- Speaker #0
All right. Welcome to another episode of Millennial Money Matters with Kelly Turner.
- Speaker #1
And Derek Mazzarella.
- Speaker #0
And today we have a special guest, my friend, Stephen Robert. Stephen, how are you?
- Speaker #2
I'm fantastic. Thank you so much for having me in today.
- Speaker #0
All right. Thank you. First, let's start with who are you, right? What do you do?
- Speaker #2
Sure. Absolutely. So my name is Stephen Robert. I'm the CEO of Bedrock Credit America. And for the past 18 years, I've been teaching about credit. And that's what we're going to dive in today. All the things you need to know about credit.
- Speaker #0
All the things you need to know about credit. You guys know that we've kind of dabbled in credit conversations in multiple of these episodes, because when you're talking about millennial money and millennial finances, credit is a huge part of this conversation. It really is. It's a huge part of this conversation. And what I have found as a lender is that there is so much myth and misinformation surrounding credit, even with the well-educated, financially acclimated, smart people. Well,
- Speaker #1
credit is basically a black box. No one knows how their credit score works. There's no very clear, this is exactly what you need to do. And that's why someone like Steven here exists, because he knows what to do.
- Speaker #2
Exactly. I know what's in the black box. I know how to do it. He's the only one.
- Speaker #1
They gave him the key.
- Speaker #0
They gave him the key. So the first question that I ask all of my clients when they sit with me is, do you know your credit score? And it's a bit of a trick question. Would you agree with that, Steven? It's a bit of a trick question. So people think that they have a credit score. When I say, what is your credit score? Most people immediately go to like, if a score is showing up on their credit card statement, that is the score, my score. And people will tell me what that score is, or they will bring up one of the free websites or something that, oh, my score shows us this. But I then have to sort of disseminate to people that like, you think that's what your score is, but you have so many scores.
- Speaker #2
There's so many.
- Speaker #0
So many scores. So let's talk a little bit about that. What is a credit score?
- Speaker #2
A credit score in general is information being pulled from Equifax Experiencing Trends Union with all the data. on all the accounts that you're currently paying and just taking that information and put it into an algorithm. A credit score can be put together by any company that wants to go out there and build one. There's literally companies that'll just make up a score anywhere from 100 to 1,000 points. Somebody could come to you, Kelly, and be like, oh, I have a 970.
- Speaker #0
And I'd be like, that's not, that doesn't make sense to me.
- Speaker #2
Doesn't exist, right? But on that particular website, it did, right? Yeah. So the gold standard though is FICO. FICO is Fair Eyes Incorporated. corporation. They've been around since the 50s. They've been entrenched in the mortgage world since the 90s. And in the year 2000, they laid the groundwork for what is known as FICO Classic, which is the most prevalent scoring model, especially when you're trying to get any type of loan. Yeah,
- Speaker #0
it's what we're using in the mortgage industry. And sometimes people get confused with that as well, that they're like, oh, well, a different lender said my score was X, so you're using a different score. And then I have to be like... they pulled your credit a month ago and I pulled your credit today and your score is different every single day.
- Speaker #2
Oh yeah. It can change when information is going in and out. Somebody paid off a credit card, a new collection hit, a new late payment hit, all that stuff is going to dictate what it does to your score, which changes constantly.
- Speaker #0
So first question then is if you want to know what your credit score is, where do you go? What do you do?
- Speaker #2
Literally the only website I ever recommend, and I'm not getting paid for this, all right, is called myfico.com. M-Y-F-I-C-O.com, myfico.com gives you the ability to see all the different FICO scores because that's really important. Does not count as an inquiry. The only caveat to it is you do have to purchase it. Costs you that is $30, but that's going to give you the information that you need, especially if they're trying to purchase a home in the next three to six months, six to 12 months, whatever it is, to see that FICO classic score. That's where you need to go because the scores that they give you, and I have this conversation on a daily basis, oh. here's my credit card statement. Here's my bank statement. And look, it's a 690. And now Kelly, you're going to pull credit and it's really a 650. And they're going to be like, but it's a FICO score. There's different versions of your FICO score and people don't understand that.
- Speaker #0
Different versions.
- Speaker #1
Yeah. Make it, make it a spicy for us. Yeah.
