00:05:49 TONYA: Okay, so this next one. Applying for a credit card hurts your credit score. Is that true or false? True!
00:05:56 JOHN: Unfortunately, it is true, right?
00:05:57 STEPHANIE: Yes.
00:05:58 JOHN: When you apply for a credit card, a loan; a lot of times that’s what they call a hard hit on your credit. Or sometimes you may have heard like a ding on your credit. It’s only ten percent of your overall credit score. And when you do apply for credit, it is on your report for two years, and it does fall off after two years. Ideally, you do want to have those dings spaced out a few months at a time, and ideally not have a few on your credit report at any given time. But again, life happens, and at the end of the day it is only ten percent of your overall credit score.
00:06:31 TONYA: And the great thing about those dings, they’re on your credit for two years, but they only affect your credit score for one year.
00:06:34 JOHN: Correct.
00:06:35 TONYA: So you have that on your credit report, but it’s not affecting your score. And I had a woman actually email me this morning and we had done all this work on improving her credit, and she said, “Tonya, I bought a car this weekend and guess what. My credit score dropped!” And it’s like, well, that’s going to happen, sweetie, because you took out new debt. It’s going to happen, but continue to pay your bills on time, continue to keep those other utilizations low, and you’ll see your credit score rebound in no time.
00:06:56 STEPHANIE: Yes. I know. But you guys, it is so tempting. When you’re out, there’s a lot of sales going on, doing a little shopping spree. All of a sudden, you know, you’re getting up to the cash register with all your great finds, and you’re thinking about the damage that’s done, right? You’ve been adding it up in your head already. And the lady on the other end of the counter asks you, “Would you like to save 20 percent by starting a store card today?”
00:07:24 TONYA: Yes, and it sounds so good. Absolutely. Who doesn’t want to save 20 percent? Yeah, but what they don’t tell you about that is those cards are usually really high interest rate cards. And so you might save 20 percent, but they might charge you 25 percent in interest. So actually, you’re spending five percent more if you don’t pay that balance off immediately. Going back to that first one we talked about, paying that balance off immediately.
00:07:46 JOHN: And use your inaud. to pay on the damage you’ve done. Are you going to be able to pay it off?
00:07:50 STEPHANIE: That’s right. And like you said, even just the look hurts you. You decide not to do it, them looking at it affects your credit score.
00:07:58 TONYA: So if they deny you, you’re still going to get a ding. 00:07:59 JOHN: Correct. Yep. All right, let’s move right along here. So next one. Paying cash for everything will improve your credit score. 00:08:08 TONYA: That is actually false.
00:08:09 STEPHANIE: It is false. But I could see how this would be a really common misconception, right? You’re a responsible consumer. You’re not having a lot of debt. And you’re paying in cash, right?
00:08:21 TONYA: Especially if you’re working on your budget and you’re trying to create boundaries, and so forth, so you’re paying for cash.
00:08:25 STEPHANIE: Right!
00:08:25 TONYA: They always say cash is king. But when it comes to your credit score, it’s not.
00:08:29 JOHN: Yeah. If you don’t have a credit card, any sort of payment history, they don’t know; institutions, if you’re wanting to borrow money from them, if you’re going to pay them back or not. One thing to keep in mind, there’s two types of credit. So we’ve been talking about credit cards a lot, and that’s what we call revolving credit. So if you think about it, it’s like if you put a hundred dollars on your credit card, you could pay it off right away, that hundred dollars is immediately available to use again. Kind of like a revolving door. The other piece is installment credit. And so for that, think student loans, a car loan, a home loan. Certain number of months, certain number of installments, and then it’s paid off, right? So we’ve been throwing out a lot of percentages. Another one is ten percent of your credit score is also what we call the credit mix. Do you have both of those types of credit, revolving and installment? If you only have one and not the other, it’s not the end of the world. Again, only ten percent. But be aware of those two different types.
00:09:24 TONYA: Yeah, because banks want to see you probably manage different types of credit.
00:09:28 JOHN: Exactly.
00:09:28 TONYA: You can pay a credit card, but can you pay a mortgage? And when you can pay both, it’s like, okay, they’re responsible and can handle different types of credit available to them.
00:09:36 STEPHANIE: Okay. Your income has an impact on your credit score.
00:09:40 TONYA: That’s false. A lot of things have an impact on your credit score, but not your income. Thankfully, what you make, who you are, your gender, your religion; those factors do not affect your credit score.
00:09:50 STEPHANIE: Yes! Absolutely. And this really levels the playing field a bit, too, because even if you may have a low wage, you can still keep a really high credit score by paying on time, right?
00:10:03 JOHN: That’s the way it runs.
00:10:05 STEPHANIE: So I think that that’s really important to know and a good hope for a lot of people who maybe don’t make a million dollars a year, and can still have a really great credit score. Now on the other hand, someone who does make millions of dollars could have a really poor credit score.
00:10:19 TONYA: There’s not a direct correlation. Just because you make a lot of money doesn’t mean you have a good credit score. Just because you don’t make a lot of money doesn’t mean that you have to have a low credit score.
00:10:25 JOHN: Yeah. And I really like this one, too, because I think the income question is a lot of the confusion out there, just because it makes sense to assume that how much money you make might affect your credit score, but it does not.
00:10:37 TONYA: It can affect a lot of things, but not your credit score, thankfully.
00:10:39 STEPHANIE: Yeah. It should be said that applying for certain types of installment loans; they will look at your income in relation to your credit score as well, too. So while it may be an important factor on some things, it just doesn’t impact the score itself.