Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.
This episode is a deep dive into consumer credit and credit scores. We go in to all the types of consumer credit, and every single thing that is considered in your credit score. Pretty vital information. Next week we'll be rounding out our credit series with tips on how to build and maintain your credit.
Come engage with us!
Instagram: @efespodcast
Email: efespodcast@gmail.com
Website: http://efespodcast.buzzsprout.com
Intro music:
Coffee & Lullabies R&B mix by J.Lang (c) copyright 2020 Licensed under a Creative Commons Attribution Noncommercial (3.0) license. http://dig.ccmixter.org/files/djlang59/62099 Ft: CrazyLittleAsian aka SHA
Coverart by Karina Ng @karina.ng on instagram
Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.
This episode is a deep dive into consumer credit and credit scores. We go in to all the types of consumer credit, and every single thing that is considered in your credit score. Pretty vital information. Next week we'll be rounding out our credit series with tips on how to build and maintain your credit.
Come engage with us!
Instagram: @efespodcast
Email: efespodcast@gmail.com
Website: http://efespodcast.buzzsprout.com
Intro music:
Coffee & Lullabies R&B mix by J.Lang (c) copyright 2020 Licensed under a Creative Commons Attribution Noncommercial (3.0) license. http://dig.ccmixter.org/files/djlang59/62099 Ft: CrazyLittleAsian aka SHA
Coverart by Karina Ng @karina.ng on instagram
Hello, and welcome to everyday finance and economics with the sicklers the podcast where we discuss what you need to know about personal finance and economics, and give you practical advice on how to get started and be smart with your money.
Speaker 2:Where are your hosts, Glenn and Christina Sigler. So Christina, what's going on today?
Speaker 1:Well matters. This week is inflation. Now inflation is simply the rate of increase of prices over a given period of time. Since the consumer price index came out a couple of weeks ago, which we discussed, people have been really worried that prices are rising too quickly. It's natural for prices to rise over time, but since inflation numbers have been above the federal reserves target of 2% recently, investors are worried that the federal reserve is going to have to increase interest rates again, to get prices, to go back down, both federal reserve chair, Jerome Powell, and United States, treasury secretary, Janet Yellen have suggested that this temporary spike should not become a problem because it's just a symptom of economic recovery efforts. Also, the price increases have been, have mainly been concentrated in a few larger industries that drove the average up for everything. And our economic term for the episode is a reminder of terms from last episode, secured and unsecured loans. Secured loans means that you put up some collateral, something that's pretty much equally valuable to you and the person lending you money will come take it. If you do not pay them back. And unsecured loan has no collateral, but usually has higher interest rates with that. Let's continue with our second part in our credit series. What are the, what are the standard types of consumer credit?
Speaker 2:Well, there's a lot, but we'll do, we'll try to go over quickly. The one most, most people are used to are credit cards. Yeah. And, um, you know, B you know, a lot of people have multiple credit cards they're issued by banks, credit unions, other financial institutions. There are affinity branded cards, you know, airlines, you know, get the United or American
Speaker 1:Miles. Absolutely.
Speaker 2:Um, um, and, and so you can even have a Disney credit card card. Um, so those are the, the, you can get them through many institutions, usually backed by some financial institution. There's two main brands, visa, and MasterCard are the two main brands in the U S but there are other brands around as well, American express. They didn't start out as, um, in the same mode. There's, there's a slight difference in them, the American express card, the basic American express card and a Diner's club card. You have, you have to pay that back at the end of each month, whereas a MasterCard or visa, you don't have to pay that
Speaker 3:Back. Now,
Speaker 2:American express has expanded and now they allow you to not pay it back at the end of each month, but, and, and act like a standard,
Speaker 3:Right. Also, what about, what about black cards really quick? What are those?
Speaker 2:All right. So there are levels within credit cards, your basic card, your silver, gold platinum, you know, the, you know, they have more and more, um, assets that you can charge and more and more services that go along with it. And so if you get one of these, you know, super fancy cards, you can charge a whole lot of money, like buy a car, maybe even buy a house
Speaker 3:With a credit card,
Speaker 2:Or, you know, all, all at once. And, you know, they'll, you know, do super fancy stuff for you. Like, they'll, they'll make the hotel reservations for you, or they'll get you tickets to the concert that nobody else can get, or they'll get you into airline. They're just a whole bunch of additional services, private services that, you know, people, um, you know, usually with a lot of money or usually spend a lot on credit, you know, those things are attractive to them. And so those services are a draw to get, to get their businesses and those and that business is, um, lucrative to the companies that have those cards.