- Speaker #0
Right. Like just how complicated can we make just owing people money?
- Speaker #2
Yeah, exactly. So what you're going to use on the lenders and all lenders use, just to be very clear about this is FICO classic, which is versions five, four, and two. And then in 2008, they built FICO version 8, passed that out to the public. In 2014, they built FICO version 9, they passed that out to the public. And then in 2020, they built FICO version 10, FICO version 10T, and now they're passing that out to the public. But we don't like those.
- Speaker #1
It's like Windows upgrades, huh? Yeah,
- Speaker #0
but we don't like those.
- Speaker #2
Exactly.
- Speaker #1
Well, let me ask this. What has been kind of the major changes that have happened over those years and why have they updated it?
- Speaker #2
Because they're trying to find a better predictor of risk. That's the whole point of the FICO scoring algorithm. How risky are you? Are you somebody that is essentially going to be paying late? sometime in the near future. And each one of those iterations becomes more and more relevant to, okay, this person is going to be that much more risky or not with the most recent version. And we'll talk more about that at the end, FICO 10T pulling in something called trending data, which is going to be an absolute game changer.
- Speaker #0
Yeah. But the real issue there is our lenders using the new information that we have is we're still kind of using an older model that is based on older credit habits. Like if we can be honest, it's based on an old, like My parents had a mortgage that they paid to a local bank, a car loan that they paid to a local bank, one credit card. What people's credit profiles today look like versus 20 years ago is very different. It's very different. And we are talking 20 years ago, which is wild. And hopefully, lenders will start to kind of get on board with some of these new models. That way, it can reflect today's habits and credit habits and things like that.
- Speaker #2
Yeah, there are going to be changes with the newer systems coming out and being implemented by the lenders. That's not going to happen for the next 12 to 24 months, depending on when they actually flip the switch. But there will be changes coming, which will be very beneficial in some aspects, but also make it very difficult in other aspects. So we can dive into that.
- Speaker #0
Some pros and cons. So I think one of the things that I see as a letter, because I am pulling people's credit every day. So pulling credit is a main function of my job. I do it every single day, multiple times a day. So I look at credit profiles, the good and the bad. And we were kind of joking before we got on that you tend to see the bad. That's really who you're getting. I'm seeing both sides. And an interesting statistic is that the average millennial credit score in 2024 was a 687. But 38% of millennials have subprime credit scores below 670. Now, that to me as a lender is like a... Because... a 687, 670 is actually really not a great place to be purchasing a home. Can you purchase a home with those scores? You can. You're not going to be in an optimal lending product. Now I'm seeing the other side of that as well, where I'm pulling credit for millennials with 800 scores. And what I have found, and maybe you can speak to this, is that I tend to see one or the other. I'm either looking at 800 scores where people have done everything right, or I'm looking at 600 scores where we've got mistakes. But there's not... always a lot in the middle, right? There's not always, because if you're going to miss a payment, you're going to probably miss a lot of payments. It's not usually like a one-off. So were you tending to find that when you're helping people with credit, is it a lot of misinformation? Is it bad credit practices? Is it just an inability to be responsible with other people's money, which is really what credit cards are, right? You've got to be responsible with other people's money. What sort of your thoughts on the general like millennial vibes when it comes to credit?
- Speaker #2
I would say it's all of it. I'd say a lot of it, it's just come down to lack of education. Their parents didn't know any better and therefore they're just trying to figure it out. I'd say there's a lot of misinformation out there. Yeah, TikTok, great. Instagram, great. Not good for knowledge and understanding how credit is put together because that information just is not the correct information. Other situations are people fall hard times. Divorces happen, jobs loss happen. That happens as well. But... It's a combination of getting the education and doing the right things. I always tell people as complicated as we think it is, it's really not that complicated if you just know how to take the certain steps to push you in the right direction.
- Speaker #0
Now, okay, a credit score. What makes up a credit score? First, I'm going to ask, we're going to look at Derek, who does not deal in credit regularly as I do. What do you think makes up it? You as a... financial professional.
- Speaker #1
Oh man, I probably know this to a T. I want you to, right?
