NerdWallet's Smart Money Podcast - 3 Crypto Questions, and Improving Credit to Buy a House

Episode Date: November 1, 2021

With crypto back in the news, you might be tempted to climb aboard the hype train. To start this episode, Liz and Sean talk through 3 questions you should ask yourself before jumping into the world of crypto. Then, Sean and Liz answer a listener’s question about how to improve their credit with the goal of buying a house, including whether a balance transfer credit card would help. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00-7:51 Money Question segment: 7:52-23:08

Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Piles. And I'm Liz Weston. To send the Nerds your money questions, call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. Hit that subscribe button to get new episodes delivered to your devices every Monday. If you like what you hear, please leave us a review and tell a friend. Before we get into this week's episode, Liz and I have a question for you, dear listeners. What was your greatest financial accomplishment of 2021? Did you get a new job? Maybe you moved to a new city or bought a new house.

Liz and I want to hear about what you did this year with your finances for a special episode of the podcast that we are putting together. Yes, this is your opportunity to brag. So leave us a voicemail on the Nerd Hotline by calling again, 901-730-6373. That's 901-730-NERD. You can also send a voice memo to podcast at nerdwallet.com. We want to include as many of your actual voices as possible in this episode, but we'll also accept

a written email of your accomplishments. Let's get on with the episode. This week, Liz and I answer a listener's question about how to improve credit with the goal of buying a house. One hint is that if you are having trouble managing your debt to income ratio, you might want to think about improving your finances overall before buying a house. But first, in our This Week in Your Money segment, Liz and I are talking about three questions you should ask yourself before buying cryptocurrency. I feel like we could have this statement on a loop, but there's a lot of activity around crypto, a lot of volatility. It hits another record high, then it drops.

One of the bits of news, though, is that there is now an exchange traded fund or ETF that's tied to Bitcoin. And it recently debuted on the New York Stock Exchange. That's kind of a big deal. Yeah, this development was pretty wild to me because think about it. People can now buy shares of an ETF that speculates on the future value of a highly volatile cryptocurrency. But people who buy this, they won't even actually own any Bitcoin. So that's just kind of mind blowing to me. But I think this development does underscore how normalized crypto is becoming, which might make folks think it's safer than it actually is. So we got to say this, Sean and I are not investment advisors. We're not

telling you how to invest your money. But we do want to talk about the three questions you should ask yourself before you sink any money into crypto. Yeah. And a quick shout out to NerdWallet investing writer Andy Rosen, whose article inspired this segment. Thank you, Andy. Yes. Let's get into these questions. The first one that folks should ask themselves is, are you in a position to buy crypto right now? There's a CFP that Rosen quotes in his article that suggests that people should cover other financial bases first before investing or buying any kind of crypto. This means things like paying off high interest consumer debt, making sure that you are investing for retirement,

getting that company match if you have one available, and also try to have at least a few hundred bucks in an emergency fund. Yeah, this is really speculative. Anytime that you're putting money into crypto, it's more like gambling than it is like putting money into the stock market, which has a long, long history of returns. There's ups, there's downs, but we know that there's value there. With any given crypto, you don't know that. So which segues into, have you done your homework? Do you really understand what this is? Do you know what a crypto exchange is? Do you know how blockchain technology works? And do you understand digital wallets? You need to understand

these terms, what they mean and how they work before you dive in. Folks should also know which coins are legit and which are scams, because some are just straight up scams. And also different coins work differently. Like Bitcoin is intended to be a currency and Ether, the second most valuable cryptocurrency, can be used for transactions. But its network is designed to execute something called smart contracts using blockchain technology. And then also, there's this interesting thing happening right now with Dogecoin, which is a meme currency that I have, full disclaimer. And there's also Shiba Inu coin. So for folks who don't know, Dogecoin is based off of a meme of a Shiba Inu. And then Shiba Inu coin was created to kind of ride the coattails of Dogecoin in a way.

