60-second video: Myths of credit

Ramit Sethi Ramit Sethi · March 11th, 2009

While personal-finance journalists love to point out that we could save $3/day by not buying lattes, they usually don’t point out that having good credit can save you over $100,000 on major purchases, like buying a house or car. Credit isn’t as sexy as lattes, but since we focus on the big wins, today I’m showing you a 60-second video that dispels myths of credit.

Check it out — a guest post from Andy Jolls of videocreditscore.com.

I Will Teach You to Be….Credit Savvy…in 60 seconds by Andy Jolls, ex-FICO Exec and CEO, VideoCreditScore.com

We are bombarded by credit ads on Facebook, mySpace, random blogs and even Nascar races. Many of these ads are for free trial services where the costs kick in before you get a chance to understand what you are buying. So here’s the skinny on what you need to know about credit in 60 seconds

  1. More than one You have three credit scores from 3 different credit bureaus
  2. Lots of models Most used scores are FICO scores. 90% of all mortgage lenders.
  3. Myth: No car, no house no worry: your credit standing can impact employment, insurance and lending decisions – don’t fight it, accept it. – 20% of all employers look at it now.
  4. Swingers: Your credit score can vary from bureau to bureau – 29% of consumers have 50 point swings
  5. Free? You can your report for free at annualcreditreport.com or get a free 30-day trial with your FICO score.
  6. Myth: Closing cards helps you. Sadly, this hurts your score as it lowers the credit available to you.
  7. Myth: You have to keep a balance to build your score. Ugh. No. Not true.
  8. Myth: Checking credit scores hurts. Nope, as long as you are getting it from a non-lender your score is unaffected.
  9. Myth: Online loan shopping hurts. Truth is all inquiries in a 30 day window for home loans are treated as 1 inquiry.
  10. Credit Repair Master#^$@*!… You don’t need a partner to master credit, in fact the FTC says you should “do it yourself”.

As Ramit and I agree on not sweating the small stuff, I want you to focus on not obsessing on your FICO score. Instead, I want you to learn the important elements – such as pay on time, and eliminate balances – and develop habits that will keep your credit score high for years to come.

* * *

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  1. Beef Supreme

    While this was interesting, it would have been more informative if he didn’t just blurt the info out and explained WHY each of his statements was valid.

  2. I’d add that it’s also a myth that if you pay off your credit card bill every month on time, you’re home free. If you run up huge balances (relative to your limit), you may hurt your score *even if you pay it off at the end of the month.* A good rule of thumb is to try not to charge more than 20-30 percent of your limit, especially if you’re in the market for a loan. I got this great advice from financial journalist Liz Weston.

  3. Although I have received my free credit report in past years I recently tried to get it from all three agencies and was either told I needed to enter my credit card (which I’m sure would require me to cancel something later on) or that I was ineligible because my state (Illinois) does not require them to provide a free report.

  4. @Megan: It’s a federal law (see http://www.ftc.gov/freereports), so you’re eligible anywhere in the states.

  5. Thanks for this! I have no credit and know I need to start building it, and everyone seems to tell me different things. This cleared up a few questions I had.

  6. I have also heard that having more than 50% of your available credit charged can hurt your score, but how much does it hurt? Of course I only heard this after I recently took advantage of some 0% balance transfer offers and now have only 2 credit cards with balances remaining, both using much more than 50% of their available credit. The overall ratio of debt/credit is only 18% but that is across all cards.

    Anyone “in the know” want to take a stab at ranking which of the things that DO impact your credit score are more important?

    For example (off the top of my head and totally guessing):

    Having a bill go to collections
    Being more than 30 days late on any bill.
    Closing cards (particularly ones establishing a long credit history)
    Having a card with more than 50% of the available credit used…

  7. Loved it! Straight talk re. credit scores is hard to come by. I’d love to see citations for the points he makes. Seems like Andy knows his stuff, but with so much contradictory info floating around, I want to be able to really make sure I understand everything.

  8. Thanks for those! It has been useful for me as I used to think that every time you check your score it hurts, good to see that I was wrong!

  9. I have been thinking that people’s priorities are jacked up. I read The Millionaire Next Door two months after it came out, which was a comprehensive study on the behaviors of self-made millionaires.

    The biggest thing I remember was to move into a neighborhood where you were comfortable with the payments and were richer than most other people, then you didn’t have to spend money to keep up with the jonses, you were the jonses.

  10. Beef, good point. Future videos will go more in depth.
    Erin, I tell people to shoot for 10% of their limits. More on this soon.
    Megan, not true. Go to annualcreditreport.com. Safe, govt mandated site.
    Danielle, check my video called “Credit Score Factors Pie” for a better sense of weighting. Worst impact : bankruptcy least impact: inquiries
    Chris, Justin: Thanks!
    Byron: Love that book. On credit, the point is to be educated. Many of the best score folks are people with simple needs, paid off mortgages, installment loans and low credit card usage ratios.