Speaker 3:Interesting. Okay. Go off with the former branding and marketing. Yeah. That makes sense. All right. Other types of consumer credit
Speaker 2:Cards and, you know, and this is sort of going out on is not as fashionable today as it was, uh, years ago, you know, before credit cards became big, but if you can get just a Macy's card or you pick the name of the store, um, and it allows you to buy goods at that store on credit.
Speaker 3:Yeah. They still have those, those, they
Speaker 2:Still have them there, you know, but because visa, MasterCard in America can be used everywhere. They may not be as popular as they once were. Um, other types mortgages. This is how most people buy their homes. Um, you take out a 15, 20, 25, 30 year mortgage you're you're alone, uh, that you're going to pay back, uh, over that period of time to, you know, when you're finished, you own the house free and clear. Uh, then there are home equity loans, which allows you allows you to tap into the amount of money, uh, the amount of value that's in your home that is not tied up in debt. We can get some money for that and do virtually anything you want with it. You can improve your house. You can pay for school, you can buy a car, you can go on vacation, but let me give you an example, say I bought a house for$200,000 and you know, right now I've paid off half of it. I've got, you know, it's worth 200,000 today. And I only have a hundred thousand dollars in mortgage left, left on that. Well, I could go out and get a home equity loan for about 10,$15,000. You know, if I get approved and, you know, fix up my house, you know, send my son or daughter to school, you know, go on a fancy vacation, but now I've got, you know, now I owe on my primary loan. I still own 100,000, but now I've got a secondary loan against
Speaker 3:My house of 15.
Speaker 2:Right. And so now, if I don't pay
Speaker 3:Collateral,
Speaker 2:They, they take the house and they take, instead of just taking a hundred thousand dollars, they take 115,000. Cause I hope of them. Then there's things called consolidation loans, which are really just unsecured personal loans. Um, it's not a credit card, but it's, uh, it's, it's going to go through some of those very same processes and it's not secured by anything. It probably has a higher rate. You can borrow for any reason. They typically go out and, you know, up to five years for you to pay them back, you know, at some, um, you know, sizeable interest rate, consolidation loans, personal loans are very, again, very similar student loans. Yeah. So, you know, paying for education can be costly. Um, student loans can typically run anywhere from 10 to 25 years, uh, for, for folks to, you know, finance the cost of their, um, uh, undergraduate graduate professional degrees. Um, and again, you know, that is, you know, typically, um, going to be unsecured. Um, and, uh, but the, the one thing about those is it's hard to discharge student loans in bankruptcy. Um, so if you declare bankruptcy, Hey, look, I, you know, I don't have any money. I can't pay off my debts. You're still gonna own the you're still gonna owe those student loans. Then there's things called payday loans. They're short term, high interest loans. They're typically not, you know, if you're using payday loans, that's usually not good. Um, you know, you need, you know, you're, you're in a under-banked area. You may have some financial difficulties. These things are, um, right for scams cash advances, short-term loans on your credit card. Um, you know, essentially they'll give you cash. It becomes a charge on your credit card with a higher interest rate, uh, auto loans, the, the loan is secured by the auto itself. You don't pay the loan. They come take the car.
Speaker 3:Oh yeah. Right. Okay. But pay your loan
Speaker 2:Life insurance loans. So people get what we call permanent life insurance, where, you know, uh, there's term insurance, enlightened and permanent insurance term insurance is I, I need this insurance for 10 years. You're going to pay a monthly amount. Something happens to you in, in the 10 years you get that amount. Okay. Permanent is a little bit different. Uh, permanent is not only do you get that, that value, but there is an, uh, an investment in it where, you know, there may be some equity market investments in there. So not only do you get the value of the life insurance, uh, state of value, you get the value of the assets to go with it. And, and you can have that, you know, for the rest of your, it doesn't stop when, and, you know, at 10, 20, 30 years, it just keeps going on. And so what some people are able to do, you know, after they've had that insurance for quite some time, they were able to borrow not against the, the stated value, but against the, the other assets that are with it. And so you may have gotten a half a million dollars of life insurance, but you made a permanent and the value of the insurance. Plus the other assets may be worth 750,000. So you can take a loan against that 250,000 that, you know, you've been paying into, uh, investment part that you've been paying into over the last however many years.
Speaker 3:And when you say, take a loan against what do you mean?
Speaker 2:So it is like borrowings. So what that other P that other part of the insurance is essentially a mutual fund type investment, where they've put money in a certain, uh, mutual funds that the life insurance company, um, runs and you can borrow against. And every month when you pay your life insurance premium, they've put some money into that fund for you and you can borrow, and you can borrow against that.