Oh, interesting. Yeah. So Dogecoin is what? At this date of recording, I think it's probably around 25 cents. And Shiba Inu coin is a very small fraction of that. But for people who don't know the difference, they might think that Shiba Inu coin is Dogecoin. Again, there's no guarantees with any of this. You also have to figure out how you're going to keep track of your cryptocurrency. If you haven't heard, billions and billions of dollars of crypto have been lost basically because people have lost their passwords or they can't access their wallets. Of the existing 18.5 million Bitcoin, around 20% currently worth around $140 billion appear

to be lost or otherwise stranded in wallets. And that's according to an article that was published in The New York Times. My friend Mark Fraunfelder wrote a wonderful story for Wired magazine about how he lost his password and his attempts to get it back. Was that the story where he was one password attempt away from losing everything he had? Yes, yes. It was like, oh, your heart your hardest meeting. Oh my God, what's going to happen next? And we were getting the blow by blow updates from his daughter on our

carpool rides to school. And she was just thought it was the funniest thing in the world. I don't think he thought it was that funny. No, probably not. Did he end up getting into his wallet? You got to read the story. Okay. I need to go back and check that out. Mark Franfelder wired. Go read it before you invest in any cryptocurrency. Definitely. Yeah. Well, the third question that Andy Rosen mentions in his article is, how will you diversify? If you do invest in crypto, some financial advisors recommend that it be a small part of your portfolio, like 5% to 10%, kind of how you would treat any sort of risky investment.

And they usually recommend that you diversify, that you don't just buy one type of cryptocurrency, but you diversify across cryptocurrencies or sections of the crypto industry. Or, and let me throw this in, maybe just invest in blockchain technology and skip the crypto altogether. And by the way, buy with cash. I'm hearing about so many people who are borrowing money to buy crypto. Using leverage can magnify your gains,

but it can also leave you with a bunch of debt and nothing to show for it. I think people are doing this because they feel like they have to get in. They're in a rush to buy. And that is never, never a good idea. You really want to know what you're into. And again, don't borrow money to

buy cryptocurrency. Yeah, the hype train has kind of gone off the rails a little bit and people want to get in on the action while it's hot, which leads me to my fourth bonus question, which is what goal will buying crypto help you accomplish? If you can understand your motivations for buying crypto and how it will or will not help you meet your goals. That can help you understand whether this is something that is a wise investment of your money. Like for me, I mentioned earlier that I have some Dogecoin. And my goal was just to learn more about crypto with that. I purchased a small amount, largely as a joke as a way to dabble a little bit. And it's been cool to see how it's grown. I purchased it for under a penny. And now, as I mentioned, it's around 25 cents, but I'm not planning on buying ice cream with it at the store down the street because I can't do that. I'm just sitting there and watching it go up and down.

Yeah. And with any investment, you want to know your goal before you get in there, because that determines your timeline and that determines how much risk you want to take. I would say anytime you're going into crypto, it's definitely speculation. You should be prepared to lose everything and you can't be guaranteed of any kind of gain. Okay. Well, with that, I think we can get on to this week's money question segment. All right. Sounds good. This episode's money question comes from Linda Haynes, who wrote us an email asking, we would like to buy a home within a year. However, my husband's credit score needs work due to his high utilization. Should he get a new card with an introductory

rate of 0% and do a balance transfer? Thank you. Interesting. To help us answer Linda's question on this episode of the podcast, we are joined by credit pro Bev O'Shea. Hey, Bev. Welcome back to the podcast. Hi, Liz. Thanks for inviting me. Great to have you on as always. So there are a few different things going on in Linda's question. She wants to help her husband improve his credit score so they can buy a house and she's really focused on utilization, which I think is interesting. And this is something

that a lot of people may not be really familiar with. So can you start by explaining what utilization is and why high utilization could be a problem when someone's trying to buy a house. Sure. What credit utilization is, is the percentage of your available credit that you're using. Like if you have a credit limit of say $10,000 and you've got a balance of $5,000, that's a 50% utilization rate. That's high. That's too high. You want to keep your utilization under 30% and lower is better. The reason it's so important is because next to payment history, nothing is big a factor in determining your credit score. And also utilization can fluctuate a lot from one billing period or even one week to the next,

right? Sure. Depends on what you spend. And you mentioned the 30% rule for keeping your utilization below that amount. Can you talk about why that's important and the veracity of that? Because some people think it's a myth, some people follow it really closely, and I want to hear your thoughts on that. Well, it's a guideline because people want a guideline. It is not a bright line. There's not something wonderful that happens when you reach 29%. I wish that there were, but really lower is always better. And if you're watching it, you can do things like pay online and pay early. But if you're in a situation where the reason

that your utilization is high is because you have charged up your credit cards and you don't have the money to pay them back in full, you may have to look at some other options for trying to get that down. And it seems like the people with the best credit scores have utilization in the single digits. So again, it's not something wonderful that happens as soon as you get under 30%. The lower you can drive that down, the better, right? Exactly. One other thing we should mention is we've been talking about balances, but that doesn't necessarily mean a balance you carry month to month, right?

