Episode 51 – Credit scores and freezing your credit
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today, we have Lyn and Nathan with us from the Washington State Department of Financial Institutions. Also known as DFI. And today we wanted to talk with them about some of the great resources that DFI offers, as well as talking about kind of the basics of credit scores and all of that financial knowledge. So, welcome to the podcast.
Lyn
Thank you very much for having us. It’s great to be here today.
Nathan
Thank you. Thank you.
Seth
Lyn, so I was poking around a little bit on the DFI website, and I learned that your office does a lot, probably a little bit similar to DRS, where people don’t know you exist until they find out you exist. So, I saw that citizens can file complaints against companies or individuals that are regulated by DFI. They can receive alerts about financial scams or frauds, learn about crypto currency, or download budgeting worksheets. So, can you just tell us and our listeners a little bit what your elevator pitch is for, what DFI does?
Lyn
Yeah. So, in super simplified terms, DFI does four things. We license, we regulate, we protect and we educate. We are a small state agency that licenses and regulates the financial services industry to ensure a safe and sound financial services sector and to ensure that consumers are protected from bad actors. And then what Nathan and I do, and this was put legislative charge on us in 2009, I believe, is to do financial education throughout the whole state.
All topics, all ages. So, knowing that we’re a small team, we have quite a bit of information online as well. And we boost that on a regular basis. Our licenses cover are pretty widespread, whether it’s you’re your state chartered banks and credit and you like your local banks and credit unions, the big guys are not ours. Those are federally regulated.
Your local banks and credit unions, payday lenders, money transmitters, mortgage brokers, financial advisors. We even license crypto, whether it’s money transmission or an investment product. So, a little bit of everything, if it has to do with money, we probably license and regulate it somehow. And for financial education outreach, like I said, we cover the whole state.
My motto is: ‘have van, will travel’, much to Nathan’s chagrin. I’m like, “sure, we’ll go there, Colville, our next stop.” We do travel the whole state. There’s very few places we haven’t been yet. All ages, from pre-K all the way to senior living as well. I was just in Oak Harbor the other day, talking to senior citizens. That was awesome.
And then we do in person. We do online. However, it works best for people and the really great thing in hiring Nathan — he’s been here officially a year now —is that he also speaks Spanish. So now we’re also reaching out to the Spanish speaking community as well. Oh, and it’s all free of charge.
Jenny
That’s amazing. How did the schools find out about you, or how often are you at a particular school?
Lyn
So, there were two different ways that schools find out about us. Well, three, I guess one is we attend their teacher conferences with a resource table and a lot almost every year we’ll have teachers come up and say, “hey, I was assigned with doing financial education. I’ve never done this before. Can you help me?” And we have a ton of resources that are vetted by the financial education public private partnership that meet state standards. And we share them and they’re free. So, you know, we connect them with stuff so they can go do training and learn how to integrate it into their classrooms.
Another way is, those teachers just reach out to us and they’ll ask for a presentation on our website, usually around November, December. That’s when Nathan’s going to be really, really busy. It’s when teachers are doing their final grading. So, we give them a break and come in and do a presentation and keep the kids busy. And it works out really well.
The other way is we have an organization called Money Savvy Generation that have been doing financial education in schools. Preschool, elementary and middle school are the primary grades, and it’s a program we pay for. We fund it, teachers sign up, they get taught how to use it, and then it gets shipped directly to their school so they can use it in the classrooms.
Jenny
Nice. That’s awesome. That’s great. I think that’s so important.
Lyn
Start them young.
Jenny
Yes, exactly.
Lyn
Well, we found out from Cambridge that our money habits are set at age seven. It’s not too late to change them, but it gets harder every year.
Jenny
Yeah. So, it’s good to start having those budgeting conversations at an early age. How to manage money, manage an allowance and all those things. Yeah. And then today we wanted to talk about mostly credit scores and all of the conversations around that. We know that it’s a topic that you regularly provide education sessions on. First, could you tell us what a credit report is and what a credit score is? They’re similar but different.
Nathan
Yeah. Nathan hopping in here. We basically like to describe the difference between these 2 in 2 simple terms. Think of your credit score as your GPA when you’re in school. So it’s sort of, a score that fluctuates based on your more recent activity and credit habits. Right? So, it can go up one month. It can go down the next, sort of based on your performance, so to speak.
