NerdWallet's Smart Money Podcast - Credit Card Secrets Revealed and How to Balance Multiple Loans

Episode Date: June 3, 2024

Learn handy tips you probably didn’t know about credit cards and why paying off loans could actually lower your credit score. 00:35 Credit Card Tips: What are some helpful credit card tips? Can paying off your student debt negatively affect your credit score? Hosts Sean Pyles and Sara Rathner discuss insider credit card tips to help you understand our options when shopping for and using credit cards. They begin with tips and tricks on navigating interest rate changes, maximizing reward points, limits on applying for new credit cards, and how you can strategically upgrade or downgrade your credit cards.  6:00 Listener Conversation: Xay from Minnesota joins Sean and Sara to discuss the end of their student loan journey and ask questions about the impact on their credit score as they plan to finance a new car. The Nerds dive deep into how paying off a loan might affect your credit score and share strategies to manage credit card debt for better credit utilization. They provide practical tips on building and maintaining a strong credit score, including the benefits of secured credit cards and credit builder loans. They also share strategies for car shopping, including loan pre-approval and considering a mix of new and used vehicles. NerdBuild is a credit-building loan designed for those with no or low credit history. Just set your automatic monthly payments and watch your credit score climb. Learn more at https://www.nerdwallet.com/article/finance/how-to-build-credit  Get NordVPN 2Y plan + 4 months extra here ➼ https://nordvpn.com/smartmoneypod It’s risk-free with Nord’s 30-day money-back guarantee! In their conversation, the Nerds discuss: credit card interest rates, credit scores, student loans, credit card debt, auto loans, financial tips, credit card hacks, credit utilization, credit card points, loan pre-approvals, car loans, paying off student loans, credit card interest rates, credit builder loans, NerdBuild, credit card signup bonuses, credit card companies, how to manage credit card debt, credit limit, Federal Reserve, credit score simulator, debt to income ratio, credit mix, car shopping, product change, loan rates, financial goals, side hustles, credit report, credit score calculation, budget calculator, credit builder loan, car financing, credit union, and mix of credit. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Sure, you know how credit cards work. You probably have a pretty fancy one in your wallet right now that you're getting as many points from as possible. But what about the insider tips? Are you sure that you're up on those? Well, this episode, we've got you covered. Welcome to NerdWallet's Smart Money Podcast, where we help you make smarter financial decisions,

one money question at a time. I'm Sean Piles. And I'm Sarah Rathner. This episode, Sarah and I talk with a listener about what paying off their student loans might do to their credit, including how it could impact their ability to get a good rate on a car loan. But first, Sean and I are giving you the inside scoop on some credit card secrets. Well, not exactly secrets, per se, but things you probably didn't know about. Yep. In fact, we have five things that we're going to share with you. Before we get into them,

I want to give a shout out to NerdWallet writer Melissa Lambarena, whose article inspired this segment. Okay, diving into number one, your credit card issuer can change the terms of your account with little warning. Your perks, rewards rates, even your interest rates can change at the discretion of your credit card issuer. Benefits can change at any time with no rates, even your interest rates can change at the discretion of your credit card issuer. Benefits can change at any time with no warning, but your credit card issuer generally has to give you 45 days notice if your interest rate changes. One big exception is when the Federal Reserve changes interest rates. In that case, your credit card APR may go up or down, and your issuer doesn't have to notify you about it. And this extends to closing your account too, or reducing your credit limit. If the credit card

issuer wants to do so, they have the right to do that. Fun, right? All right, let's get to number two. Your interest rate may be more flexible than you realize. Just like your credit card issuer can increase your interest rate if they want, they can also lower it. Now, they're not likely to do this unprompted just because they want to be nice, but you might be able to call the number on the back of your credit card and ask if your credit card company would be willing to lower your interest rate. This can be an especially helpful tactic if you're having a hard time making progress on paying off your credit card debt, which is a situation that a lot of people have found themselves in as the Federal Reserve has raised interest rates over the past couple of years. And just know that there's no guarantee that the credit card company will lower your rate.

But try giving them a call and asking because the worst they could say is no, they're not going to raise your interest rate just because you asked. Just to punish you. Yeah. No. Okay. Now on to number three, that sweet signup bonus that inspired you to sign up for a new credit card in the first place. Turns out you might not qualify for it. You may run into this if you recently applied for a credit card with the same issuer. Chase, which is a NerdWallet partner, has what's known as the 5-24 rule. Essentially, Chase won't approve you for a new credit card if you've applied for five credit cards across any issuer within the last two years. You may also face limits on earning bonuses on cards from American Express, which is also a NerdWallet partner.