No, it's usually your statement balance. Even if you pay it off every month, you can have a high utilization if you're using a good bit of your credit limit. What's interesting about this question is that we're left to doing a little bit of guesswork because Linda hasn't let us know what the utilization is on her husband's accounts or what his credit score is. So I will also put out a pitch for our listeners to send us as much detail as you want and can give us when you're trying to send us a question because it helps us answer your questions. All right.

So now I want to talk about some ways to lower utilization. And there are a few strategies that come to mind, like just paying off the debt, maybe asking for a higher credit limit, potentially adding an authorized user. Bev, what are your thoughts on different strategies and how much they could be effective? The authorized user option, I really, really like. If your husband or you know somebody who has a high credit limit and is willing to add your husband as an authorized user, that can be a really useful and powerful thing. We should explain what an authorized user actually is. So let's say I have a credit card and I want to add you to that card. You would be the authorized user. Now, the cool thing is, is that my good history with the card

and my credit limits are exported into your credit file, into your credit report and used to calculate your credit scores. So it's a way to really give somebody a bump if they're trying to build credit or rebuild credit. One of the things that I like about it is that you don't have to apply for the credit. So there's no hard inquiry. Another thing that I like about it is that primary user doesn't necessarily have to give you a credit card. And that's something that you can make clear to someone as you ask for that big favor is that you won't have the card, you won't be using it, and you won't be charging. All that you want is the additional credit limit.

I realize this might be a hard question to answer, but how much do you think this could actually impact their credit scores and overall utilization? A whole lot, depending on how much extra utilization that they have. I did this for my children to help them with their credit scores. And in their cases, it dramatically dropped credit utilization. And I believe one of them had a score that went up about 40 points, but I have high that have been working really hard to improve their credit over time. It's often quite a long process. Could I add them onto one of my cards or is it only people that you are related to? It's not necessarily just people that you're related to. There's a business I don't particularly like of what is called credit piggybacking, where people actually pay to be added.

And you can pick a credit card that has a very low utilization, a long history. That's not something I recommend. I would suggest using somebody that you know well. And I think each credit card has different policies on this. Sometimes they'll only do it for relatives. Sometimes they will do it for anybody. I also think it can be an issue if you have a younger person on the card. I seem to remember when I added my teenage daughter to a credit card, it wasn't reported to the credit bureaus until she turned 18. And then all of a sudden it showed up. We do have information on the site.

You can do a little research to find out which cards will report authorized history to the credit bureaus and which have limitations on it. I want to go back to what she is suggesting, which is having her husband apply for a 0% card. And I want to say no, it's probably not the best idea because A, you're going to have a hard inquiry, which can ding your credit score just a little bit, and B, you don't know what his credit limit would be, that's kind of a dicey way to get it down. It seems like that would potentially be a better option if they're focused on really paying off the account to have utilization be as low as possible. Well, with the applying for a card, oftentimes the 0% requires a

pretty high credit score. So I don't know what his credit score is, but I have some other ideas that I think might help them achieve the same goal. Sure. What are they? Well, one would be getting a personal loan and then paying it off. A personal loan does not affect your credit score the same way that high utilization does. Okay. And why is that?

Regular installment debt, as long as you're paying it on time, has almost a neutral effect on your credit. And that could actually potentially help in some way because it'd be adding to the diversification of lines of credit on their credit reports. Is that right? Well, if he doesn't have an installment loan, definitely. And it gets that revolving credit off the table, puts it over in the installment category. There would be the same hard inquiry hit probably when he applied for that personal loan. But going forward, it would be better for credit utilization to have that moved over to the second category. One thing that comes to mind is that it wouldn't actually address the core issue of the balance itself because they would have the

same debt to income ratio if they haven't actually paid off the amount in the personal loan. And that could potentially raise a red flag for a lender if they have a high debt to income ratio. Right. That isn't part of the credit scoring formula, but lenders do obviously take a look at that. And if they haven't paid down the debt or made it disappear, one way to make it disappear is to use a 401k loan. So this is getting a little confusing, but we don't typically recommend you borrow against your retirement. But if they did, if he did, and he moved the debt from the credit cards to his retirement account through a 401k loan, it would effectively disappear. It would go off the credit

reports. And I don't think a lender would ask about it. So it's a way to make debt invisible. It's just super risky because if you lose your job and you can't pay that loan off, that becomes a withdrawal and that's bad for your future. So I keep coming back to the fact that there is this debt that our listener and her husband has to pay off. No matter how you try to disguise it through having a new balance transfer card or a personal loan or a 401k loan, it still should probably be wiped out so that they are in the best financial position possible to become homeowners. It brings me back to the question of whether they might actually have a cash flow problem if they're having trouble

