NerdWallet's Smart Money Podcast - How can my credit score save me money?

Episode Date: September 9, 2019

Sure, you got a high credit score — but how can you make the most of it? Sean and Dayana talk with NerdWallet all-star Liz Weston to see how you could use your high credit score to save thousands of dollars.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. This week's question is from James in Oakland. He says, Hey nerds, I know it's important to have good credit and I finally got my credit score in the mid 700s. What happens next? I think he means besides the edible arrangement that should have been delivered the very moment he hit 700. Yeah, absolutely. This is a great question though. So much of a credit score conversation is around getting it high. And once you get into the 700s

or higher, there are some serious perks here. And here to tell us about how to get the most out of a high credit score is NerdWallet all-star, longtime columnist, and certified financial planner, also the person who literally wrote the book, Your Credit Score, Liz Weston. Liz, we are so happy to have you on the Smart Money Podcast. Also, we've been hyping you up a bit, so expectations are kind of high. No pressure, right? Okay, fine. Not at all. No, I know you're going to knock this out of the ballpark. James is wondering what he can do now that he's improved his credit score. But before we get into

that, let's define the different ranges of score and talk about what's considered, quote unquote, a good score. Yeah, it's considered, quote unquote, a good score? Yeah, it's important to know that every lender really has its own policies about where these cutoffs are. But in general, if you're talking about FICO or Vantage scores, those are on a 300 to 850 scale. So as long as you're over about 720, your score is basically considered excellent. You're doing very well. There's a few lenders that might want to see you at 760 before you get the best rates and terms, but generally you're on track if you're 720 or above. The range of 690 to 719, that's considered good. 630 to 689 is generally considered fair. Once you get down below 629, that's typically considered poor.

That's not a great credit score to have. And what that means is you're not going to get the good rates that you see advertised, right? But what else? Are you just not going to be approved at all? Yeah. Once you get that low, it's really tough to get a loan. You're going to pay higher interest rates. You might not get the best rates and terms that are out there, the best terms, I should say. So your credit life is going to be a lot harder than if your score were higher. Okay, so I know that you've actually done the math on this, right, Liz? So what does a higher score mean dollar-wise here? Okay, dollar-wise, I do this math example every time I update your credit score, the book.

And in it, it can vary, but typically it's about $250,000 over a lifetime when you compare a mediocre score, so like mid 600s to a good score, say mid 700s. And that's taking in account if you carry credit card debt, if you have that lower score, you're going to pay higher rates. If you buy cars with car loans, which most people do, higher rates on that. When you get your mortgage, you're going to pay a higher rate on that. So it just kind of cascades through your life. And that doesn't even include some of the other ways that credit can affect you, like your insurance premiums, for example, or what kind of cell phone plans you can get. That's just the, in terms of borrowing money, how much more it can cost you over a lifetime. It just all is adding up. And then over the course

of your life, you're just going to pay tens, hundreds of thousands of dollars more. And that's one thing I find really fascinating about credit scores in general is that we're all trapped in the system that we didn't sign up for. And we can touch on the thorny implications of that in another episode. But there is something to be said about making the system work for you. Optimizing your score can open a lot of doors and save you a lot of money. I love the way you put that, Sean, because it's exactly it. We are trapped in this system. You cannot opt out. The companies that are collecting all this information about you are going to go on collecting it. So you might as well figure out how this system works and turn it

to your advantage. You can't opt out, so you might as well opt in with a vengeance and get it to work for you. Right. Let's touch on some of the lifestyle perks of having a high score. This opens a whole other world of credit card points, perks, and luxury travel, right, Liz? Oh, absolutely. I am all about the luxury travel, man. I totally set her up for that because I always love to hear about your travel. Oh, my gosh. And I love to brag about it because if you're in this world where you're taking advantage of the credit card perks, you can have some amazing experiences. We stayed in Venice last year, two nights in a Venice hotel, the Greedy Palace, which is every bit as fabulous as it sounds. The rack rate, which is the weight that normal people would pay to stay and sleep in a bed there at the Greedy

Palace while we were there, 1,500 euros the first night, 2,100 euros the second night. That's because there was some international film festival going on. The whole island was sold out, whatever. I would never pay that kind of money in real life to sleep in a bed. But I have to tell you, using points to make it free, that was pretty fabulous. That's amazing. Okay, you work it, girl. What are some other perks that people can get when they have a high score? One of the important things is if you carry credit card debt, when you have high scores, you can get much lower rates. You can get those sweet 0% deals. And I wouldn't use those to keep kicking

the debt down the road. You can use it to get the debt paid off faster. And that's huge. So any loan you go out for, you're going to get a better rate on it. A lot of people don't realize this, but your credit scores are really important in determining which cell phone plans you get, which promotions you qualify for. There was a point a few years ago where T-Mobile said half of its customers couldn't qualify for its best promotions because of their credit scores. So that's another reason to pay attention to this. So people probably know, you know, lenders and landlords and cell phone companies run your credit to determine what interest rates you get, what plan you qualify for, or if they'll let you rent an apartment. But your score is so important in many other ways and many other decisions that can have a financial impact on your life. A lot of people don't realize how important