In some cases, if you already had a certain card, you may be ineligible for a welcome offer on a different Amex card. In general, you'll find a card issuer's rules about this within the card's terms and conditions. It's a long, but I promise you, worthwhile read. All right, number four, the value of your rewards may vary, especially for co-branded store credit cards or travel cards. The points you earn will be more valuable if you redeem them in certain ways compared to others. Like if you have a travel credit card, your points may be more valuable when redeemed for travel than if you redeem them for cash back or when

you're checking out on Amazon. All right, on to our final tip, you may be able to upgrade or downgrade your credit card. In the industry, this is called a product change. And it can be really handy if, for example, you have a credit card that has an annual fee and you don't really want to pay that annual fee, but also don't want to cancel your credit card. You can call up your issuer, ask for a product change to a different card in their lineup that doesn't have an annual fee, and you should be good to go. You could also upgrade to a different card that has better perks, but that might mean taking on an annual fee. So just keep that in mind. All right. That's all we have for credit card tips for now.

We'll probably have a few more in the future, keeping them in our back pocket. So let's turn to our new nerdy question of the month, which is, listener, what are you most excited about financially this summer? Sean, how about you start us off? What are you the most excited about? Well, I just used a bunch of credit card points, actually a sign up bonuses worth of credit card points to book a trip to Chicago to meet up with my twin sister for our birthday later this month. So I'm really excited to get back to the city that I called home for a number of years and get together with my twin and have so much fun in the sun. And I'm also feeling great about it not costing me real dollars to get there.

What about you, Sarah? Well, my family joined a local pool this year and it opens for the season in five days. And I have my bathing suits ready to go in my drawer. We tested it out last summer for a much lower cost by joining friends as their guests. And joining a private pool is expensive, but I think it's going to bring us a lot of happiness.

Yeah, that sounds really nice. So listener, we would love to hear what you are most excited about financially this summer. Maybe you're finally buying your first home or the date that you'll be out of credit card debt is coming up. Or maybe you've been saving up cash and are excited to blow it on a great summer vacation.

I am a fan of that. So share it with us by leaving us a voicemail or texting the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us a voice memo at podcast at nerdwallet.com. And while you're at it, listener, send us your money questions. Maybe you know what you wanna do with your money this summer, but you aren't sure how to do it. Well, we nerds can

help. You can email us your question or send it to us on the nerd hotline. Now let's move on to our conversation with a listener. We're back and answering your real world money questions to help you make smarter financial decisions. This episode, we're joined by a listener, Say, who lives in Minnesota and has some questions about paying off their student loans and how that might impact their ability to finance a car. Say, welcome to Smart Money. Hi, thank you for having me. I'm excited to listen and hear everything you all have to offer for me as I think about my decisions.

Of course. So Say, before we get into the conversation, a quick reminder that we're not here to give you individualized personal finance advice. Our goal is to give you the information that you need so you can make the most informed financial decision possible for your situation. Does that make sense? Yes. Thank you. Perfect. All right. So we know that you're getting close to paying off your student loans, which is awesome. But you're worried about whether this bit of good financial news might actually harm your credit score. So before we get into all of that, can you talk to us about your financial situation in general right now? What are some of your financial goals, pain points, and what's your credit score? So my credit score is upper 700, so like 783, 783, that kind of range. Paying points, I think credit cards,

but I know that, you know, that's ongoing. And so I'm not too worried about that. But I'm really excited to purchase a new car. I've been with my car for a really long time and kind of want to get a new one. And so I'm trying to save up for a car and then very interested in getting a house eventually. And so I want to get a car first before I get a house. And so that's kind of part of the financial plan that I'm trying to work with and figuring out what's the best next step. And you're also planning to pay off your student loans within the year, right? Yes, I am, which is super exciting. It's been too long. But of course, it's like my longest relationship in terms of credit. And so I do feel nervous about, oh my gosh, if they close this account,

like does it shift or change my credit score? I understand that concern entirely as someone who's getting kind of close to paying off their student loans as well. And I'll be paying off my own car loan within the year. So I've been sort of wondering how that might impact my credit. But the truth is that paying off a loan may lower your credit score, which can be a little bit frustrating. It's also difficult to say precisely how paying off a loan might impact your credit score because there are so many factors that go into any individual's credit score. If you want an estimate, I would recommend playing with NerdWallet's credit score simulator. And that can just show you how different actions might change your score one way or another. Just know that even though it's not uncommon for paying off your student loans to maybe make your

