Money Rehab with Nicole Lapin - Hear How You Could Improve A Low Credit Score By An Average of 21 Points In 3 Days (Listener Intervention)

Episode Date: August 5, 2024

Your credit report is like your financial report card: it can really affect your financial future if you’re not acing your credit score. Today, a Money Rehabber who isn’t happy with their credit score calls up Nicole to get a strategy to improve it. The result? Nicole shows her a tool that could raise her low credit score by an average of 21 points in just three days.   Join today’s Money Rehabber and give your credit score some love! If your credit score is 619 or lower, you can sign-up for Credit Builder from Intuit Credit Karma by visiting creditkarma.com/moneyrehab.   Credit Karma is a sponsor of this podcast episode. Credit Builder plan is serviced by Credit Karma Credit Builder and requires a line of credit and savings account provided by Cross River Bank, Member FDIC. Learn more at creditkarma.com/moneyrehab.

I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Your credit score is like your financial report card. And maybe your report card wasn't all that important once you got out of school, but in the money world, it is very important. A low credit score means you might pay a higher interest rate on your credit card, and when you're buying a home, it will mess with your mortgage rate, and it can be the deciding factor in whether or not you get a mortgage at all. Net-net, if you need to take out a loan for something important, banks will look at your credit score to approve you or not. Today's Money Rehabber Jen reached out to me

because she's not happy with her low credit score and wants some help making a strategy to possibly improve it. In our conversation, I give her a plan that could help her raise her credit score by an average of 21 points in just three days. If you're looking to show your low credit score some love, this plan might help you get started too. So let's dig in. Jen, welcome to Money Rehab. Hi, thanks for having me. So I know you're feeling like your credit score needs a little rehab, needs a little love. Yeah. Tell me a little bit more about what's going on. I think that I have made some poor choices in the past, had a little lifestyle creep, trying to have a little fun while working. And I seem to like got myself into trouble. So I've been working on trying to pay it back, but you know, I'm at a time where I think about wanting to buy a home in the future, like

maybe needing a new car. And it's kind of scary because I make some money, but you know, my credit score doesn't really reflect that based on my past choices. Yeah. I mean, even saying that you feel like you suffered from lifestyle creep, like giving the words to the problem is the first step. The first step to any recovery is admitting you have a problem and being really clear about it. So now that you have this goal of rehabbing it, getting to a better place with your credit score. First of all, I love that for you. You're thinking about this in the absolute right way because improving your credit score is really the basis for such great financial health. And it's going to have a positive impact on your entire financial life. So it's a really great place that you've identified that you want to

start. Speaking of your financial life, let's paint a picture here. What exactly is your credit score? It's like 575. Okay. Has it been consistent or has it been lower? It's been probably anywhere between that and maybe like $640,000, somewhere in that range. It kind of ebbs and flows depending on like what's going on. Do you see a correlation for when it's gone up or down? Sometimes I get really aggressive about making repayments and then, you know, it's summertime and I want to go on vacation and then I really sometimes indulge a little bit too much. You know, I work really hard. I work a lot of hours. And sometimes I think that I should reward myself a little too

much. And then I put it back on the credit cards again, because I'm like, oh, I have all this room and it feels like free money, even though it's not. But then it kind of becomes a cycle. The cycle is really tricky to break. And you are a nurse and doing amazing work. And you absolutely do deserve to treat yourself. And we can talk a little bit more about a plan for that in just a sec. But how do you feel about your financial life overall right now? I mean, I think that I make a reasonable amount of money. I'm happy in my career, like financially. I think that I don't have enough in savings. I have some investments. I feel okay about my contributions to my 401k and my Roth, but I really just have this credit card debt hanging over me. So that is bothersome.

How much debt do you have right now? And is it all credit card debt? I have student loan debt as well. So I don't count my upsetting debt. I probably have maybe about $20,000. Okay. And what percentage do you know? I think it's around 18 to 20% depending on the card.

And you bring home about $4500 bucks a month take home. Do you keep a budget? No. Do you want to keep a budget? I think I have to. So once upon a time, I hated the word budget. It like made me feel like a crash diet. And then I looked for templates that might make sense. And I hated all of them. And it just felt not sustainable for me. So I made my own, and I called it a spending plan that was kind of like an eating plan, something that was sustainable. It wasn't like some crazy diet.

