NerdWallet's Smart Money Podcast - Rebuild Your Credit And Your Savings, Plus Why 7 in 10 Americans Feel Squeezed

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Starting point is 00:01:18 And my name is Elizabeth Ayola. This episode's question is all about balancing different financial goals, as Sean just mentioned. And the goals in question are saving money and rebuilding your credit. Hi, NerdWallet. I'd love your advice on rebuilding credit after a rocky financial history. I had miss payments, high balances, and other credit mistakes in the past, but I've finally gotten out of debt and have been working hard to change my habits. I currently have two credit cards with only about $400 limits. I've become really interested in sinking funds and using cash savings intentionally, but I'm trying to figure out how to balance that with rebuilding my credit. I'd eventually love to get a travel rewards card for a future international trip, but I'm nervous to apply. Should I focus on building a longer track record with my current cards before applying for

Starting point is 00:02:10 a travel card? And how should I structure sinking funds so I can take advantage of credit card rewards without falling back into old habits? I'd especially love advice on making the transition from repairing bad credit to actually building excellent credit. Thanks, Witt. Thank you for that question. Joining us to tackle Witt's question is NerdWallet's senior credit expert and a friend of the pod, Amanda Barroso. Hey, girl, hey. Hey, girl. I'm glad to be back with you guys. It's been a while. Welcome back, Amanda. We've missed you. So let's talk about building credit, restoring credit, however you want to call it, since it's been a little while since we discussed this. What are maybe two to three things that are relatively easy for folks to do to actually get their credit into a better spot?

Starting point is 00:02:54 I think this is a great starting point. I think the two biggest things anyone can do to build their credit is number one, pay bills on time every month. Believe it or not, payment history is the number one factor that both FICO and Vantage score used to calculate your credit scores. Missing one payment can really harm your score. So that's the number one thing you can do. Make sure you pay those bills on time. The second thing that you can do is to keep your credit utilization at 30% or less. And that's kind of a fancy word for just saying the amount of your available credit that you're using at a given time. You want to keep that below 30%. So if you're like Witt, like our listener, and you have a $400 limit on your credit card, you're only going to want to use $120 or less at a given time. Once you make a payment, that kind of restart the clock, right? But that's kind of the threshold you're looking at. Yeah, because, I mean, thinking about only spending $400 a month on your credit card, that's a pretty low limit. But Witt could in theory, you know, say they go and get groceries one day and it's a couple hundred dollars, they could pay that off right when the charge actually hits their account, and then they would

Starting point is 00:04:02 be back to a lower credit utilization. So that way they can maintain lower utilization, but also keep using their cards throughout the month. And you're building that payment history also, right? The next recommendation I'd make is to check your credit reports, just to make sure that the negative marks that you might have gotten in previous years have aged off after the appropriate time period. Keeping an eye also on potential mistakes. Like credit bureaus are making mistakes. Lenders aren't always reporting the right thing. And it's kind of up to you as the consumer to make sure that you're catching those things and staying on top of it. So some things you might want to look out for are payments that are marked as missed, but that you know you paid, right, that are on your bank

Starting point is 00:04:43 statement. You can prove it. Making sure that all the accounts on there are accounts that you recognize, making sure that the names on there are names that belong to you and you alone. Now, sometimes they might have your maiden name or they might not have the most up-to-date address or employer. And those are small things that you don't need to report. But these other things are things that can really impact your score and impact them quickly if you file that dispute and get it fixed. Yeah. And some folks who have common names should really check into this too. Like if your name is John Smith and there are millions of other John Smiths in the country, you might actually have a credit line for maybe an auto loan or a credit card for another John Smith that's not actually you. So it's really, really crucial

Starting point is 00:05:24 that you do check that every account on there is actually yours. Or if you're named after somebody, my husband is named after his father. So sometimes I tell him, like, make sure he's actually the fourth. So I'm like, as annoying as that is, put those Roman numerals, right? Because you have to distinguish yourself somehow. And there are times where people get him and his father confused on mail and that kind of thing, you know, right? So that's another thing to, to, to consider? Yeah, there was a time that I was getting mixed up with my mom. So my mom's information was on my credit report because we're both Elizabeth Ayala, but she uses Susan as well. But anyway, I didn't know that until I check my credit report. And thank you also, Amanda, for calling me out