Speaker 3:What did you mean against, does it just mean borrow from them
Speaker 2:Borrow from that money now you're supposed to pay that back. Yeah. But there are con you know, there are certain conditions where you don't have to pay it back. Okay. And then there's family loans borrowing from friends and family members. You don't need a FICO score for that, or credits for that. You just have to get your family members to trust you and please pay them back. Cause that starts a whole bunch of family fights.
Speaker 1:Yes. Don't break up your family over alone. Yeah. But that happens a lot. Yeah. It seems we've been talking a lot about a credit score, but it seems like it's kind of important for your life to get things. What, what goes into your credit score?
Speaker 2:Okay. Like I said before, credit score is a numerical representation of your credit history. If you've been good at paying your debts, it's really high. You know, and typically they run up a scale to 850 and, and scores that are above seven 50 are considered super excellent and, and pristine folks who, you know, always, you know, pay back, pay back their loans. They'll get the best rates, they'll get the best deals. What goes into it, your payment history, Hey, have you paid your bills on time, your credit utilization? And what's funny about this is you, you know, you're, you've got a great credit score. One of the things that helps you drive up your credit score is not using a lot of credit. So if you've got a credit score, uh, you know, you got a credit card and it's got a$20,000 limit. If you use less than 2000, it keeps your credit score high. You, uh, you use three, four, five, 6,000. The more you go up the lower, you know, you'll start to your credit score will start to deteriorate.
Speaker 1:Even if you pay it all back, well, we'll start to deteriorate
Speaker 2:It, you know, so that, you know how quickly, if, if you're not paying it back in a month, it can impact you.
Speaker 1:But if you use the whole limit, but also pay it back
Speaker 2:Then. Yeah. Then you're good. Okay. Yeah. Interesting. Okay. Um, length of credit history, you know, if you show a long somebody who has a long history of using credit and paying it back, that person's going to have a higher credit score than somebody that just started on their credit journey. That just makes sense. You've got to you, you got a better track record. They've proven themselves, uh, opening new credit. Um, so you know, every time you open a new, you know, line of credit, it can essentially reduce your credit score because then you know that that's a new, that's a new risk. Yeah. Oh, you can handle three credit cards and can you handle the fourth one or can you handle three credit cards and a mortgage? So, you know, it's not going to tank your score, but it's going to take a nap. That's doubt right now here's a big one. Um, bankruptcy. So bankruptcy is essentially a failure in credit and credit repayment right now. You've just, you've just said, look, I, you know, I had this debt, I wasn't able to pay it back. So, um, you know, your credit scores and your ability to access credit are going to be negatively impacted by that. And that's that, that becomes a matter of public record. And so anybody that's in the credit, uh, in the credit agency, the bank, they'll all find out about it. Yeah. Types of credit you use lenders and creditors want to see that you can handle multiple types of credit. They want to see revolving combination of revolving and, and, and non revolving credit. So, you know, use credit cards and use standard loans, loans of various lengths. Uh, so you know, you got a mortgage or you got a mortgage you're handling that, can you handle a two year loan or a three year loan and a five-year loan. And can you, you know, can you handle the credit cards? Um, and so, you know, the one thing about the, the closed end credit, as I said, they close. And so they get removed from your credit history after a period of time. And so, you know, that's why having a mortgage and having credit cards and other loans throughout your life becomes important to show that you're continually on top of your game and managing credit wise. You don't want to just use one and not one tool and not the other. Yeah, you gotta, they gotta see variety. And then the other aspect
Speaker 4:Which, which
Speaker 2:Hits, uh, hit your credit score, usually negatively is the number of inquiries on your credit card. What is an inquiry
Speaker 4:On your credit card? So
Speaker 2:Every time you look to open a new line of credit, whether it's a credit card,
Speaker 4:A store card, a home
Speaker 2:Equity loan student loan, there's an inquiry somebody's going to an inquiry is checking into your credit history. And so every time, so when you open a new and when you've opened that new line of credit, there was an inquiry about, so, uh, credit companies get nervous when you have a whole lot of credit inquiries at the same time, Hey, it's Glenn trying to open up five new credit cards and is he going to go, you know, and, you know, spend all his money on all those credit cards and not pay us back. Right? So they have those kinds of concerns. So you've got to be mindful of all of those things and, and understanding how they affect your credit score.
Speaker 1:All right. That's our show. Thank you so much for listening and be sure to tune in next time when we discuss how to build and use your credit. If you have any questions for us, you can email us@efspodcastsatgmail.com and follow our Instagram at EFS podcast. Thank you so much for listening. Take care, everyone.