Mainly it’s your more recent credit habits and how you’ve been using that. The scores range generally, but depending what score is being used because there are a couple different types of scoring, there’s VantageScore and then there’s the Fico score and they have slightly different ways to calculate what factors play into your score. But in general, the scores range sort of from 350 to 850 most of the time.
Really, the score is an indication of how responsible you’ve sort of been with your credit. And the single biggest factor in having a high credit score is paying your bills on time, not having any late payments on your credit history. So, all sorts of institutions, from banks to lenders to insurance agencies to even employers, they’ll oftentimes look at our credit scores as a quick way to determine the level of risk that we incur as individuals. And in the case of, of a bank or a lender or a or a credit union, it would be the risk that they take by lending us money. So that’s credit score. Is it sort of like our, recent GPA.
The credit report is like that quote unquote, “permanent record” that they always warned you about in school, right? That if you don’t behave, this is going on your permanent record. So, it’s sort of like an academic transcript in that sense. Generally it spans 7 to 10 years. It has all of your current lines of credit as well as the past lines of credit. Even if you’ve closed the credit card, you’ll stay on there for a number of years, as well as information that shows whether you’ve been paying on time.
So, each one of your lines of credit will have a little check mark with “on time payments” basically, and a little red circle, usually with a with an exclamation point saying, hey, they were late for that payment. So late payments, bankruptcies, foreclosures, any sort of financial events that might cause worry for a lender, especially those stay on your report for up to ten years.
So, to wrap it all up, in general, your credit score is a little bit more of a recent snapshot of your current quote unquote, credit worthiness, how much risk, an institution might take when they’re lending you money. Whereas your credit report is more of an in-depth breakdown of your whole history. So, it doesn’t necessarily score you, but it does have ten years of credit history documented there.
Seth
I love that visual of thinking about my GPA. And then if you grabbed my college transcripts and my high school transcripts like that, GPA is just like one tiny summary of all of that information together. That’s a really wonderful example. And, Nathan, could you tell us, like you’ve touched on this a little bit, but how are how are credit scores used and why might my credit score matter as I’m kind of navigating the world?
Nathan
Absolutely. So, credit scores seem like an arbitrary number that people might show off and throw around like, yeah, I’m on a 700. I’ve got an 850. Oh, man, you’re only at 650, you know, but it’s much more important than just a status symbol. And it does have real life implications. So having a high credit score indicates that we pay our bills on time, that we don’t use too much debt, or rather, that we’re not reliant on debt and also having a good mix of credit.
So that’s sort of like not only having credit cards and paying those off on time, but having installment loan, for example, a car loan or a home loan that could also potentially boost your credit a little bit. Just having that diversity of credit. Having that high credit score is important because a lot of things are based on the credit score, car insurance rates.
I just got a car recently, and when I was signing up for insurance, they wanted me to select which one of these score ranges I was in. And that I assume influenced, how much they’re charging me. They can also impact what sort of cell phone plans you might qualify for, whether you can rent an apartment. A lot of times, apartments say you need at least a 600 to a 650 credit score in a lot of areas to even rent.
And then the interest rate you’ll get on a car loan or on a credit card, for example. So the higher the score, the lower generally the interest rate you’ll qualify for. And that’s especially important when we’re thinking about a big purchase, like buying a car where it’s tens of thousands of dollars, 1% interest can generate over the course of five, six, seven years.
That 1% difference in the interest rate you’re paying can end up being hundreds or even thousands of dollars, for lack of a better way to describe it. It’s sort of how banks and services determine how responsible you are basically with money, to put it really simply.
Lyn
Yeah. During the foreclosure crisis, we learned that the military, sort of assessed their people based on their credit score for their security clearance. So, we had some military folks who were at risk of losing their job and their security clearance when they had foreclosure issues. So, it impacts a really wide variety of things.
Jenny
When I appreciate kind of the example that Nathan gave of 600, is about what they’re looking for as you start to be considered like medium, trustworthy or something with your credit. But then 850 is the is the highest, which I always thought was kind of a strange, arbitrary number. It’s not 900, it’s not a thousand. It’s just 850 is the highest you can go.
Lyn
Yeah. And Fico and Vantage used to have a different scoring system. I think they aligned a little bit more again recently. But yeah, I mean, some of us are big enough nerds in our household. We have competitions. I’m winning right now.