Starting point is 00:06:06 and reminding me that I need to check my credit report again. Listen, you can get it free every week, so no excuses. Annual credit report.com. Go to that website. There are a bunch of other companies that might make you try to pay for your credit report, but you can get it for free at annual credit Report.com. And you know what? The good news is, Sean, is they updated their website so they don't look like you're on the scam website anymore. So that's good. That's great. It did. For years, it looked so sketchy. It was straight out of like 1996. We were directing people there. It was the legitimate website, but it always felt a little bit awkward because it just looked so bad. So that is great news. I'll have to check that out. Yeah. Give the person who updated the website or

Starting point is 00:06:45 raise. Yes. Cudos to whoever finally did that. Okay. So Amanda, at what point would you consider a secured credit card to be a good idea when you're on the path to bettering your credit score? That's a good question. And just before we get into the details of that, I just want to make sure we're all on the same page. So a secured credit card is one where you pay a deposit first, and that money acts as your credit limit. So use it just like a normal credit card. And every month when you get the bill for what you spent, you pay it back. And this type of card protects the banks and gives you a chance to build credit history and also some trust with lenders.

Starting point is 00:07:20 The goal here, though, is eventually to graduate to an unsecured credit card, which is, I think, kind of what Witt is looking for. So now that we kind of know what a secured credit card is, back to your question, Elizabeth. So here's what I'd say. I wouldn't apply for a secured credit card until I had zero credit card debt, and I've paid my existing credit cards in full every month for a period, say like six months or something, so that you know that you're capable of doing that. The other thing you'll need is a cash security deposit. So most secured credit cards require somewhere between $200 to $500. So that's another benchmark that Witt can use to assess their readiness.

Starting point is 00:07:57 Once you have that, I'd recommend finding a card that reports to all three credit bureaus if you can. And those are Equifax, Experian, and TransUnion. You know, if they're only reporting to one or two, you're not going to get as big of an impact as you will get if they're reporting to all three. So on-time payment history and all of that, you want that going to everybody. so you can see your score increased across the board. Amanda, I have to admit that in the past,

Starting point is 00:08:23 I've been kind of skeptical and a little bit frustrated by the idea of a secured credit card because you're basically paying for the privilege to have access to a credit card that works a little bit like a debit card, really, because you're kind of funding the money that's in it. And given the fact that we're kind of being held hostage by the credit system, the fact that you would have to pay into it

Starting point is 00:08:42 with the secured card, I just found a little bit frustrating. But there is a use case, especially if you really can't qualify for other cards. Am I being too cynical here, or are these actually maybe better than I've been thinking of that? I think you're being a little cynical. I think because you are getting credit towards your credit score. I mean, that's really kind of the goal here. It is safe, right?

Starting point is 00:09:05 Like with your debit card, nobody cares if you're using your debit card or not. Good for you, right? You have to make sure you have the money and that's up to you and between you and God, right? But with this, you are getting credit those online. on-time payments that you're making, those credit bureaus are recognizing that, and so are FICO and VATO advantage score. So I think, yes, we are being held hostage in other ways, and that's probably a show for another time. But I do think that there is a time and a place for this, for sure. And fun fact, guys, my first ever credit card in the U.S. was a secured credit card with Bank of

Starting point is 00:09:38 America. Moving from London, I did not have any credit history because I left the U.S. when I was 17. So I needed to build my credit and that was the first credit card that helped me to do that. So to Amanda's point, it did teach me, I guess, one of the fundamentals of having a credit card only spend what you have because I had to pay into it, right? And it worked like a debit card. So I thought it was helpful. Do you still have that credit card open, Elizabeth? You know, the more you learn and the more you know, absolutely not. No shade of America, but the fees, I banked with them. So they were actually my first bank period. That's a good question. Wait a minute. Because I'm I'm always honest on the show. I need to go and see if that credit card is still active. But if it is, I have not used it in almost two years now. It didn't offer many benefits in terms of credit card perks. So I was like, what am I using this for?

Starting point is 00:10:24 So I kind of sheled it. Just building your credit. Yeah. But if you do have it open, that could be really helpful for establishing your credit history, which is also an important factor and your credit report and credit credit score. Well, Amanda, quickly, I didn't actively close it, but I know if you don't use your credit card for a long time, it can become dormant, right?

Starting point is 00:10:40 And the credit card is sure it might close it. They should say, like, hey, we're going to close your credit card. Like I had, my first credit card was a Wells Fargo credit card that I got when I was going to college. And they, like, last year sent me a notice that was like, hey, by the way, you haven't used this thing in a while and we're going to close it. I was like, no.