It was something that allowed you to have the Hershey's Kiss or the chocolate or whatever that kept you going and allowed those small indulgences. So for me, a spending plan felt more fun. It felt more focused on what I could spend on, not what I was not getting or what I was depriving myself for. I imagine that resonates a little bit with you too. It does. It does for sure. If you're not allowing yourself for those shopping sprees, what are you spending on, by the way? I drug up choices handbags. But I mean, just like, I'm trying to spend more on like things of value to me, experiences, trips, going out with friends. I've been really, really good. I've

been selling my bags when I'm not using them to trade them. So that feels better to me. Because then I'm trading it and it's like it doesn't count. But that's like how I get my little fix. But probably experiences. Okay. Well, you should have experiences. Like you work so hard. You work hard for your money. Your money should, you know, work for you in a lot of different ways.

It should work for you in investing, which we can talk about in a sec. It should also work for you in allowing you access to cool experiences and vacations and memories and all of these things. So I definitely never advocate to cut everything out cold turkey, like don't buy a latte. Don't go on a trip because it just doesn't last. Like people will come to me a few months later and they're like, I was so good, which is the words you said, by the way, I was so good. I didn't get anything. But then I got like a Gucci purse because it was so good. I think, yo, you could have bought all the lattes during that time. So for me, the spending plan that I think about, I break it down into the three E's. I love alliteration. So

of what I make, 70% goes to the essentials. So these are things that are essential. You can't live without your food, your housing, your transportation, your electricity, all of your bills, all of your non-negotiables. And then 15% to the end game. So the future gen, your retirement, your savings, your down payment for your house, whatever that future looks like for you. And then 15% of your take home goes to the extras. So those experiences, whatever the next trip is, whatever the next, you know, weird excursion is, whatever does it for you, like, have that set aside that you know goes to that because that will keep you more on track and keep you from binging financially

later on. In the past, I have tried to set up these things where I've opened a separate checking account. And I was like, this is my fund money account. I have a second job. I was like, okay, most of my money for my second job goes into that. But then I start to mix and mingle a little bit. I start pulling money. I implement these systems. But then I end up pulling money out of my fund money account for bills or vice versa.

Or I start pulling from my savings account to cover expenses. It happens. It's hard. It happens. And you can set up these systems and guardrails for yourself so that you like safeguard yourself from yourself. Automatic transfers are really helpful with that. It's like, you don't see it coming out and it goes directly somewhere. I have a friend who put like literally put her credit cards in the freezer. So when she wanted something, she had to wait for

them to defrost. And by the time they defrosted, she still wanted them and she'd get it. But, you know, we all have these systems and it's really about finding it's trial and error, finding what works for you. So if we do the math based on your take home pay, 70% of your overall take home pay is $31.50 for essentials, $6.75 for the end game, and then $6.75 for extras a month. How does that sound? I mean, it seems reasonable. And now I'm about to get a new job and I'm thinking about, I know it's probably bad, but it feels like a good and bad move to take the money out of my 401k when I leave my job and pay off credit card debt.

And you have a separate Roth? I do. I have a 403b through my employer and I have a Roth also. And how much are in those accounts right now? It's about $35,000. Is there a plan that we can come up with to tackle your debt? Are you making payments towards the debt? I am. I mean, I make all my minimum payments and then I try to pay a little more. But then sometimes I view that as like free money. That's based on my credit card. Got it. What if we accounted for some of those debt payments within your essentials? Are you renting?

Do you own? Like how much is your rent? It's up $1,500. And then food and transportation, car stuff. How much is that? Utilities. Car stuff. My car payment is like $500.

My insurance is like $120. Okay. And do you think that 675 as an extra budget is doable? Probably if I showed some restraint, yes. Okay. And then 675 that I had for the end game, it sounds like you're already putting money toward the end game. Yes. Okay. I mean, I compare interest rates to see which moves are typically going to be better. If your credit card is at 18 or 20%, right, then that's snowballing out of control. And your 401k or your retirement accounts are, you know, maybe growing seven to 10% over time. That's compounding. That's going to be really important to keep growing because interest is making interest on itself. But you also have this big, ugly debt monkey on your back. And let me just say before we try to tackle it,