Seth
It’s like you’ve been listening to the conversations my wife and I have been having. That makes me nervous. [laughs]
Jenny
Oh, man. [laughs]
Seth
So, Nathan, I appreciate the examples that you provided around credit score. At the start of the conversation, we also talked about credit reports kind of making up kind of the history of that, then becomes can become the credit score. So, my understanding is people can look up their credit report and pull their own credit report and see what’s on their credit report. What sort of things would a person find on there? What sort of things should they be on the lookout for?
Nathan
Yeah, well, first of all, before I say anything, I want to say, a lot of people have a misconception that when you access your credit report, your score takes a hit. That is actually not true. You can access your credit report for free, and it won’t impact your score. When checking credit reports does impact the credit score.
It’s in the case of a financial institution or a lender checking your score, or even an employer or an apartment complex. If you’re getting these hard pulls from external institutions, then that’s an indication to these credit bureaus that you might be seeking out credit more than they would like.
Jenny
So really quick, where is a good place to go check your credit score or your credit report?
Nathan
Yeah. So, a good place to see your credit report is Annualcreditreport.com. It’s a federally recognized site, and it allows us to get all three of our credit reports for free. So, there are three credit bureaus Equifax, TransUnion and Experian. And if you go to Annualcreditreport.com, you can see all three of them. You sort of flip through one, then hit next and then flip through the other and then hit next.
And you also have the opportunity to just view one and not another. You can sort of pick what you see. And then within each of those, credit reporting bureaus that I mentioned, you can create an account. Most of the time it’s free. And unfortunately, to be able to see your credit score, you will likely have to pay if you create an account with these three bureaus.
Now, a lot of banks and credit unions might offer, their clients, their account holders, a way to see your score. And that is one approximation. Once again, all three of these bureaus sort of have different ways of calculating them. So, your score at Equifax might be a little bit different, a couple points different than it is at TransUnion.
For example. So going back to Annualcreditreport.com, because we’re talking about credit and it’s very sensitive personal information, we have to put in our Social Security numbers. It’s really important that we do go through a trusted source like annual credit report.com. And just actually as of October of last year, just about a year ago, the federal government permanently extended a program where we’re now able to access our credit reports for free once a week from all three bureaus.
Now, I know it’s a little bit confusing because the website says annual credit report, right? That’s a throwback to the past. But now let it be known that we can access all three of these for free once a week. This sort of started when Covid hit and there was a lot of rampant fraud, but people liked it, and I’m not entirely sure what went into the decision making process of permanently extending it, but I am very excited that it is an option, because checking your credit report should be something that’s freely accessible.
In my opinion, it is my personal information. At the end of the day, you know, and there’s a lot of risk associated with having faulty or incorrect information on your credit report. So, I’ll just talk a little bit about what are some of the common issues that you asked about. So, all three of these credit reporting agencies might have slightly different information depending on how they work and how and when they collect the data.
You might need to correct things like your home address where you work, duplication of accounts, for example, on one, that might not be present on another, credit bureau’s credit report of you. So, it’s important to sort of go through all three and make sure all of the information on it is recognizable. Make sure that addresses and phone numbers you recognize. If their addresses and phone numbers or accounts, especially accounts that you don’t recognize, it’s really important that we dispute that because that could adversely affect our credit score.
If an identity thief uses our personal information to open up a credit card account and they don’t pay it, those late payments or those missed payments are going to severely affect our credit scores, right? And it’s not until we dispute this account being open and dispute the late payments that these institutions kind of realize that it’s not you and it’s the identity thief, because up until that point, the only two people that know are yourself and this thief.
So, it’s really important that we do dispute any sort of, inaccurate information, whether that is an address or whether that’s a line of credit that’s open. If you have closed lines of credit that should have already dropped off.
Lyn
You can contact the credit bureaus and request it if it’s been hanging on there for a while. And it’s not the greatest thing you want to see out there, you can request that it be removed, but it is important to check. It’s surprising what the damage can be done. I had, a credit card that was counted twice, so it looked like I had more debt than I did.
And so, my credit score was going down. And so, I contacted them and was like, “no, no, no, no, this is the duplication.” And it fixed it and my credit score went back up.
