’s the amount of debt that you are utilizing out of your credit history.
If you make payments down and you reduce the amount of debt that you have, that’s good. That can affect your score positively pretty quickly, but if you are looking for a history of payments, they keep bad credit history on there for a good amount of time, almost seven years.
Your payment history will have its effect. If you paid late more than 30 days, 60 days, 90 days, each one of those is going to affect your credit score slightly differently, but it’s going to stay on your credit report for a number of years.
Simply paying correctly for one or two months is not going to have a positive effect. The thing that’ll have the most positive effect is paying down your debt. Then it will take time to show that you’re a good credit risk for the companies going forward.
That’s the way credit works and credit scores work. We, basically, gave over our rights to have this information any time we provide a Social Security number when we applied for credit in the first place. People are sharing this.
When we had the Equifax data breach, we saw very clearly that here was tons of information that was readily available. You had the opportunity of freezing your credit.
Equifax gave you that as a free benefit, which meant that no one could apply for it, would be automatically denied because you’re not permitting anybody to grant it. Then you’d have to turn it back on and off. You need to do that within some period of time.
I’ll end with this quick story. My dad figured out that he was somebody whose information got violated in in Equifax. He went right on and he froze his credit, which I recommended that he did.
Time came out to get the new Apple phone. It turns out he couldn’t buy it. Kept getting denied when he applied for getting the 12‑month pay off thing that they have where you can pay monthly for your new Apple phone, the new iPhone.
He’d forgotten that he’d frozen his credit. In order for him to do that, he needed to go back into the computer system, unfreeze the credit, apply for the credit, and freeze it back in.
I tell you that’s just the world that we live in right now that we have to take on all of this additional work in order to secure our information because information is so readily available and privacy is so, so low these days, especially anybody that participates in social media or gives over their information. They’re mining it.
You heard me talk about last week, tax scams and the idea that tax scams, essentially, one of them is people doing your taxes for free in exchange for the opportunity to sell you stuff.
Welcome to Credit Karma’s business model. They’re there to give you free credit score, but they’re also there to offer you credit cards. You’ll go and dive in. I did it, I signed up just to see what it was all about.
Here you go, you got a credit card offer because they’re going to get paid on the referrals that they make from putting people into specific credit cards. Watch out for that information. Anyway, I hope you found this information helpful for the week. I’m glad that you stayed with us and listened to us.
If you’re interested in either of the seminars, you go to trumptaxreformtalk.eventbrite, that’s B‑R‑I‑T‑E at the end, .com. Or you can email as at info@medinalawgroup and we can get you registered either for February 5th, which is just this Monday or February 15th, which is coming up in a couple of weeks. I hope that you can join us.
This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. We’ll catch you next week. Bye‑bye.
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