credit score drop a little bit, it's likely to just be a temporary dip. And given that your credit score is in the high 700s, I don't think it'll be too catastrophic to your ability to get a good deal on a car. Thank you for that. That's good to know. I'll have to check out the simulator. Yeah, it's kind of fun to play with. I know it's a little bit nerdy to even say that, but it's just cool to see how you might be able to tweak your score one way or another, depending on certain actions. You mentioned credit cards as a pain point for you as well. Do you also carry debt on credit cards? I do, but it's less stressful for me. And it's like a part of building my relationship to with

other credit card companies, aside from the relationship I have with my school loans. And so I'm working through that. And I think that it's a healthy relationship, then I would say like the start of my college years or something like that. And so I feel like I'm at an age where I'm more financially responsible. Have you thought about what a potential plan might be for paying off your credit cards? You know, it would be helpful to actually write it out and be like, okay, this is how much I should plan for.

I think for me, what's helped is every time I get a bill, I know to not just pay the minimum, but I pay more than the minimum as much as I can to work my way down from the credit card. And so that's been helpful. But of course, I would love to jump on Excel and map out like, hey, what does it look like, right? And what's the interest rate? And how is it impacting me throughout the time? And I think any resources you have for that would be wonderful. Well, one thing that might actually help with getting your credit score in the best position possible for a good auto rate is thinking about paying off your credit cards a little bit more, maybe getting the balances lower because of what's called your credit utilization. That's basically the amount of your available credit that you're using.

And that translates to your debt to income ratio, which auto lenders and mortgage lenders as well will be concerned about when they are considering what type of rate to give you. That's good to know. Yeah, lenders like to make sure, one, that you're making on-time payments for all of your bills and debt obligations. But also, you know, does it look to them as if maybe you're a little bit in over your head when it comes to how much debt you have every month versus how much money you're bringing in as income. And so lowering that debt total while keeping your income the same or even increasing your income is something that can work in your favor, potentially, when it comes to looking at applying for new loans. Wonderful. Yeah, I think these are really helpful to know, even the increase in your income. Yeah, always. It's funny because we always talk a lot about cutting spending as a way to apply more money toward debt payments and other goals and savings. But that's just one half of it.

It's also about the money that you're bringing in. And so if there is potential there to increase income, then that's definitely worth pursuing for so many reasons, but also because it makes it easier to pay down your debt. That's wonderful. Yeah. Looking at some side hustles or something. Yeah. Side hustles, promotions, ask for a raise at work, all sorts of good things. Yeah. I think so often we think about like, oh, how do I cut down on my spending? Maybe I don't need that extra coffee, you know, this and that. And then there's like always the option to make more income to really support it versus like trying to think about the deficit, you know, mindset. And so I think that's really helpful to just reframe. Yeah. And the coffee part is so

funny, too. It seems like everyone kind of latches onto that as like, oh, yes, one less coffee a week will mean that I suddenly have all this more money to pay off my debt when often it's the bigger things that we can do that have the greatest impact on our ability to save retirement or pay off debt, like increasing your income and also making sure that debt that we do take on, like an auto loan, isn't too expensive. Because for many people, especially in the past few years, auto loans have become just enormous. We're talking upward of $40,000, $50,000, depending on the car that you're getting. And that can really inhibit your ability to meet other long-term goals, like build up that down payment for the house that you want. Yeah. I think even in this conversation, what I'm realizing is how much scaffolding has to happen, right? Just to get to that part, right? Of like, oh, okay. Yeah, great. I'm going to pay off my

school loan, but actually now I should target their credit cards too. So that when I do get a car loan, my debt ratio is good, right? They're willing to give a different amount of interest rate for me, and it'll then help me still be able to save for a house. What I don't want to happen is I'm buying a house and a car at the same time. I mean, a lot of people do that, and it's hard because maybe you're relocated from a more urban area to an area where they need to be a little bit more car dependent. And so they didn't necessarily own a car when they lived in a city, and then they move to a more suburban area to an area where they need to be a little bit more car dependent. And so they didn't necessarily own a car when they lived in a city and then they move to a more suburban area and suddenly they need one or even two cars right at the time that they're just beginning to pay