Seth
So Lyn, that was an example of how somebody might improve their credit report or make, I was going to mention my wife found that she had, an old medical bill that had gone to collections. We had moved a couple of times, and for whatever reason, the bill hadn’t gotten to us. I think it was when we were buying a house and our lender mentioned, hey, your credit score, got this little hit on it.
Like maybe I think they pulled the full report for us or something, and I ended up able to go and pay it and get it taken care of and move on. I think to Nathan’s point, if you don’t look, you don’t know. So how would people go about fixing things if that was important to them to fix things on their credit report?
Seth
What sort of steps might a person take?
Lyn
Well, I would say it’s important to everyone to fix those negative items on your credit. What we’re seeing now is, like you said, people don’t know unless they go look right. So and we’re trying to encourage people to please go look because, there was a background check, company National Public Data that had a data breach. And there are 2.9 billion, with a “B” — Social Security records out there that are now in the dark web.
So, we’re telling people, make sure that whatever’s on your credit report is yours. Right. And it’s really important to get that stuff fixed. Even if you’re not looking to get a loan. It does impact just about every aspect of our life.
Nathan
Yeah. So once again, having a high credit score indicates you pay your bills on time and on time payments is about 35% of how they calculate your score. So that’s the single most effective thing you can do is making your payments on time, even if it’s the minimum monthly payment that still counts as an on time payment. The second biggest factor would be to not use too much of your credit line.
A lot of experts say anywhere between 20 to 35% of your credit limit is the recommended maximum use. Now, there is a bit of confusion around this idea as well, so I’d like to clarify that 20 to 35% is how much we’re carrying over basically from one month to the other. If you max out your credit card within one billing cycle and you pay it all off before the billing cycle ends, right?
Your carryover balance is going to be zero into the next month, right? So, it doesn’t matter that you spent all, what do I know, all $5,000 of your credit limit because you paid it off before the billing cycle closes. But when you carry it over from one month to another, having it under that 20 to 35% threshold is going to be helpful.
The next biggest factor is going to be the length of your credit history. So that means how long has your oldest line of credit been open for? In my case, it’s a credit card. I’ve had it open for close to eight years now. If I were to close that, suddenly the average age of my accounts would go down drastically because I don’t have this long-term open line of credit that I’ve shown responsibility with.
So oftentimes people say that when they finish paying off a car or when they finish paying off their mortgage, their credit score takes a hit. And that may very well be the case, but it’s because of exactly this. You imagine you’re paying off this house for 20, 25, 30 years. You’ve got this long credit history. Once you pay it off, suddenly your credit history goes down to whatever your oldest, your second, oldest rather line of credit is going to be.
So that’s about 15%. And that’s where having the same credit card or a student loan mortgage, these kinds of things that you pay off over an extended period of time may actually help your score. The other items, at about 10% each, are having a good mix of credit. So not having it all in credit cards, right? Maybe some variation there with installment loans like car and home loans and then not having too many new lines of credit.
If you open several lines of credit within a couple of month period, then once again, these institutions are going to assume that you’re going into a space where you’re overly dependent on credit. So that’s sort of the overview. There are some pretty simple ways to raise your score among them. What I mentioned at the beginning is not using too much credit and then paying your bills on time, if at all possible.
Jenny
I love that example, I had that happen to me with having different credit cards and my oldest credit card, I decided to close because it was one of those extra points or miles or something, and they were charging me like $125 a year and their annual fees, and I didn’t want to pay that anymore. And I liked a different card better.
So, I closed that one and then saw that hit my credit score. And having that moment of like, wait a minute, I was responsible. I paid all my credit cards on time and everything. I was a responsible credit card owner and it still went down. But, you know, a couple months it goes back up.
Lyn
Yeah, one way you can minimize that when you close them is to make sure that they record “closed by consumer” so that it doesn’t look like the company closed it on you. It’s still a hit but it’s a little bit less of a hit.
Jenny
Yeah. Yeah.
Lyn
It still feels wrong when they ding you for doing the right thing.
Jenny
Or like the other tip I’ve read is, I mean, obviously if they’re not charging you an annual fee, just you can still leave that line of credit open and just not use that credit card. And it can still be on your credit record even if you’re not charging anything to the account.
Lyn
Yeah, you just need to be somewhat careful because a lot of the credit card companies are going through and canceling those accounts on people. So, you want to like once a month, go buy a bag of groceries or tank a gas, pay it off so that you’re using it. But it’s not something that’s creating havoc in your life.