I know that debt is so stressful. And I was in credit card debt. I was ashamed of it. stressful and I was in credit card debt. I was ashamed of it. It was always on my mind. I got out of it. I'm debt free. So honestly, if I could do it, you could do it. And I didn't know any, like I came from an immigrant family. Like I didn't know any of the credit cards. Yeah. So they didn't talk about, you know, any of that. I'm assuming the money's like in a closet or in a safe in the basement. It's a hundred percent. The cash is hiding somewhere. Yeah. Yeah. We had a safe under the sink. And until recently, I always had a safe under the sink. Anyway, those ways that you saw growing up are really hard to break. They are. And you're doing it and you're taking these steps. And I'm super, super proud of you for doing that. So I'll just say that what you're taking into consideration really is what

is going to compound faster, your debt or your investment. So stock market historically has grown 7% to 10% year over year. If that interest rate on your debt is more than that, then you're going to erase a lot of those gains that are in the stock market. So for me, when I was in credit card debt, I think my APR was also around 20%, like insanity. So I took the 15% for my end game and I just put it toward paying down my debt. So does that sound like something you could do? can you take the 675 and consistently put that towards your debt, but still contribute to the 401k with the match? If the new job has a match? It does. It actually has a better match than my current job. I mean, I can, I feel like 675, though, with the interest, the debt feels like it would take forever. And I feel like this sort of

just feels like a way to wipe it away. But it also really hurts my feelings to get taxed on it and then take a 10% hit on an early withdrawal. I was just going to tell you that, but I'm very glad that you already know. I did. It feels terrible to lose whatever, like 10 grand just by taking the money out. But it also feels like it's a fresh start. I mean, I'm 36. So I have a lot of working years ahead of me to contribute. So I don't know. I don't know what the right move is. And to be clear, you would be doing this with your 401k. So you would take some of it, and then you would roll the rest of it over to the Roth that you have or to the new 401k

for the new company? I don't have to look. I'm not sure how it works. Because it says, when I look at it, it says, do you want to like completely withdraw? Okay. So generally speaking, I would say like robbing from your future self, like sassy old lady Jen is the last resort. Like we don't, we don't want to hurt her. We love her. She'll thank us. I promise. So let's put a pin in that for a second and let's look at some other options first. So I was actually going to talk to you about another tool from Intuit Credit Karma, who's the sponsor of this episode. First, they actually have a debt repayment calculator that we can use. And this

is in addition to being able to just check your credit, which it sounds like you do regularly, not too much. So you can make a game plan based on how much you can pay every month. So either you can quickly pay it off. You can put 15% of your paycheck toward paying off your debt. You'll be debt free in three years and four months to be exact. I know that you don't want to have this take forever. And, you know, for me, I set myself a two year deadline, and I broke it down from there. Do you have a sense of when ideally you want to be debt free? I know, like right now, I mean, the sooner the better, honestly. I mean, I want to be realistic. And I don't want to

hurt my future self. But also also I know that paying my debt will increase my credit score. And I mean, that'll be the quickest boost. And I mean, I just want to be in, well, I don't really want to buy a house, but I wanted to be in the position that I could, if I wanted to. You want options. It really, it can be cliche and I hate cliches as you know, from listening to the show, but money is freedom. It is power. It is choice. So I get it. If you wanted to be debt free in two years, let's say, so that's what I did. Based on how much debt you have, you'd have to contribute $998 a month. Okay. And you'll have spent more than $3,900 in interest doing that. If you want to be debt-free in a year,

you'd have to pay basically $1,800 a month. Yeah, I'm not sure. I mean, that seems aggressive. I mean, appropriate, but aggressive. Okay, so neither of you are like pass on both. It's fine. No, I don't want to say pass on both. I mean, two years sounds like it sounds more reasonable. And my student loan payments interest is hurting my heart, too. Interest sucks, but interest when it works in your favor is amazing, which we can talk about that because growing it quickly is also part of this whole equation. Hold on to your wallets. Money rehab will be right back. OK, I get it. When it comes to pursuing your money goals, the financial system can feel complicated. With so many options out there, it is easy to feel overwhelmed. That's why I'd like to thank Intuit Credit Karma for, well, first sponsoring this ad.

Thanks, guys. But more importantly, for giving you everything you need to outsmart the system so understanding and navigating those choices around your money feels less like walking on broken glass and more like a walk in the park. Credit Karma's tips, tools, and recommendations are meant for you. Yes, you. As in personalized for your financial situation. You know I love me some personalized attention. And Credit Karma is so much more than a credit score app.