- Speaker #0
That's kind of the fun part. Well,
- Speaker #1
yeah, I'm definitely not doing credit repair for clients. Yeah, but I understand there's, I think, what, five factors. It's your credit history, so the length of payments you've been making. One part of it is the amount of debt you're actually revolving, credit you're using. So if you have a credit limit of $10,000, you're using $5,000 of it versus $2,000. There's a difference there. It's looking at the types of credit you're doing, so like credit card versus mortgage. and a few things like that. And my clothes are my clothes.
- Speaker #2
Yeah, you actually hit three out of five so far. Yeah.
- Speaker #0
Look at that.
- Speaker #1
And I blanked on the other two because you put me on the spot here.
- Speaker #0
Put you on the spot. Yeah. All right. So Steven, let her rip.
- Speaker #2
Absolutely. So 35% of our scores are past delinquencies. So that's what you're kind of mentioning where that score could be 800 or it could be 600. And that 600 happens because of those late payments, a collection, things like that. 30% of our score is debt utilization. As you mentioned, like how much money am I using? compared to my overall credit limits. I have a thousand dollar limit. I owe $500. I'm at 50% utilization. That's going to impact my score. And we can dive into all these subjects, but we'll go as an overview first. 15% of our score is the average age of the credit file. So it's looking for that longevity. They don't want you constantly opening up new accounts. 10% of your score is a perfect mix of credit, kind of that variety. Do I have a mortgage? Do I have student loans? Do I have credit cards? And the last 10% is inquiries. So anytime I apply for something, whether I get approved or not, that's going to be an inquiry. And that's going to... negatively impact my credit?
- Speaker #0
Let's rewind to the two that I think there's the most information about. So one is how much credit you're using, right? So I get a lot of borrowers that say, well, I have $30,000 or $40,000 in credit to use. I can use it. And they don't understand that. Like it's there, but please don't use it. So let's talk about like... what if you have a $10,000 limit on a card, what ideally should you be having on that card at any given time?
- Speaker #2
Like 50 bucks.
- Speaker #0
50 bucks. That low.
- Speaker #1
Yeah. Oh, so not even like a 10%. I can't use.
- Speaker #2
So a lot of people go off of those percentages. I don't give percentages. And here's why, right? Your card might be $10,000, but your card might be $100, right? And if I say, we'll go spend 10%, well, for you, that's what, $1,000 versus $10, right? Right. So going off the percentages can be very tricky because if you get in trouble and you need to pay off that $10, you can probably come up with $10 to pay it off. If you get in trouble and now you have to put a new tire on the car, the kids need braces or something. Oh, you know what? I was going to pay off that $1,000. I can only put $400 towards it. Now I have a $600 balance. Well, guess what? That $600 balance, it's at 30% interest. And now you're going to get hit with it because you didn't pay it off that month. And it starts to snowball really quick.
- Speaker #1
So you're saying I should open up 20 cards and have a very low balance on all of them.
- Speaker #2
Not exactly. No? Not exactly. We definitely want to have more than one card. Okay. Three to five is the optimal.
- Speaker #1
Three to five. Oh,
- Speaker #2
three to five is the optimal. With that being said, my kind of caveat to that is if you have one, should you automatically go out and get two more? Not necessarily. If you have eight, should you go close down three? Not necessarily, right? Because these could be negatively impacting the credit. But- the point of the debt utilization is you want to be using the cards in a way that's going to keep them open, keep them active, but keep your utilization as low as possible, especially when we start talking about what's about to happen with trending data. But even in this current model, we want those balances to be as low as possible. And for the person, I know somebody out there watching is going to say, yeah, but Steve, I have a thousand dollar credit card. I put a thousand dollars on it, but it's okay. The day I get the bill, I pay it in full. So I'm all right, right?
- Speaker #1
Yeah, you think, right?
- Speaker #2
You think, but you're not. But why aren't you? Because the credit card companies only update to credit bureaus one time per month. So the day they send you that bill, that $1,000 balance where you're at 100% utilization, that's what gets sent to the credit bureaus for the next 30 days.
- Speaker #1
So do we know what that day is? And can you hack that?
- Speaker #2
Everybody's different, right? So your Chase credit card goes on the 22nd. My Chase credit card goes on the 15th. Yours goes on the 8th. So it's per what you're doing. So you'd have to kind of hack the... Well, I know mine goes on the eighth. Then I have to pay that bill on the first to make sure that by the time the billing cycle ends, it has a lower balance.