for the mortgage. And they've just paid the down payment and other closing costs as well. So it's been a very bank draining time, bank account draining time, I should say. And suddenly you have these one to two other major expenses that are necessary. And it's not easy. It's not easy to plan for something like that. But it's a very common issue. Well, I would recommend playing around with something like NerdWallet's 50-30-20 budget calculator to see how getting an auto loan might impact your budget. Because ideally, you'd be able to go from having a amount of money going toward your student loans and then direct that into your auto loan, right? So it almost is like a net and you're just kind of going out of zero. But we know that's not

how things work all the time. You might end up having to have a greater monthly car payment than you're paying in student loans. So just get a feel for that beforehand so you understand what it might mean for your budget and where you might need to cut back or where you might even be able to save more money. Yeah, yeah. That's a great suggestion. I'll have to check it out for sure. So one thing that strikes me is that your question is really a question about timing as well. You're trying to figure out when to get an auto loan as it relates to paying off your student loan. So currently, what are you thinking about timing? Do you need a new car in the coming six months or so? Could it last you a little bit longer? What are you thinking about timing? Do you need a new car in the coming six months or so?

Could it last you a little bit longer? What have you thought about that? Yeah, no, that's a great question. I think it could last a little bit longer. I think it just feels a little inconvenient for my current job, right? Because it's a smaller car and I have a job where we go tabling and do different events

and need to have more space. And so, but obviously there's other solutions around that as well. And definitely waiting a little bit longer. Sounds like the more financially responsible thing to do and probably better timing as well. Thank you for that. I do want to just quickly touch on general credit building tips. We know at NerdWallet that tried and true tactics like making on-time payments, that's the single biggest factor that impacts your credit score. So continuing to do that on your credit cards, your student loans,

when you're still paying them off and your future auto loan will be able to enable you to have the best credit score that you can going forward. And also in general, there are products that can help you build credit. It seems like you may be beyond that. So if you know someone who's just beginning to build their credit for the first time, something like a secured credit card or a credit builder loan can be really beneficial in this space. NerdWallet happens to offer both a secured credit card and a new credit builder loan called NerdBuild. And there are a lot of other great companies that offer those as well. And we'll have a link in our show notes post about how you can use products to build your credit. You know, when we talk about how paying off a debt can potentially dip your credit on temporarily, but many people do notice a drop in their credit score when they pay off a debt and get it off of their plate.

And I mean, we would like to acknowledge how cruddy that feels because you're doing everything right by paying down debt. And then it feels like you're getting penalized for it instead of rewarded. And so let's talk a little bit about why you might see once you do pay off your student loan and then in the future, if you have an auto loan, once you pay that off, once you pay off credit card debt, why you might actually see the unexpected happen, which is that your credit score takes a bit of a dip for probably about a couple of months. And that's because one of the factors that goes into calculating your credit score is what's called your mix of credit. And that's where you have a mix of what are called revolving debts, which is credit card, which is a debt that you can continue to add on to while you're paying it off. And then also installment loans, kind of like a student loan or an auto loan where you borrow one sum of

money. You don't add on to it. You just simply make payments toward that loan until it's paid off entirely. And lenders kind of like to see that mix. And so when something comes off of that list, they knock you down a little bit and then you move on from it. It is a little bit of a mystery how that works. You know, credit score calculations, they kind of happen in this black box. And it's not a knock on your character or who you are or that you've done the wrong thing. It's merely just, you know, how the math shakes out. So I would say to anybody who's in this situation, you might be in this situation, say, in the near future, just know that this is not a permanent drop. You have made a financial move that could benefit you in the long term by getting

this debt off of your plate. And credit score is one financial factor that's considered when you're looking to borrow additional money for some purpose. It's not the only thing that's taken into account. Other financial information is also taken into account as well. And if you're, you know, looking for a loan, it's helpful to shop around and maybe compare a couple of different options. NerdWallet has great comparison tools for this, but you can look at banks, credit unions, online lenders. And when you walk into, say, a car dealership, you're already armed with information with a loan pre-approval. So when the dealer offers financing, you come from a really strong negotiation point.