With Credit Builder, you could raise a score of 619 or lower in less time than you think, all while saving money at the same time. Simple. Credit Karma can also help you find the right credit card offer for you, giving you more confidence when applying. And the best part, you can do all of this while walking your dog in the park, or your cat, if that's more your style. I won't judge. So take a walk down the sunny side of your finances. Check out all these great features and more on the free-to-download Credit Karma app. Visit creditkarma.com slash money rehab to learn more and for full terms. Credit Builder Plan is serviced by Credit Karma Credit Builder and requires a line of credit

and savings account provided by Cross River Bank member FDIC. And now for some more money rehab. So paying off your debt is, as you rightly know, going to help your credit score. There are also other ways to glow up your credit score too. Do you know the five factors that determine your credit score? I'll remind you. It's not a quiz. Okay. So payment history, the amount you owe, credit history, new credit, like the variety of credit you have. It sounds like the biggest factor dragging down your score is your utilization rate. Like you're just, you're, you're overspending based on your limit. Ideally you want to keep, you know, the spend to about 30% of the overall limit. So if you have 10 K as your credit card max, then you want to try to keep it to like 3K.

So your outstanding debt is what's dragging you down the most. Yeah. Well, I have a tool that I think could get you started along your journey to reach your credit score goals. This tool is called Credit Builder. Have you heard of it? No. So it's like a loan and paying back loans is something that also factors into your credit score. But with Credit Karma's Credit Builder tool, you're paying back a loan basically to yourself. But it's different.

And in my opinion, it's a better fit than a literal personal loan that you would go and take out at a bank. As you're researching improving your credit score, which it sounds like you've really been doing, which is amazing. You're going into this eyes wide open. Have you looked into personal loans at all? I have done it in the past. I actually have one that I'm paying back still, um, that I had taken out for school at one point. Okay. How much is that? How much is left on it? Um, I want to say like 8,000. Okay.

Didn't mention that one to me. So it sounds like you kind of lumped it though, to be fair, in the student debt category. Yeah. Some people take out personal loans in hopes that they'll build credit history, which in turn boosts their credit scores. But first of all, to qualify for a personal loan, you'll typically have to go through a hard credit pull, which can likely cause your score to dip temporarily. Plus, some personal loans may come with high interest rates. So while personal loans may make sense for other situations, like if you're refinancing credit card debt, they might not be the best option for the sole goal of raising your credit scores. Yeah. Do you know what your interest rate is? I think it's pretty high.

I don't remember, but I want to say probably like 25-ish. It was like 25, 47. So that we might want to prioritize actually over credit card debt. It sounds like that one might be higher. Yeah. I mean, but I think that the payments are lower. But you really want to prioritize the highest interest rate first. So part of my little homework for you is to really get clear. You know approximately, but this really matters in the long run. So when I was going through this, I ranked my highest interest rate debt first. And I tackled that first because that's going to snowball out of control. There are two methods to this. It's the avalanche method and the snowball method.

I like the avalanche method because you're taking on the highest interest rate first and then you're paying those down because those are going to accumulate faster. Yeah. Some people like the snowball method, which is like pay the smallest bill first because it will give you more momentum. But I think that I don't I don't like that because it's not actually. If you think about it, it doesn't make the most sense. Right.

Right. So when you're thinking about raising your credit score and living happily ever after, Credit Karma's credit builder tool could really help you. It's not what we talked about with the personal loan. Instead of paying the bank back for your personal loan, like you're currently doing, and having to factor in all of that interest

working against you, with Credit Karma's credit builder tool, you're just paying yourself. So there's no interest. There's no credit check required. And on average, people have seen a 21 point increase in their credit score in just three days. Oh, that's very helpful. Does that sound like something you'd want to try? Sure. I mean, I am open to trying anything for a better future. Great, great goal.

And I am in there with you. So this is how this works. So Jen, first decide how much money you want to commit to savings every month. And we can talk about that. And then you set up these automatic transfers so that when you're paid, that amount gets deducted automatically so that you don't have to think about it. And then every time you save 500 bucks through these automatic transfers, Credit Karma will send you that $500. Pretty simple. Yeah. I'm going to stop there. How do you feel? I mean, I think that sounds good. And then I could

just like use that lump sum theoretically. So I pay my debt, which sounds like the reasonable thing to do. It's not a treat. Yeah, that sounds reasonable. From my perspective, my homework for you, Jen, is if you're still thinking about liquidating your retirement account, it's a really complicated question. I've done episodes on this. I'll link those in the show notes so you can listen to it. It gets complicated. And as you know, there are penalties. It's not my first choice. It seems like the easy choice, and it's not my first choice. It seems like the easy choice, but it's not my first choice. We are in violent agreement here. So maybe, you know, I don't know if you have a financial advisor, get a better sense of what your options are because you do

have options. That's a great news. But as you're assessing this, I think make a spending plan feels good for you. You can use mine. If that jives with you, I will so not be offended. If it doesn't, this is just to get you thinking. Is it possible to contribute $6.75 a month? Is it possible to contribute $9.98 a month? Like, what is it? I think you need to sit down with that yourself and make that commitment to yourself.