- Speaker #0
See how complicated this is, man? No, I think the trick for people is that credit is a tool and it's required to live in the financial system that we have. Correct. Because the flip side to this is also I do have people who I'm making air quotes here don't believe in credit. And there is even some large influencers in the financial world who believe all debt is bad, credit is terrible. But it's the game you got to play. It's the game you got to play because I get the opposite too, where I get people who make a ton of money, have investments, have done all the right things, have no credit. They buy everything in cash. They have no credit cards. Their credit is terrible. Which they may say, well, I don't use other people's money, so it doesn't matter. But what happens? in an emergency. What happened? And I actually had a guy who he had been in a great financial situation. He literally had no credit cards, no car loans, had also never bought a house. He lived in a family home that his parents had owned. He had been living in it. The mortgage was never in his name. It was time for him to take out the mortgage for that house in his name. And his credit score was a 610. And he was so offended, so upset with me. thought it was like a rack. What do you mean? And I was like, sir, you, the whole point of credit is showing that you can be responsible with somebody else's money. That's why mortgages care about it, right? Is, hey, yeah, if you're likely to pay back your credit card bill and your car loan, you're more likely to pay back your mortgage. That's, that's like literally how, how simple it is. If you never prove that, we don't know.
- Speaker #2
Exactly.
- Speaker #1
Well, so can I get back to the revolving credit for just like one second? So let's say, I mean, you really only need to really, really worry about it. If you're in bad credit situation, right? But B, if you're like looking to actually buy a home or get a car, right? Or actually take out some, some debt. So would your advice be like, Hey, I'm thinking about buying a home in the next three months. Should I be using my debit card then for like those three months versus the credit card to, to keep that balance really low? Yeah, absolutely.
- Speaker #2
So, so there's things you want to do to prepare, especially if you're going to make a big purchase like that. So yeah, if you're somebody that constantly uses the credit cards and then say, Oh, you know, I want to buy a house this spring. Great. Get all your credit cards down to zero. leave them there. Do not close them, but leave them at zero.
- Speaker #1
Put like 50 bucks on it, right? Well, not even that, really.
- Speaker #2
Well, when you're preparing to purchase, if you can get it down to zero, optimal. The $50 a month thing is like, if just, okay, just my regular, I need to keep making sure I have good credit and for the longterm. But if you're now, okay, I want to go purchase a home.
- Speaker #1
You've got a three month window, right?
- Speaker #2
Three month window, get everything down to zero. Don't close it. Let it cycle there because that's enough time where you were just using it, right? you wouldn't put it down to zero and be like, well, I'm going to buy a house in the next spring, right? Because at that time, what's going to happen after six months of non-use? Yeah,
- Speaker #0
they're going to close your card.
- Speaker #2
They're going to close your card. And people don't realize getting one card closed can take your credit. And I always like to give this example when I'm doing presentations, which I'm glad we're recording this because I like to use my hand a lot. But think of it this way. If you have two credit cards, right? And you have one with a thousand dollar limit and another with a thousand dollar limit. And one card you max out, but the other card has a zero balance. Collectively, you're 50% utilization. Not terrible. But if this card that you haven't used stuck in the drawer and it gets closed six months later, now that goes away. Now what's your utilization percentage? 100. Exactly. It went from 50% to 100% simply by having a card be closed. And then your scores tank because that's 30% of our score. So you got to watch these things as you're trying to prepare. either in the short term or the long term.
- Speaker #0
Yeah, and I think the length of account. So that was my next question about sort of the length of credit history, because that is another piece. I think inherently, right, we think to be responsible credit users, I have a card and I don't use it. Why don't I just close it? And I always give people the example of, I have a JCPenney's credit card that I have had since like maybe 2001. I have not purposefully shopped a JCPenney's in. I could not even tell you how long. But I go. There you go. I have figured out, because they send me warnings before they're going to close the card, that I need, it's like a nine-month window. I get like nine months before they threaten to close this card. And I go and I buy like a pack of socks. I go buy whatever. My kids need some new leggings. I don't even know. I go buy a couple of things to keep it open. I don't need this card, want this card, any of the above. But it is my very oldest card. And I didn't take out another card for almost 10 years. So there's like a 10 year difference between that card and my next card. And I would have canceled that card 10 years ago. But I met Steven who gave his talk and said not to do that. And now I like religiously keep this card open. So I think if we could talk a little bit about like the importance of the history, the length of history, because I think it goes against our senses, right? My sense is why would I keep cards open that I don't want?
