April 28, 2019
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In this episode of Women & Money, Suze gives you everything you need to know about credit cards.
More and more, I am hearing from you and you are writing me and you are saying the following. Suze, after 20 years, after 30 years, sometimes after 40 years, I have just divorced my spouse. I never thought I would be in this situation; I never took control of my money and now I am starting over and I don't know where to begin. I don't have credit cards in my name. I don't even know what a credit score is. I don't know what I need to know. I don't even know how to protect myself if during the divorce now, it hasn't been completed yet, what do I do with the credit cards that I have in joint name with my ex-spouse to be? I don't know! Can you tell me, Suze? So today's podcast is all about everything that you need to know about credit cards and a credit score. You have got to know about these things. Because these two things, believe it or not, can be the true basis of your financial foundation. Let's start with a credit score. They are formally known as a FICO score. FICO stands for Fair Isaac Corporation. The company that created the score many years ago. So why did they create it? Because there came a time when all of you wanted to start borrowing money to buy a car, to buy a home, to get credit cards, whatever it may be. And rather than the lenders having to look at all your financial behaviors, do you pay your bills on time? Do you run up and use all of your credit? Are you responsible? Are you irresponsible? That would take them forever. FICO Fair Isaac Corporation came up with a numeric coding system. A three digit number that when a lender looks at that number, they know exactly if you are credit worthy or not. They know exactly if they should lend you money or not. They know exactly if you are a credit risk or not. And if you are a credit risk and they decide to lend you money, they are going to charge you more interest on that money, because you might just not pay them back. So by a simple glance at a number, they were able to determine your financial future. FICO scores run from 300 all the way up to 850. Let me just say, anything under 500, you are FICO’d. Got that everybody? The FICO score that you want to have is 760 or above. That would be a great FICO score for you. Why? Because the higher your FICO score, the lower your interest rates. The lower your FICO score, the higher your interest rates. And a high interest rate when you are purchasing a home, especially since home prices have increased so much, you want the lowest possible interest rate that you can get so that you can afford the monthly payments. It's just that simple. But it's not just the interest rates that you will pay on your car loans, your credit cards, your home mortgages, and things like that. Do you know that Direct TV actually determines the amount of money they charge you based on your FICO score? Do you know that there is a derivative of a FICO score known as your insurance risk score, and sometimes your insurance premiums for your car, that premium is based on your insurance risk score. So it has a lot to do with everything, because the more you pay for things, the less money you have to save. So one way that you can make more out of less money, is to have a great FICO score. Especially if you are starting over. And you're on your own. And now you're applying for credit cards on your own, you're applying for a car loan on your own. You maybe are applying for a mortgage on your own. You want a good FICO score. Now you might be listening to me, and you might be saying, what is the difference between a FICO score and a credit score? I know my credit score Suze, but I've never heard of a FICO score. The FICO score is your legitimate credit score. It's just the name of it. But it is the score that 80 to 90% of your lenders use. Because this was such a big business, all the other credit bureaus. You have three Credit Bureaus. Experian, Equifax and Trans Union. And years ago, the way that it worked, is that FICO would take the information on those three credit reports, and they would create three different individual FICO scores for you. So the truth is you not only have one FICO score, you have three. And then those three credit bureaus decided, we should get into this game. Why should FICO be the only one creating a FICO score? We will create a score. Originally it was known as the Vantage score, and will sell that score to all the banks. Because we already have all the information FICO has to use our information that's in your credit reports to create the FICO score, so why don't we just do it? The problem with their thinking, was this. The banks already had, the lenders already had, everybody already had in place all the machinery to look at FICO scores to evaluate whether they should give you a loan and the interest rate that you would pay, and they didn't want to spend the money to transfer over to the regular credit scores or the vantage scores. So when you get your credit score for free, such as on creditkarma.com, and I love Credit Karma. I love them. But is that the score that the actual lenders that you are using are going to look at? Chances are it is not. So when you go to apply for a loan for anything, you want to make sure that you are checking your actual FICO scores, versus just your credit scores. But for this podcast, I am going to refer to them as FICO scores. Got that? So now you know the difference between a credit score, a avantage score, and a FICO score. So your question should be where can you get FICO scores? Well let me tell you where I get my own FICO score. I get it from the Discover card. Yeah. Suze Orman has a credit card. Yeah, she has a few credit cards. But I don't carry a balance on them. But that is beside the point. This is not about me. But then again sometimes it's always about me. But I won't go there. Anyway. If you want to check your score, why not just get a credit card that offers you those scores for free? And there are a variety of them, believe it or not. So you can do again the Discover credit card. They have a scorecard. Even American Express has them. Citibank, Bank of America, Chase all of them. So just check it out to see. You can also go to myfico.com. But there's a way for you to get your FICO score. Now here's what you need to understand about credit cards. How you deal with your credit cards has a lot to do with your FICO score. The main two elements that the score looks at is do you pay your bills on time, and how much of the credit limit that has been extended to you, how much of that limit have you used? So if you want a good FICO score, you have got to pay your bills on time. If you do not pay your bills on time, your FICO score will be dinged so much, it's not even funny. Next. How much of your credit limit have you used? Officially, it is called your credit utilization ratio. How much credit limit do you have in comparison to the debt that you carry on your cards? Let's assume you have five credit cards. And they each have a $2,000 credit limit. That gives you a $10,000 credit limit totally right? You have five cards, with $2,000 of credit limit on it. You have a $10,000 credit limit. And just let's also say, that you have used and maxed out all five of those cards. So your debt that you carry on those cards is maxed out at $2,000 each, you have five of them, so you're carrying $10,000 of debt. So you're debt of $10,000, in comparison to your credit limit of $10,000, is 100%. You want a debt to credit limit ratio of 30% or less. The less debt to credit limit ratio that you carry, the higher your FICO score. Therefore, how do you improve your FICO score? You can improve your FICO score by paying down your credit cards, and not charging on them. Carry a low debt to credit limit ratio. Another thing that you could do, if you were responsible, you could call your credit card companies and ask them to increase your credit limit, as long as you don't use that credit limit. Another way that you could help your credit utilization ratio would be possibly to open up another credit card as long as you already don't have too many. And as long as you don't use that credit limit. How do you hurt your debt to credit limit ratio or your credit utilization ratio, is you closed down your credit cards after you have paid them off. Listen to me closely now. You have those five cards that are each maxed out, you have 100% debt to credit limit ratio, and you pay off one credit card, all $2,000 you paid off and you close it down. You pay off another credit card, all $2,000 and you close it down. Another one, you pay it off, you close it down, you close down the fourth one and now you have one credit card left, you have $2,000 of a credit limit, but you still owe $2,000 you still have 100% debt, what you owe to your credit limit ratio. If you kept all five of your cards open, as you paid them off, and now you only owe $2,000 on one card, but you still have five cards with $2,000 of credit limit each, but you don't owe anything on the other four, you now have a $10,000 credit limit, you owe $2,000 in debt, that's a 20% debt to credit limit ratio, bingo. Your FICO score should start to go up. Now you have five credit cards, and you have paid them all off. If that is the case, and you never carry a credit balance, you always pay off the debt, and your bills as soon as the bill comes in, then you can feel free to close down other credit cards, especially if they carry a fee on them, because if you never carry any balance on your credit cards, then in the long run, truthfully your debt to credit limit ratio after you have paid off your bills, is zero. Now here's where you have to be careful so listen to me. The other day, I get an email from a good friend of mine. And she says to me, Suze, I'm so, so panicked I had $20,000 that I've charged on my credit cards. And I planned to pay them off at the end of the month, and I've just checked my credit score, and my credit score went down considerably. Why would they do that to me, Suze? I pay off my credit cards at the end of every month. Why? Let me tell you why. When you charge on a credit card, the bureaus do not know that you are going to consistently pay off that card at the end of every month. Just because you've been doing so, doesn't mean that you're going to be able to continue to do so. So if you check your FICO score at a time when you are carrying a high balance on your credit cards, your FICO score will go down because your debt to credit limit ratio has increased. And so now you think you have a low FICO score. If you are ever applying for a loan, for a home loan, a car loan, a credit card, whatever it may be, make sure that you, number one, if you can, pay off all your credit cards, now you have a zero balance, and do not use those credit cards again for a month or two during which time you apply for your loan and when your lenders check your debt to credit limit ratio they're going to see that you're doing great and you will get a lower interest rate. Just that simple. Again, if you can't pay off your cards in full, please try not to charge any more than you have to on those cards. If you're going to be applying for a loan. Let's talk about credit cards and divorce, and what you need to understand. If you have a credit card with a spouse that you are divorcing, you have got to make sure that during the divorce you close those credit cards in full. And the only way that you can close those credit cards in full is to pay them off in full. Meaning, if you owe $5,000, and you can't pay that $5,000, and yet you call the credit card company and say close down these cards, oh they'll close it down. They'll tell you they closed it down, but the truth of the matter is because you still owe money, the card is technically opened. It cannot be closed down. Then all of a sudden, a year or two or three from now, you find out that your ex-spouse has been actually charging on that credit card, and you legally owe that money. The only way that you can physically close down a credit card so that you or your ex-spouse can never use it again, is to pay off the balance in full, and then close it down. So if you are separating or going through a divorce, you have got to close down joint credit cards. Or better yet, don't open up any joint credit cards, ever. You should have your own credit cards in your individual name, your spouse should have credit cards in their individual namr, and do not have joint accounts like that. Do you hear me? That's number one. Number two, your name is on a loan, the mortgage of your home that you purchased. And now, your ex gets the house. They get it. And you aren't responsible for it, you aren't whatever, it's all in their name. But yet they do not refinance that house and take your name off of the mortgage, and now they stop paying the mortgage. They start to go crazy with money, but because you never made it mandatory that they refinance that house and take your name off the mortgage and only put it in their name, now the mortgage lenders start coming after you. So during a divorce, you have got to give yourself credit. You have got to make it so that everything is just in your name, anything in joint name is closed totally. That your names are off mortgages and your ex if they're going to keep the house, has to refinance it and it is in their name only. Are you understanding me? It is so important that you do this. It is important because once you have gone through a situation where you're now separating your heart, you're separating your life, you're separating everything, and you're really doing okay. The years have passed now, and you've gotten over the emotional hurt, and now financially you're really doing okay. You do not want to knock on your door saying you owe this much money, you have to do this, you have to do that. You want your life to go forward, you don't want to have to go back to that financial mess. So can you be the strong, smart and secure women that I want you to be, and can you take credit for your own life in every possible way? The choice is up to you.
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Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.