keeping utilization low. Yeah, that's a really good point, Sean. We don't know enough about their situation to know if they're otherwise in a good position to be homeowners or to be buying a house. That's a bigger question than what she actually asked. The thing with paying off debt, especially if you're in the market to buy a home, is you might need that money for your down payment. You might need it for closing costs. So it's a good long-term strategy and we're all in favor of paying off debt. But there are situations where maybe you want to hang on to your cash and maybe the better solution is to go the authorized user route. But then you have to find someone to do it, which makes me wonder whether the asking your

credit card issuer for a higher credit limit could be the easiest one for some people, because all you do is pick up the phone, sometimes even just log on to your portal online and see if they can raise it. And then the worst they can do is say no, right? Well, no, that's not the worst they can do. The worst they can do is say no and add a credit inquiry to your file so that you lose a few points on your credit score and you're in the same situation that you were. Well, then nevermind. I think if the reason that you're applying for additional credit or asking for a higher limit is because you're not able to pay off what you have, your chances of a yes are not as high as you might hope. And in this case, we know he has a spouse who obviously has good credit or better

credit who probably could add him to a bunch of credit cards or at least one. So he does have a pretty good route to getting his score up. Because our listener is really focused on buying a house, I want to talk about a few options that they might have for strengthening their credit as they look to buying a house. So there are a few main tactics that we think about and that we know that are pretty reliable for improving credit, one of which is paying all bills on time,

since credit history is the biggest of all bills on time since credit history is the biggest of all factors that affect your credit score. And I'm wondering what other options you think they should look into when they're trying to manage their credit. Checking your credit report, preferably a year before you apply for a mortgage, is a really good idea because you don't want to find out that there is erroneous information that is holding your score down when you apply for a mortgage. The sooner that you take a look at this and clean up any problems, the better. And right now you can get weekly access to all three of your credit reports.

You need to go to annualcreditreport.com and you can pull them from Experian, from Equifax, and from TransUnion. And that will give you the reports that the lenders are using to create your credit scores. And this ability to get your credit reports for free weekly runs currently through April of 2022. And if they ask you for a credit card, you are on the wrong site. People will type in annualcreditreport.com and just go to their first result. And those are typically ads. So they're going to a credit monitoring site, not the actual site. So actually type this into your browser bar, annualcreditreport.com. And even some of the credit bureaus have

services where they will try to charge you. And it seems like you have to pay to get your credit reports, but that's typically a credit monitoring service as well. So when you're just getting your credit report, you do not have to pay. That's really important to know. Another thing that people who are looking to maintain and build good credit in the lead up to buying a house should think about is keeping their credit cards open

because closing a credit card can reduce the amount of available credit that you have, which can then lower your utilization and ding your score. Any other factors that you think people should be thinking about when they're trying to manage their credit as they hope to buy a house? One more thing is avoid applying for other credit. If you're going to apply for something big like a mortgage, just at least for six months, and I would prefer even longer, don't apply for any other credit. So Bev, don't personal loans also

ding your credit score? They do. They can take off two or three points. It could be more than that if you have just recently applied for credit. But if you're able to pay off the balance there and move that to the side of the ledger that is loans rather than credit cards, you may see that the gain in points offsets the deduction that you get for applying. So if that's the route you want to go, apply as soon as possible so that you have more time between applying for that and applying for a mortgage. And if nothing else, you're having trouble qualifying for a regular conventional mortgage, you could also look into FHA, VA, those kind of

mortgages, right? Those are good options. And that's good because they tend to have a lower barrier to entry in terms of your credit score to get approved, right? Right. And often allow you to get in with a lower down payment. Oh, that's a good point. And we'll include information in our show notes post about how to shop around for these loans. Well, Bev, thank you so much for joining us. Thank you for having me, Sean. And with that, let's get on to our takeaway tips and I can kick us off. First up, prep your credit before home buying. That means disputing erroneous information on your credit reports and working to get

your credit scores above 620. Next, understand how credit utilization comes into play. Higher utilization can drag down your credit scores, which might worry potential lenders. And lastly, take steps to lower your utilization. You can ask someone with a high credit limit to add you as an authorized user or ask for higher credit limits. But paying off your debt is likely the best approach for your long-term financial health. And that is all we have for this episode.

Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And be sure to subscribe, rate and review us wherever you're getting this podcast. Here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.