- Speaker #2
Right. Well, I think that example right there is exactly why, because you're giving yourself so much extra history and that's 15% of our score. Seeing that longevity, like you were just saying, the system wants to be able to see that you can take out debt, continue to pay it back month after month, year after year. That's decade after decade in this situation. It's old. That's the duration that you want. You want to have that longevity. And if the card gets closed, it stays on your credit report for the moment, but eventually it's going to fall off and eventually going to lose all that history. So you want to continue to have that. And going into the inquiry side of things as well, for the people that do the holiday shopping and open up a card and then get their 30% off and then the next month they pay it off and then they close it, you're now only having a card with one month worth of history and that's damaging your overall average age. So yeah, you save $30 at Victoria's Secret or whatever, but is that really worth what just happened to your overall credit because you opened and closed that card right away?
- Speaker #1
Now, is there a certain age that you can say, hey, look, as millennials, we have kids now and they're getting older. At what point would you give a kid a credit card to help them build up history? Is it 16? Is it they have to wait till they're 18?
- Speaker #2
Yeah. So at 18, they're going to be building it themselves, usually through a secured credit card. And I do that for two reasons. Number one, when they generally, and we'll talk about a secured credit card, but generally speaking, if somebody has no credit and they try to apply for credit, they're going to say, well, you don't have anything yet. You got to start proving to us, right? Yeah. And then number two, it makes them put the skin in the game. So if we just give them a credit card, then it's like, okay, great. Dad gave me a credit card. I'm going to go nuts. But if they, so a secured credit card is, hey, bank, I know I don't have any credit history. I'm going to give you $300 in advance. You're now going to give me a credit card with a limit of $300. I'm going to use it every month for 10, 20, $30 a month. Wait for the bill to come to mail, pay it in full. And after a year of using that card. congratulations, they pat you on the head, they give you the $300 back, and now it turns into a regular credit card that they literally have for the rest of their lives. Great.
- Speaker #1
Okay.
- Speaker #0
So important. Do you hear that, guys? And I know secure cards are one of your big pieces of advice when I send clients to you. A lot of times, that's one of the first things out of the gate for you is people with limited credit or old bad credit is we're going to open up a secure card.
- Speaker #2
Right. Because you have to start building. It's all, again, based off the timeframe. Don't just start going willy nilly, start opening cards. But as long as you have a six to a 12 month period in front of you, when you're not doing that major financing, that makes sense. Because why? When you do apply for the secured credit card, you do take care for the inquiry. It does lower the average age of your credit file. But sometimes in life, you have to take one step backwards to take five steps forward. Right.
- Speaker #0
All right. So other things that you hear, I'd love to hear kind of from Steven, like the, what is the question that you get all the time from people? What is the biggest hangups you have you get from people about credit?
- Speaker #2
The 35% of our score being past delinquency. People don't understand what that is all encompassing, right? And there's so many different layers to it. And we can kind of peel back each one. The first one is a past due does not equal a late payment, but a past due will hurt you, right? So if you're due on the 15th and you don't pay till the 28th, you're past due. And as that past due gets reported to the credit bureaus, your score is going to drop 50 points. Yes. which people don't in itself, they're like, well, it's a big deal. I'm past due. Well, yeah, that's 50 points. But as soon as you bring it 100% current, that past due goes away, you get your 50 points back. But a past due can hurt you that much. But what if you actually hit that 30-day mark? That's where it becomes a game changer because you're doing the 15th, you don't pay until the 17th of the following month, you're now 30 days late. That 30-day late payment, again, 30, 50, 80 points, depending on... exactly what it is that you're late for. I've seen literally 120 point drop from one mortgage late payment from an older gentleman who had like 30 years of positive credit history. It was insane.