  11. so are these all those “Secrets That Credit Card Companies Don’t Want You To Hear?” If I hear another debt consolidation/elimination/repair commercial touting this line I’m going to take a hammer to the radio. ugh I can’t be the only one sick of hearing this multiple times an hour when I’m at work.

  12. This was a really interesting post. I liked the video, by the way. I know for a fact that there’s so many myths and unknown facts about credit, insurance, loans and all that jazz. I remember when my mom was gonna get a van for the family… She had a really bad deal and now our van is just horrible. I guess she would’ve had a better deal had her credit been better at the time. And since we don’t have proper insurance, well, I’ll leave it up to you to guess how it’s running.

  13. […] (which, funny enough, ranges in about the 50-point swing Jolls says any two bureaus may differ by). 60-second video: Myths of credit [I Will Teach You To Be […]

  14. “Myth: You have to keep a balance to build your score. Ugh. No. Not true.”

    It may not be directly true, but carrying balance, even a small one for one month, DOES lead to more frequent credit limit increase with most cc issuers, which will help your debt ratio, which will help you credit score. I know, because I spent 8 years doing this to go from a score in the 500’s to 808 as of last month. i started with a single credit card with an $800 limit and now have 6 cards ranging from 15k to 30k.

  15. Quick question:

    I have a 2k loan from undergrad and have the cash on hand to pay it off free and clear, but my parents tell me I should pay it off over time to build up a credit score. Is this BS? I don’t want to pay the interest if I don’t have to. Thanks!

  16. NewmanDog

    Haven’t seen anyone mention creditkarma.com on here. I don’t care enough about my score to shell out $15 or whatever every month for the “FICO” score, but this one’s free and it’s close enough. I use it to get a general idea of which direction my credit’s moving in

  17. […] (which, funny enough, ranges in about the 50-point swing Jolls says any two bureaus may differ by). 60-second video: Myths of credit [I Will Teach You To Be […]

  18. […] 60-second video: Myths of credit | I Will Teach You to be Rich (via Lifehacker) » Get Caveat Emptor delivered to your inbox! Subscribe to Caveat Emptor by Email […]

  19. […] credit myths explained in 30 seconds Video/blog post […]

  20. Regarding credit card balances:
    Generally, it is not the balance compared to the available credit on each card that matters, it’s the total balance / total available credit that counts.

    Meaning: if you have a total balance that is 50% or less of your total available credit you will be OK.

    If you have a total balance that is 30% or less of your total available credit your FICO score will actually increase each month. Sometimes drastically.

    This is why closing a CC account hurts you, it reduces your total available credit compared to your total debt.

  21. […] (which, funny enough, ranges in about the 50-point swing Jolls says any two bureaus may differ by). 60-second video: Myths of credit [I Will Teach You To Be […]

  22. Devil’s advocate here – the only reason he gives for building a credit score is because 20% of employers check your credit. How many employers would actually not hire you simply because you had financial problems? If you are in a financial field, this may be probable and reasonable. But not having a credit score does not mean you are financially irresponsible. On the contrary, how rare a quality for you to be so financially responsible that you actually pay for things you buy, whether it’s regular purchases, or cars worth thousands of dollars.

    I’ve heard others claim you need good credit so you can get loans, but most people can work through college, save up for a car, and use manual underwriting (based on financial responsibility) for obtaining mortgages.

  23. […] (which, funny enough, ranges in about the 50-point swing Jolls says any two bureaus may differ by). 60-second video: Myths of credit [I Will Teach You To Be […]

  24. Very informative video and post.. In India we have CIBIL and SAtyam Scores in place of FICO but it too wroks pretty much on same principles.. Thanks for the post.

  25. I don’t bow down to the almighty credit score myself (I never really cared much about it but I do check to make sure my ident isn’t stolen)

    I also think if your employer wants to check your credit before working there that’s a redflag on the employer.

  26. […] (which, funny enough, ranges in about the 50-point swing Jolls says any two bureaus may differ by). 60-second video: Myths of credit [I Will Teach You To Be […]

  27. […] covers some of the myths of credit. (Read it at I Will Teach You To Be […]

  28. MoosTracks

    Great tips. Your information is generally quite credible. However, telling me to roll over and take it by not “fighting” employers who want to look at my personal credit score is OFFENSIVE.

    How I spend/misspend/mishandle my money or when I bought a car, a house, asked for a loan, etc., is MY business- not my potential boss’s.

    Stay OUT of my personal credit information.

  29. […] sixty-second video on myths of credit. (Watch it at I Will Teach You To Be […]

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