Starting point is 00:10:58 And so I just put my Starbucks auto reload on there and just have it set to pay automatically every month. So it's like maybe 25 bucks every month. But it's keeping it alive. So. I've been really surprised by how long credit card companies will just keep your account open if you're not using it. I have at least one card that I have not used in maybe going on three years. And I keep it open because the credit limit is $20,000. This company really wants

Starting point is 00:11:22 me to go into debt for them, apparently. And I just don't touch it. I don't even know where the physical card is at this point somewhere deep in my sock drawer, I'm sure. But they've just kept it open and keep waiting for that letter in the mail saying, hey, use this or we're going to close you out. And it just hasn't happened yet. So yeah, still good to keep an eye on these accounts if you're not using them, but just know that it's not really going to vanish tomorrow necessarily. Yeah. All right. Well, Amanda, Witt doesn't just want to have better credit. Witt wants to have excellent credit. They want to be in the 850 club. Okay. So what typically goes into having this prestigious level of credit? Listen, I respect it. You know, it's like we don't want to just be good.

Starting point is 00:11:59 We want to be the best. So the thing about credit is that it just takes time. It's like the bummer thing. We live in such a society of like instant gratification, right? And credit is the thing that just makes you slow down and you have to earn it. You have to work for it over time. So I think building a mix of credit is a place to start for wit. So revolving credit like a credit card or installment credit like an auto loan. You want to have a good mix or balance of those things. Lenders essentially want to just see that you can handle different types of debt responsibly. So that's something that way can work toward. Building an excellent credit score also means being a little strategic. So for example, renters don't get credit for paying their rent in the same way that homeowners do, right?

Starting point is 00:12:44 I own a home. So when I pay my mortgage on time, that's counting toward my payment history. But looking into a rent reporting service might be one way to help Witt's score if Witt is a renter, right, get recognized for that good financial behavior in the same way that homeowners do. We actually have a guide about rent reporting services and what to look for, and we can link that maybe, Sean and Elizabeth, in the show notes or something for folks to take a look at. And the good news is maybe if your renter, your landlord might already be a partner and be participating in one of these programs, you just have to ask about it. But this is a good way to just get credit for something that you're already doing. It's low lift. Another thing that

Starting point is 00:13:21 likely sets those with excellent credit apart from their peers is that they ask for increased credit limits and then they just never use it. That's the key. You cannot use it. So this is, they don't need the additional credit for expenses. They're just using it to lower that over. overall credit utilization, which then strengthens their score. I say this last because I think this is when you're at a really established place, again, where you're asking for the credit that you don't need because you just wanted to sit there and help drive that utilization score lower. Yeah, I think those are three things that folks can really build toward and start to see their score improve over time. Yeah. And asking for a higher credit limit is so simple. You just call up your

Starting point is 00:14:04 credit card company and the worst they can say is no. So in some companies actually even allow you to ask for a higher utilization within their app. So it couldn't be easier. I want to go back to your mention about how it takes time to get an excellent credit score, Amanda, because something else that takes time is negative marks to drop off. Depending on, you know, maybe if you missed a payment, it could take around seven years for that negative mark to drop off. And there isn't a whole ton you can do about that, especially if it's an accurate reporting of a missed payment. So as frustrating as it can be, it just is going to take a little while.

Starting point is 00:14:37 for those things to work through, kind of like how it takes time to build up your savings, which is also what Witt is talking about here. Absolutely. And I will say this. Yes, maybe it might take seven years for some things to age off. But I think the good news for a lot of negative marks is that their power lessens over time, right? So maybe the first couple of years, it's this negative marker or the couple of marks that you've gotten are really driving your score down.

Starting point is 00:15:02 But as you move toward that seven-year mark, the power of that negative mark, really starts to lessen and you can make some movement in your score. And of course, it depends on, we don't know everything about what credit passed, right? But I do think that it's not something to feel so defeated about like, oh, why should I even care until this thing ages off? Right. No, you know, you start building those habits now because they're really going to pay off. Yeah. I do want to applaud Witt for lowering their credit limit. That's something someone in my family also did when she realized she kept overspending, just to kind of keep her spending in check. So if you know that you have a problem with impulse spending or you see that credit limit and you just see dollar signs,

Starting point is 00:15:42 it may be best to lower it to a place that is more manageable for you. And that's also why a secured card can be so handy because it is guardrails. You cannot spend more than you put into that account. That's right. That's a helpful tool too. All right. So Witt is also interested in getting a travel credit card. Amanda, what's a general credit score range of someone has to be in to actually qualify for one of these cards?