credit scores or credit information is when it comes to insurance. The insurance you pay to have a car, the insurance you pay if you're a homeowner or renter, those are heavily dependent, in most states anyway, on your credit information. And in some cases, your credit score matters more for your auto insurance premium than your driving record. Now think about that. Whether or not you cause accidents is less important than how you handle your credit. So whether that's fair or not, that's not what we're getting into. That's just the reality of the situation. So that's another good reason to pay attention to your credit and make sure that you're keeping it clean and using it responsibly and making sure you pay all your bills on time,

all that good stuff. And there's so many other tricky implications of why someone might have a low credit score, and even socioeconomic issues in terms of why someone might not be able to pay a bill or know how to handle their personal finances. But again, that would be another episode of the show. Sean has thoughts and feelings on this topic. I do. I really do.

We'll get into those sometime. Yeah. Give me a drink and I'll just ramble for hours. But I do want to make a distinction between using your newly high score to get the lifestyle that you want and then also maintaining that lifestyle and that score. Because keeping it up is a totally different thing. And so, Liz, I want to hear your top tips for maintaining your credit standing and also ways to build your credit if you're not at that ideal point yet. Yes, and Sean, this is super important because it takes so much longer

to build a good score than it does to ruin it. I mean, one missed payment can knock 110 points off a good score. One lapse of judgment. So that's why it's super important to make sure all your bills are paid on time. Most credit scores, the two biggest components are your bill payment history, so whether you pay on time, and how much of your available credit you're using. So you want to always, always, always pay on time. Don't let disputes go to collections. Monitor medical bills especially

because a lot of times those fall through the cracks with insurance and that can wind up as a collection. And while the latest versions of credit scores sort of treat those a little bit differently than regular collections, a lot of lenders use older versions of the scores and they just treat all collections the same. So just bird dog those medical bills. Make sure those get paid. Another important thing to keep in mind, the less of your available credit you use, the better. You might have heard that you want to use 30% or less of your credit limits on

any individual card or whatever you've got, home equity line of credit, the reality is the less you use, the better. So 30% or less is good. 20% or less is better. 10% or less is best. And if you're really getting where you want to improve your score, sometimes that's the way you squeeze those last few points out is to get your credit card balances, the amount of credit you're using down below 10% of your available credit limit. And I think I need to throw in here that it doesn't matter to credit scores, at least the current ones unused now,

it doesn't matter to credit scores whether you carry a balance or not. People have this idea that they have to carry a balance to have good credit. Absolutely not true. You don't need to do that, so don't do that. And then you had a, in your book, which we can plug here, you've got, you have other tips, and you've written about this a lot, that, you know, applying for, you want to apply for credit

sparingly. Yeah, it's really tempting, especially for those of us who love credit card rewards, to just, you know, apply and apply and apply. You want to do so sparingly. And what sparingly means, you know, I tried to space out my applications about six months apart, you know, a year is probably better. So you don't want to be applying for a bunch of credit all at once. And we've heard on our community forum on NerdWallet, we've heard from a lot of people who will repeatedly apply for the same card or they'll apply for like five different cards in a day. Don't do that. That's not good. Just take it easy, guys. It's ding, ding, ding, ding, ding on your score. Exactly. And you don't want to apply for any credit if you're in the market for a major loan, like a mortgage or a car loan. Don't close accounts if you're trying to improve your scores.

A lot of people think that somehow closing accounts can help their credit. It can't, and it could make things worse. So don't do it. That's right. Maybe the limited express, that store no longer exists, but I've got that card, darn it, in my wallet. You know, they're really good for scraping your car window, you know, when there's a lot of accumulation of ice or whatever. So keep it for that. It does, and getting, you know, stickers off of things.

Yeah, yeah, that's good too. Anyhow, Liz, these have been great tips. Thank you so much for being with us. You are my hero in every single way. And James, congratulations on getting your credit score up there. That's a really great accomplishment. It is, and hopefully this helps you make the most of it. And with that said, let's get to our takeaway tips. All right, first up, your ultimate credit score goal depends on which scoring system you're looking at.

But anything above 720 is great. Anything above 760 is excellent. That'll set you up to be eligible for the best rewards card programs and a congratulatory edible arrangement from Sean. It may be gathered from random things in my cupboard, but I will send you some junk food that I don't want anymore. Beyond the fun perks, know that a higher credit score can add up to huge savings. As Liz said, a high credit score can mean savings of $250,000 over a lifetime. And that's not just because you qualify for lower interest rates on loans and credit cards, but you can also get better cell phone promotions and car insurance rates. But don't get too carried away with your fancy credit score. Once you achieve that excellent

credit standing, you want to maintain it. To do that, you want to make all payments on time, apply for credit sparingly, and keep your spending to less than 30% of your available credit. And if you can keep it to less than 20 or 10% of your available credit, even better. And that's all we have for this episode. Do you have a money question of your own? Turn to the nerds and call us or text us your questions at 901-730-6373. That's 901-730- everyone together now.

Nerd. Yeah, NERD. Yeah, that's great. 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 subscribe, rate, and review us wherever

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