Seth
Lyn, you mentioned data breaches and Nathan mentioned the Social Security numbers. The, you know, most sensitive piece of information we have. And so if a person is concerned about fraud kind of in their life in general, I’ve heard freezing your credit is a good idea. What does that mean to freeze your credit and how would somebody do it?
Lyn
So, I actually recommend it for everybody, especially with that data breach that happened with pretty much everybody’s Social Security numbers out on the dark web now. So, I tell everybody to freeze your credit. It’s super easy. You go to the three bureaus, you follow the instructions for how to freeze your credit. The Washington State Attorney General’s office has actually a whole page that walks you through it on how to do it.
Once you’ve frozen it, nobody can take out credit in your name, provided that the person who’s providing credit checks, credit those places that say “no background check. No credit check.” Yeah. That’s not going to help you there. But for all you know, the standard, reliable licensed entities, they’re going to check your credit. Right. Well, they’re going to come up and it’s going to say “credit is frozen.”
I forgot to thaw mine when I went to go get my car a couple of years ago. Had my little dope moment. Had to go thaw it out. You thaw it for a certain number of days. You just ask your lender when are you going to check and which bureau are you going to check? And you thought that bureau specifically for a couple of days and then have it refreeze so that it’s always locked up?
And then we also tell people with your credit cards, if you’re not using them, make sure you use the app to lock them as well, because I was also… I’ve had weird things happen to me. I’m the most paranoid person you’re ever going to meet. So, like my debit cards and credit cards are in the RFID protector sleeves.
I have them locked on the app. I took it out, unlocked it, put it in the ATM, got money out to take my nephew out to lunch, put it back in the in the RFID sleeve. Locked it again in that time a random number generator in Denmark spent $35 on my debit card. And luckily my bank person could say, well, I can see you’re in Tacoma.
I know you weren’t also in Denmark, so yeah, we’ll revoke that. They’re having problems with random number generators picking up and spending money as well. So, if you don’t have things locked down it’s really easy for people to spend money in your name. And then it’s really on you to be checking that credit report to make sure that whatever’s on your report is actually yours, that you’ve actually spent it.
Seth
That’s great. I appreciate that piece of advice. Or if there’s a takeaway for the episode, people should go look into freezing their credit and seeing what that process looks like. So, I appreciate the time that you both have spent with us. Where would our listeners go if they wanted to learn more about the resources your office, the Department of Financial Institution, has to offer to the public?
Lyn
DFI.wa.gov that’s our main website. And then if you click on the financial education button, sort of in the middle of the page, that takes you to a whole host of things where you can search in the search bar for any topic. We currently have a financial fraud prevention campaign running called the 10 Billion Reasons. There’s a big banner at the top of our website.
You can click on that. It takes you under the website teaches you different types of fraud, you can identify, how to identify it, how do you prevent it, and then where to report it. The name of that came from the FTC data that showed us that Americans lost $10 billion — with a “B” — billion dollars in 2023.
And what we know from the Justice Department is only about 15% of people actually report the fraud. So that 10 billion is only about 15% of actual fraud losses. So yeah, we recommend people really be checking your credit report, keeping an eye on your statements, your, your whether it’s your bank statement, your credit card statement, your mortgage statement, whatever it is, keep an eye on those things and make sure that it’s going as it should, that you’re not having some hiccups somewhere.
Those are the big things — dfi.wa.gov —that’s the simple way to find us.
Jenny
That’s great. I think I’m definitely going to have to go freeze my credit now. And that’s a great tip too, because you can keep it frozen and then just thaw it out, if you’re applying for a loan, or a mortgage, or a car and then just refreeze it.
Lyn
Yeah, I highly, highly recommend it. I mean, nothing is ever 100%, right? We know this from the gentleman who used to run LifeLock and used to run his Social Security number on a billboard in downtown New York, who doesn’t do that anymore. So, nothing is ever 100%. But there’s things that can give you a big leg up in the security end of things and freezing your credit as one of them and just staying on top of your credit report and all your statements is the other.
Seth
Wonderful. Thank you both for joining us.
Lyn
Thank you for having us.
Nathan
Thank you very much.
Lyn
Yeah. And if anybody ever wants Nathan to come out and talk to them, Nathan’s available. I am too, but Nathan’s our primary outreach person.
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