Starting point is 00:16:05 because it's not for folks with poor credit typically, right? Right. So I actually reached out to one of our colleagues, Sarah Rathner, who, you know, she's one of our credit card experts, and I was like, girl, give me the lowdown on this, right? She said, good to excellent credit is the goal here. So if we're thinking about credit score ranges, they start at 300 and go up to 850, 850 is a perfect credit score. But what counts as good and excellent is different for FICO and for VANGE score.

Starting point is 00:16:33 So for FICO, you want a score of 670 or higher. And for Vantage score, you want a 661 or above. So is the 670 or 661? Is that for good credit or excellent credit? For good, right? So if our goal is good to excellent, those are the baseline, right? So the higher you get above those, the better your shot at being able to be approved for one of these cards. Now, Sarah did note, like, you know, like with anything in life, there's no guarantees, right?

Starting point is 00:17:00 You could apply and get denied, right? a lot of other things are considered. So your income, your credit history. But I think coming to the table with a strong score is a good start. Yeah. I was once denied a travel credit card despite my above 800 credit score because I had applied for a travel credit card within a year prior to that at a different company. So yeah, all sorts of factors going to us.

Starting point is 00:17:22 I know. Yeah, I took it really personally, unfortunately. As you should. But something else, we should always mention when we talk about getting travel credit cards, especially if folks have trouble managing their spending and maybe, indulging and overspending is that if you are carrying a balance on a travel credit card, the interest you're paying is really going to pretty quickly wipe out any value you're getting from the point on these credit cards. So it's just not worth doing that. So keep that in mind,

Starting point is 00:17:46 too, just around how to spend and pay off your cards when you are using a travel credit card. Well, Amanda, do you have any other best practices so that people can get approved for these credit cards and not denied like Sean? I say that would love Sean. Thank you. Well, you want to know your score first and foremost. Like when you click submit, you better know what your credit score is. I think in the weeks leading up to your application, like you have a little work to do. You need to try to pay down your balances as much as possible. I think getting your utilization as close to that 30% or under, I mean, ideally it's like 10%, right?

Starting point is 00:18:19 But that threshold at 30% as close as you can get to that, that's great. Now, before applying, you could see if there's any pre-qualification tools that the lender offers. So this way you can get a sense if you fit the profile of other card members before actually applying. This is a really good tool to use. And then once you're ready, learn from Sean, space out your applications. Now, really, the expert guidance is like every six months. So that lender was a little wild. But the reason that we say space out your applications every six months is because these kinds of credit applications

Starting point is 00:18:55 require a hard pull on your credit. So this kind of dings your credit score by a couple points. It's not that big of deal when you were just doing one. But if you're like, bam, bam, bam, it really can add up. So the sort of thing to keep in mind is too many applications close together can hurt your score. And also can be a red flag to lenders like, why is this person applying for so much? Like, is something going on? You could appear more risky than what you really are.

Starting point is 00:19:22 They're like, am I going to get my money back? Denied. Exactly right. All right. Let's turn to the other part of which question, which is about sinking funds, one of our favorite topics here on smart money. Amanda, where do you stand on syncing funds? Do you use them or are they too complicated for you? I love them. This is like one of my favorite financial tools, seriously. So I use ally bank for like my family's high yield savings. And right now, before I literally checked before I came on to talk to you guys today. I have nine savings buckets. Okay. You're competing with Sean. You have more than me now. Yeah. I'm so proud of you, Amanda. Like one of these is about to go away. You guys know, I've been saving for this Disney trip forever and ever and ever. Okay, we're about to go in like two weeks.

Starting point is 00:20:05 So that's going to go away. Actually, it's going to become my Spain-Portugal savings bucket. And that's for another time. Just a revolving travel fund, basically. Yes. We have a separate travel fund, but this is for like the big expensive trip. So I have a Disney bucket. But I also have like a home improvements bucket, a holiday gifting bucket.

Starting point is 00:20:25 car repairs, you know, I could go on. Love a sinking, sinking fund, okay? To me, the perk really is being able to pay cash for like a vacation or Christmas gifts. It's such a wonderful thing for just like my mental health and for the stress of it all. Like nobody wants to go on vacation and like sit on a beach and be stressed about where is this money going to come from. Like mine is, it is paid. By the time I'm on that beach, it is paid. And that is not something that I've always been able to do until I prioritized singing funds.