One thing I want to add on to what Sarah mentioned around what's going on with your credit score behind the scenes is that it can be helpful to remember that even though you are the one paying off this loan and your credit score may change accordingly, in some ways, it's not about you. It's about what lenders want to see from potential customers. So back when credit scores were first created, we consumers were actually never supposed to see them. They are for businesses to understand how risky they think we might be to lend to based on previous credit data. So when something like a loan is no longer active on your credit report, you have fewer data points coming in. As a result of that, it can be harder

for them to estimate your riskiness. It's nothing about you. So I always try to have a certain level of remove from the number of my credit score, what it is today and how I am behaving as a consumer, doing the best that I can on a daily basis to keep it in good shape. So let's talk a little bit about your potential new car. Let's start really broad and just tell us a little bit about what kind of car are you thinking about shopping around for? Yeah, yeah. Feels amazing to be like, let me just dream.

Yeah, this is the fun part. This is like an ideal world. What car just lands in your driveway or your parking spot or in front of your house or whatever? A car with wings, no? Yeah, a jet pack. Yeah, yeah. Some transportation device.

I've been looking at smaller SUVs, so I'm actually a lot shorter. So driving a big car is scary for me. But like I said earlier, I'm needing to be able to transport more things than my little car. And so I've been looking at the midsize, smaller SUVs, you know, like a CR-V or even like looking at Mazda, you know, Mazda 6, Mazda 7, those have looked really nice too, RAV4. So kind of looking at that kind of car and I do want it to be a little bit newer

because I want it to last me longer. And so anything in like the 2020s and above will be. But potentially a used car, right? Yeah, used car. Maybe a new car. I'll go test drive a couple of those just to see, but something that will last me longer. Well, as we all know, buying a new car, the idea of buying a new car can be extremely exciting and it can be really easy to get caught up in the momentum of it. So I always like to urge caution and say, before you go into the dealership, know how much you want to spend really before you even shop at all, because it's so easy to buy a car that's more expensive than you can really afford. And you might just fall in love

with the car on the lot or maybe even get pressured into taking on a larger loan than you want at the dealership. So get really clear on that with yourself, play around with your budget like we discussed earlier and have an understanding of what total amount of car you would want to buy and then think about what that might mean on a monthly basis.

A lot of dealerships will actually put their financing in terms of monthly only, but then they extend it out for months and months and months, and you end up paying a lot for a car loan over its entire term. So be really mindful of that too. And doing this before you go into a dealership gives you so much leverage in negotiations, because they might be able to actually offer you a better rate on the loan than what you got from somewhere else. And they might know that you have other options to choose from. So you have more cards in your hand at that point. And also, I wanted to ask you, are you a member of a credit

union? I am of two. Okay, great. Well, that gives you two places you can shop around from really easily. Credit unions tend to have very competitive auto financing rates and they can pre-approve you pretty quickly because they already have a lot of your financial information. And I'd say don't be afraid to walk out of a dealership if they are, I don't know, hemming and hawing and being difficult. Vote with your feet. They'll come running after you. They'll keep calling you. But part of the power that you have as the shopper, as the consumer is if it doesn't feel like a good situation, just leave. There are other car dealerships and that gives you a lot of power as well. So don't be afraid to do that.

Awesome. That's so affirming to hear that. Yeah, you still have choice. Yeah, you can play the mind games right back at them. Turn the tables a little bit. Okay. Well, say, I know we've talked about

a few different parts of your finances and what you might want to do with your credit score and your loans going forward. So I'd love to hear after this how you're feeling about your finances. And do you think you know how you'll time paying off your student loans and getting an auto loan? Yeah, no, this is super helpful for me. And I think one just to be able to talk about it. I'm

like, Oh, my gosh, feels good. But the second part is like, you know, like I said earlier, sounds like I've just gaffled a little bit more, but at least I know now to say, okay, as I'm paying off my school loans, how do I start upping more of the credit card payments too? So I could bring that down. And then from that, really thinking about my relationship with my credit unions and to say, okay, when I'm ready, how do I give myself enough time if it's that two week window to go and get pre-approved and then have a number of like, this is the amount of money that I am planning to spend in a car. And so probably go play around with the calculator that you were sharing earlier and then go just check out some of the cars and know that I have a choice to walk away if it doesn't work out. Great. Well, you're in a really exciting position right now. So please keep us posted on how this all goes for you. Absolutely. Thank you so much. Great. Well, say thanks for joining us on Smart Money.

My pleasure. And that's all we have for this episode. Remember, listener, that we are here for you and your money questions. So send them our way. You can call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Tess Vigeland, who also helped with editing. Sarah Brink mixed our audio and a big thank you to NerdWallet's editors for all their help. And here's our brief disclaimer. We're 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.