This is for you. This is not for me. Like this is only for your future self and your greater financial good. No, I 100% value your opinion. Thank you. I'm only here to help, but I would say the other thing to think about is really to rank your highest interest rate credit card debt first. Get really, really clear. Is it 25%? Is it 26%? It's really important. All of that matters. So the more specific, the better. And then I'll just say to try the Credit Karma Credit Builder. Just go to creditkarma.com slash moneyrehab and click on the Get Started button under Credit Builder. It's a no-brainer. Yeah, it seems easy. You're welcome.

No, really, thank you. It is a harmless act. It's a no brainer. Yeah, it seems easy. You're welcome. No, really. Thank you. It is a harmless act. It's a helpful act. It is a helpful me saving money for me. Are you gonna can you please let me know how it goes? Of course. How do you feel right now? Overwhelmed and excited. This is something I need to get a hold of because I've been trying and failing and I really need like better habits. And I need structure and I need to like there is no reason why I am not in a better financial reason other than myself well right now yourself my new friend please don't talk about her badly she's awesome we just spent what more than 30 minutes talking about how to pay off your debt like Like she's awesome. So don't talk badly about her.

Forgive your former self for what she didn't know. It's okay. Like she was doing the best she could with the information she has. But now Jen, like I will give you tough love. It's not okay. Moving forward. We just had this full conversation about this. Oh, it's not okay. It's not okay. So it's a combination to me. What's always worked is forgiveness and tough love. It has to be both. Forgive immigrant's daughter, right? Forgive that safe mentality. Forgive all of the times that you needed to spend because you were going through a breakup or something like, Oh yeah, there was a Chanel bag with a breakup last time. I totally, I totally understand. It's not about being perfect. It's just about making progress.

So progress, not perfection, but we have to make progress from here on out. Because for me, really like after those two years that I was clear and serious about getting to the other side, I felt a huge load off and I didn't want to go back. I was like, I did this and I beat myself up for so long, but I'm not going to see those days again. I did it. I'm done. Like, and we're not going through two years of. No, I'm not going to do it again. I can't. I'm really proud of you. Can you say that you're proud of yourself too? Because you should be. I am proud of myself. I'm not saying that I need like a healthy dose of shame. I'm going to call it a reality check.

We're here. This is reality. Like I gave you the cold, hard numbers. Numbers don't lie, but like money is mushed together with a whole bunch of financial trauma and feel like it's and emotional and stuff. But like, look at this. You can be clear you're a nurse and you had to study way more to be a nurse and to be able to administer the CCs or whatever that you're doing. I don't know anything about this, but you had to go through a ton of schooling, a ton of studying. Like you have figured out harder things in life, Jen. I know. I know. And you can do this. Well, thank you so much for taking the time to talk to me.

I really appreciate it. I'm excited to see how it goes. I'm excited to see how it goes, too. For today's tip, you can take straight to the bank. If your credit score is 619 or lower and you want to do some credit rehab, go to credit karma dot com slash money rehab and try credit karma's credit builder. Oh, and this is not a tip, but more of a favor. I have another super short anonymous survey about the pod, and I would love to hear from you again. And if you already filled out the survey that I put out in June, well, first of all, thank you so much for being my hero. And I love your hero-ness again in this survey as well.

You can find it at moneynewsnetwork.com slash moneyrehab. Your feedback is such a huge, huge help to me and all of us here at MNN. So if you want to support the show and tell us how to make it better just for you, we want to do that, but we can't do it unless we hear from you. So please take a minute to respond to the survey. Again, it's moneynewsnetwork.com slash moneyrehab. Thank you, fam. You're the best. The freaking best. You are the freaking best. Thank you. Credit Builder Plan is serviced

by Credit Karma Credit Builder and requires a line of credit and savings account provided by Cross River Bank member FDIC. From December 2023 to April 2024, members with a TransUnion credit score of 619 or below who opened a Credit Builder Plan and had it reported on their TransUnion credit score of 619 or below who opened a credit builder plan and had it reported on their TransUnion report saw an average credit score increase of 21 points in three days of activating the plan. Late payments and other factors can have a negative impact on your score, including activity on your other credit accounts. Visit creditkarma.com slash moneyrehab to learn more. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes.

Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make. Thank you.