Starting point is 00:21:01 So the way that it works for me is like every month I deposit a chunk of savings and I break that chunk down into the various savings goals. And some people just automate it. But for me, it's not always the same every month. Like we just had to buy tires for the car. Next month, I'm going to put a little more back into our car repairs fund to try to build that back up. But I love the flexibility that it offers. And the last thing I'll say, you know, I love that an ally. I can redirect the monthly interest that I earn from the high-yield savings part of this whole

Starting point is 00:21:30 equation to a bucket to boost it. So like every July, I redirect my high-yield savings interest that I've earned into my holiday gifting bucket so that it's paying for my Christmas. So from July to December, I have a nice chunk of change that I know I can use to buy gifts for my family, my friends, to host for the holidays. And so it really is thinking about passive income. like a great way to earn that. One thing I want to throw out is that while Ally is a nerd wallet partner, Amanda is not being paid to give this endorsement specifically.

Starting point is 00:22:04 You just really love Allies. Listen, absolutely. I wish Ally was paying me to say these nice things about them. But no, it truly is. I had Ally before I ever worked at at NerdWallet and in fact have gotten a bunch of my friends to sign up for high-yield accounts because we just truly, honestly, it's the sinking fun feature, the flexibility to be able to being able to be able to be able to. to like really parse out my savings goals has been a game changer for me and my family. What I find really interesting too is that you do your deposits in a different way than how Elizabeth and I typically talk about it. I mean, I'm really for the direct deposit and knowing exactly what percent goes into what account and kind of having it just on autopilot. But you

Starting point is 00:22:45 have built in a certain amount of flexibility. Like you said, like you need to put more into your car fund right now. And you can easily do that without having to shuffle between what was already deposited automatically into one account or another. So I just think that goes to show how adaptable the strategy can be based on your style of managing your money and your specific savings needs at any given time. Totally. Every month there are certain things that I have to pay a certain amount for, like my daughter's tuition, right?

Starting point is 00:23:10 But beyond that, there might be like $250 that I can allocate to whatever I've, like, oh, we have a trip coming up. I'm going to put a little more in the vacation fund or something. I love how it can meet you where you are in your life. One of the things that can happen with sinking funds if you're not careful is you can overspend. And this is a terrible analogy, but it reminds me of like stacking buy now, pay later loans, you know? So you're just taking out money, taking out money, then you don't know where your money's going. But anyway, so how can people avoid overspending while they're doing these savings buckets?

Starting point is 00:23:41 I think it starts with knowing your budget. Put enough into your fund money account to cover what you typically spend in that category. And don't charge more onto your credit cards than you can afford to pay off. I think the savings bucket strategy can actually help support good credit habits and encourages you to have a clear understanding of your financial goals and your spending habits. For me, I tend to work backwards when I can. So let's think about like spring break or something. If I know that our spring break vacation will cost $2,500, we're going to rent a beach house with some friends and go. I'll divide that by the number of months I have until I need to pay.

Starting point is 00:24:16 So let's say that's six months. So that's $416 per month that needs to go into that fund. If that's not doable, like that's a decent chunk of change in my book, right? If that's not doable, then I might need to start planning even earlier to lengthen that savings runway. I mean, my friend's joke that I'm like such a planner, but this is partially why. Like, I want to pay cash, but I ain't rich. You know what I'm saying? So I need some time to save.

Starting point is 00:24:40 That also speaks to the adaptability of the savings bucket strategy where you can have sort of continuous savings like you have for your car fund or a time box. savings like you have for your Disney trip coming up. So as much as you are putting away money each month and you happen for a long time for this Disney trip, you see an end date, whereas your car fund, that's just going to be something you continue to save for, like with your house over many, many years. So that's why I just take a certain percentage of my income amount and just put it into accounts like that versus kind of when I was getting ready for my wedding last year, I knew I had to have a certain amount saved by a certain date. So it was easier to do what you said. It's kind of back your way

Starting point is 00:25:14 into how much you need to save each month to hit that goal. And it's a motivating factor. When you have that date attached, it really keeps you from overspending in other areas, I think, because you know you have that deadline and you need the money, right? Yeah. And other senses, right? Like, if you have a fun money bucket and maybe one month, like, you got to pull from it. I mean, this is the benefit of putting it in a high-yield savings account versus an investment account or something. Like, you still have access to the money. Like, all that money in an emergency, like, what is a fun money bucket?

Starting point is 00:25:45 Right? It's your survival bucket. So like all of this stuff in a sense acts as an emergency fund as well. Like, you know, fund money is nice to have. Vacations are nice to take. But if something were to happen and we needed that money, we could access it. Yeah. And I want to talk a little more about how these two goals, even though Witt saw them as kind of in conflict with each other, are really complementary. They're both things that are going to take time to establish and work on. Building your credit, like you said, Amanda, isn't something you can do overnight. Building your emergency fund also takes a long time to do. So I think

Starting point is 00:26:16 having the perspective of time and patience and your focus on your long-term goals and what you really care about doing both with your credit and with your money, you can help you stay focused over the long run of accomplishing both of these things, building your credit and building your savings. Yeah, it's a good lesson in patience and persistence, knowing that the small blocks build a big tower, you know? I think it's a good lesson for us all in life. Like, over time, you'll be surprised if you even chip away little small bits at a time, right? You're going to log into your high yield savings and see a number that really surprises you in a good way. You know, it speaks up on you, but it does add up quickly. Right. An adage that I encountered in all of my

Starting point is 00:26:55 running training over the past year is that people overestimate what they can do in a month and underestimate what they can do in a year. And that applies to so many areas of our lives. Yeah. And Witt, I'm not being a party pooper here, but in case you ever get discouraged, when you finally do get to 850, nothing happens. Nothing at all. You're not getting a free toaster as we talked about. No, you're not getting better rates. Nothing. And this is coming from a gal who, I don't know, I stopped checking my credit score for months.

Starting point is 00:27:27 And then I logged back in a few months ago. And I was like, oh, I'm at eight, whatever it was, 30, great. And then I just paid off my car and 35 points down. So I'm just like, whatever at this point, right? Because you no longer have that line of credit, that loan on your credit report. So, yeah, it can feel like a bit of a bummer. But also, I think it can help. separate your sense of self-worth from your credit score.

Starting point is 00:27:48 Exactly. Exactly. Listen, I got an 8-50. One time I took a quick screen grab. I looked over at my husband. I was like, ah, look what happened. And then he was like, good job. Pat on the back.

Starting point is 00:28:01 You're like, you're not taking me out to dinner. You're not taking me out to lunch, nothing. Yeah. And then sort of life moved on. You know what you? Yeah. Do you still have the 850, Amanda? No.

Starting point is 00:28:11 Like, it fluctuates so much. Remember, I had my age vats. I had, oh, that hurt. Yeah. I remember that was expensive. I will get back to the mountaintop. You will. You'll realize the view is kind of meh.

Starting point is 00:28:24 But not worth it working toward. Right. Yeah. Still, you know, a lot of bulgol, although it is just a bandy metric. Anyway, Witt, I hope this has helped you figure out how to save and build your credit all at the same time because you can't accomplish both simultaneously. If folks have other questions about building credit or saving, please send them our way because we as nerds love to talk about this stuff. And Amanda,

Starting point is 00:28:47 thank you so much for coming on and talking with us. It was a pleasure you too. Thanks for having me. Stay with us for our weekly money news segment. We're talking about a new report measuring affordability pressures faced by American families. But first, folks, especially those who live in the Chicago area, Elizabeth and I are going to be in your town the week of October 19th and we would love to talk with you in studio.

Starting point is 00:29:10 So please send us your money questions in case you're like, well, I want to see them, but I don't know what to talk about. anything to do with your finances. If you are wondering how to budget for the holidays or how to set goals for the new years, maybe you are trying to build generational wealth in your family and don't know what pillar to start with. Whatever your question is, come on over to the studio

Starting point is 00:29:30 and we would love to help you answer the question in person. To send us your money questions, send an email to podcast at nerdwollet.com with the subject, Chicago. And then as soon as we get your email, we'll give you a call so that we can arrange a time and a day for you to come and see us in the studio. We can't wait to see you.

Starting point is 00:29:48 And if you do hang out with us in the studio, I might just take you to Portillo's afterwards because I need a chili dog. Okay. Ooh, Sean is rich. They are so good and also pretty affordable for our Chicago dog. And one last thing,

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Starting point is 00:32:18 Today, we're looking at how families are faring economically in this country, and the news isn't pretty. Our news colleague, Anahilhaski, is back with the details. Today I'm speaking with Lorraine Bigelow, executive director of Georgetown Center on Poverty and Inequality about the findings of the Family Economic Well-Being Index. And it's a new tool to measure the affordability pressures that families in the U.S. are facing. Elaine, welcome to smart money. Thanks for having me. Affordability is something that's really top of mind for people right now. And it's not just about how expensive things are.

Starting point is 00:32:48 It's about whether people actually have enough breathing room in their budgets to cover the basics. The big takeaway from the index is that 70% of Americans are struggling to afford at least one basic need. What does that tell us about what people's financial lives actually look like right now? Well, it tells us a lot. And maybe I might back up for a minute and just say, as a popular. One of the biggest things that we like to communicate to people is that poverty is shaped by policy choices. And that means that policymakers can add a tax credit. They can fund nutrition assistance.

Starting point is 00:33:23 They can fund child care. And that has a huge impact on people's economic security. Recently, we actually had a great example of this in 2021 when Congress passed the child tax credit. The next year we saw on the data, we cut child poverty in half. So that's what we mean when we say poverty shaped by policy choices. And when we set to develop the index, we really wanted to figure out what can people afford? Can they afford the basics? And of course, we've heard from low-income families that they've been struggling to afford the basics.

Starting point is 00:33:54 But more recently, we've heard that this stretches well into the middle class. And like you said, our index found that 70% of people have one economic burden. But when you look at closer at that 70%, 83% of those people are above the poverty line. So that tells me that this is not like individual choices that people are making, that we have a larger structural issue with economic security. And you use the word burden in the index. What does that really mean for a family? What is being financially burdened actually look like in day-to-day life? A great example is the housing burden.

Starting point is 00:34:27 In general, policy folks tend to say that, like, you don't want to spend more than 30% of your income on housing. And burdened means you're spending more than that. more than 30% and a lot of people were actually close to 50%. Housing burden was one of the things that we saw across the country. And, you know, particularly, there is a big difference between renters and homeowners. 52% of renters experienced when economic burden compared to 32% of homeowners. We didn't look at exactly why all of those things are happening, but I'm sure a lot of the renters who are listening right now are thinking,

Starting point is 00:35:04 yeah, that's because my rent goes up every year. and that little extra that I'm trying to save, it makes it much, much harder. Being a renter seems to make all other financial pressures harder. How much is housing instability spilling over into the rest of the family budget? We didn't really get to see the interaction that much between those. The data didn't really show us that. But I do think these are great questions for people to be asking. Particularly we know people's in their 20s and their 30s right now.

Starting point is 00:35:31 They are not able to buy the home like they were 20 or 30 years. ago. And so they are delaying some of those financial dreams that they might be having. And a lot of that is because, you know, either their wages aren't keeping up with the costs right now and the rent is too high. So when you think about those two compounding factors, it is really hard for people to feel like they can save for the future or that they can get ahead. And what does this index help us see about Americans' financial lives that we might miss if we were just looking at the traditional poverty rate? There's so many economic indicators. haters out there. One thing that makes the index so different is that we're actually looking at people and we're trying to figure out how do people experience the economy. And that's what I really love about it. And what makes this so unique is that we have a shared burden across this country. To me, that tells us that we also can demand, you know, shared action from policy makers. To me, this isn't about the bootstress mentality of individual choices. This means that we have some bigger issues to tackle of housing, food, health care, and child care in this country that helps

Starting point is 00:36:41 make our country more economically secure. These pressures are reaching into the middle class, and there was something that I saw about nearly seven and ten middle class families with young children face child care burdens. What does middle class really mean if a family can have a middle class income and still struggle to comfortably afford those basics? That's probably what people are asking themselves. people who have worked hard, they've gone to school, they're saving, and they're like, I can't afford child care for my family. And when you look at the data, actually, child care was very persistent

Starting point is 00:37:14 even among higher incomes, meaning that the burden was still there for people. And again, this is kind of where I go back to the structural issues. You can work hard, make a decent salary, but that doesn't open up a child care slot for you in your city or state. And so that makes a huge difference how we are thinking about whether or not people can go to work. And so somebody's having to stay home that has long-term impacts on their retirement, their ability to save the whole family's income. And I think a piece that to me is really important is that 81% of children in this country are in a household facing an economic burden. Forty-three percent of children are facing food insecurity. And that to me shows that this is going to be lasting and there are going to be a lot of

Starting point is 00:38:01 effects, generational effects down the road. What's broken about the economics of it that make it such a huge burden, even for families who are relatively well off? Well, the pay. First of all, we don't pay child care workers enough. And so what we saw actually during the pandemic was a lot of them took other jobs that paid a lot more because everyone was feeling the rising costs during the pandemic and the rising costs are still here.

Starting point is 00:38:26 So pay is a really big piece of that. The second is the fact that there are. ratios that make it more expensive, obviously, to have younger kids. And so child care costs between zero to six is actually more expensive than, like, obviously, once they get to school. And so the burden for families that have younger children is actually a lot more significant. Usually because there aren't enough slots available, that does mean somebody has to stay at home, which again is a loss of income. Right. And there aren't universal pre-K programs everywhere. Exactly. And I live in D.C. And we have a great pre-K-3, pre-K-4 program, which I think has just done wonders for D.C.

Starting point is 00:39:06 Switching over to another area, health care is actually the most widespread burden in the index and that affects 41% of Americans. What's behind that finding? And does it change the way that we should think about what health care actually costs families? Oh, absolutely. We didn't look at the Y. We just looked at the data. But one, a pattern that we did tend to see across the country were states that did not expand Medicaid, which is a health care program for low-income families, they tended to have higher uninsured rates in those states. Again, this brings me back to, it's not just individual choices. There are bigger choices that policy makers can make to make it easier for families. And that to me really rings true. A couple of years ago,

Starting point is 00:39:48 Congress decided not to extend the premium tax credits, which help a lot of middle-class families afford health care. It will take a year or two, but we will probably continue to see that data bear out and make health care a lot more unaffordable for families as well. The index finds that 80% of Latino Americans and 77% of black Americans face at least one affordability burden compared with 66% of white Americans and 67% of Asian Americans. And that gap gets even bigger when you look at people facing three or more burdens. What do you think that pattern is telling us about who's most financially vulnerable? There's a long history there of why blacks and Latinos are facing,

Starting point is 00:40:29 higher levels of income and inequality compared to whites. And I think a lot of this is due to structural racism that we've seen in this country over the past, you know, 100 or so years. And so what that tells me is that when people are discriminated in their jobs or facing lower wages, that has a longer lasting impact on whether or not they're able to build wealth. Poverty is very difficult to get out of. And so that's something that I was really hoping in this index that we would be able to see too is that, you know, somebody may be receiving a SNAP benefit, but that doesn't necessarily mean that they are able to lift themselves out of poverty doing that, right? They have a housing burden. They have a health care burden. And when they compound,

Starting point is 00:41:16 it makes it even harder. So again, to me, when I think about this individual responsibility, bootstrap's mentality, that is not how we should be thinking about how we are going to alleviate poverty in this country, especially for people who are facing historical racial discrimination in this country. And so we need to be thinking about these solutions in an inclusive way, in a bigger way, and a bolder way. So you mentioned having more burdens, food, housing, health care, et cetera, and 16% of Americans are dealing with three or more of these burdens at the same time. If you're trying to keep up with housing and food and health care all at once, how do families actually cope? Is there a point where a family can look financially fine on paper, but really just be one unexpected bill away from a crisis.

Starting point is 00:42:00 The phrase is the math doesn't math, right? And so here is this like stigmatized sort of myth that we have out there about people who are low income don't know how to manage their money. In fact, I heard a senator say that just a couple weeks ago. And in fact, I think they're probably really great at managing their money. But when your bills are $1,000 and you're bringing in $900, you're always going to be at that deficit. A lot of times people who are low income, they know the grace period for their rent. They know they have it until the third. And so if they get paid on the second, that they can pay their rent on the third, and that will be okay. And they probably know their deposit policy better than anyone in this country. They know when their check will clear. They know how long it takes for

Starting point is 00:42:44 something to come out of their account. So I think for me, when I think about people who are struggling, they are very good at managing their money, the income isn't enough, their wages aren't enough, and that everything is just really too expensive. If you could leave people with just one takeaway from this research, what would you want them to understand? Well, I'd want them to understand that we are sharing this economic pressure right now, and this isn't just about otherizing other folks.

Starting point is 00:43:11 And to me, this should be about knowing that we can demand collective action because we are all, a lot of us are experiencing this economic burden. So like I said, policy shapes our economic security and we should be demanding better from our policymakers. All right, Lelaine Bigelow, Executive Director of Georgetown Center on Poverty and Inequality. Thank you so much for joining us today. Thanks so much for having me. All right, people, remember we're here to answer your questions about money.

Starting point is 00:43:40 Could be anything. Maybe you want to figure out how to plan for your next vacation. You don't know where it's going to fit in your budget. Maybe your budget is a mess and you want to send it to us so that we can do a budget rehab on it. Whatever your question is, turn to the nerds and call us your questions. The number is 901-730-373. That's 901-730, N-E-R-D. You can also send us an email at podcast at nerdwollet.com.

Starting point is 00:44:06 Join us next time as we scrape the Reddit threads for the juiciest financial goss and questions and give our own spin on the answers. Follow smart money on your favorite podcast app, including Spotify, Apple, podcast and IHeartRadio to automatically download new episodes. And in case you didn't know, we are on YouTube with full video episodes. So check us out there and follow along. And here is our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes. And it might not apply to your specific circumstances. Some companies mentioned in this episode may be nerd wallet partners, but that does not influence how we

Starting point is 00:44:42 discuss them. And with that said, until next time, turn to the nerds. Thank you.

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