- Speaker #0
Well, and on our end, for a mortgage company, when I'm pulling credit, I see those lates, like your 30 day lates show up on your report. I see them. And there are some rules for different mortgage programs that you sometimes, even if your score is qualifiable, you cannot get the mortgage. because of those lates. And people don't really realize what an impact. And lates are a funny thing because I see lates a lot because I always inquire about them. Like, hey, I see lates. What's going on here? And 50% of the time, it's because something happened, right? We didn't have the money that month. There was an emergency. But it amazes me, especially with millennials. And I think this is a millennial issue more than anybody else. Our parents got their credit card statements in the mail. They filed them away. They paid them with their checkbook in one shot. We're kind of like doing it on the fly, right? Like millennials are doing this on the fly. You may miss one. Hopefully not your mortgage, please. But even credit cards, car loans, they might miss one. And when I ask about them, like, oh yeah, I just somehow that one slipped my mind or I forgot that I put money on that card and people don't realize what a huge impact that can have.
- Speaker #2
Or how long it lasts. Number one, people come in. Okay, yeah, oh yeah, I see it's past due. I just brought a current. And that late payment, that'll go away in a couple of months, right? No, that is negatively going to impact your score, number one, for seven years. Wow.
- Speaker #1
Long time.
- Speaker #2
And this is how, for the millennials, right? This is what I do when I do my presentations, especially when I start going to schools and I do colleges and high schools and stuff. I'll say, remember back to seven years ago, what type of person were you? And they're like, whoa, that was a completely different human being, right? that's how long that one mistake is going to stay with you. And that blows their mind. That number one is going to stay that long. And number two, it'll age out over that course of time, but it's not going to rebound in 30 or 60 days. Now you're stuck with that negative piece there.
- Speaker #0
Yeah. So we've got a late payment. Yeah. We've got a 30-day late. Yeah. What happens next?
- Speaker #2
It gets worse.
- Speaker #0
Tell me. Tell me about it.
- Speaker #2
So this is where the ball starts rolling down the hill. It goes 60 days late. It goes 90 days late. 120, 150, 180 days. After 180 days of, let's say, not being able to pay a credit card, now you're going to charge off status. And I want to harp on this for just a moment in terms of misinformation, right? I've recently had a loan officer tell me, sorry, tell the client and then question me, oh, well, the accounts are going to charge off. You don't have to worry about the debt. They're charged off. You're absolved. And all those open charge offs on the credit report, don't worry about it. No, no, no, no, no. That is not true at all. When an account goes to charge off, it's just their way of saying, we're not going to continue to report the negative information on a monthly basis, but you still owe that $5,000 that you spent, which is now 5,500 with interest and penalties. Yeah.
- Speaker #1
I can't imagine credit card companies be like, oh, okay, cool. Yes. Don't pay me forever and I'll just wipe it away.
- Speaker #2
Yeah. Don't worry about it. Good. No, no, no, no. It doesn't work like that. And then when it gets from there, the next level that people don't necessarily realize is now it goes to collections. So that $5,000 debt gets pushed over to a collection company. Now that collection company hits your credit.
- Speaker #0
On another one. So it's twice now. We see it two times.
- Speaker #2
Right. Because you have the original credit showing a zero balance, but this one is now showing an open collection. Boom. Your score goes down another 20 or 30 points. Still trying to report and try to collect on it. And then more and more and more. What's the next step? Judgment.
- Speaker #0
Judgment. And I will say, I appreciate that you say more and more and more. Because five years ago, right, COVID, we weren't actually seeing a lot of judgments on our side. They kind of had stopped. They weren't kind of bothering. Judgments right now on our end are rampant. And sometimes judgments are surprising. Like, I will sometimes say to people, like, hey, do you know you have a judgment on your credit report? And no, people like won't even have it. And they'll have, I'm like, you went to court.
- Speaker #2
Right.
- Speaker #0
You don't know that you went to court, but you went to court. What?
- Speaker #2
Yeah. So and to be clear on that, so it's under the public record search that it's actually pulling up that information. And people think, well, because it's actually not under the actual scores to actually drop the scores, but it's under the ability to be able to say, well, I have a $5,000 judgment. Are the underwriters going to let me get qualified? And the answer is absolutely not. And the worst part about judgments, that's when they freeze bank accounts or garnish wages. Yeah. And that just becomes whether you go to coffee for one morning, you go get your Starbucks. all right, $2,000 in there and they pulled out all $2,000. You're not getting your coffee that day.
- Speaker #0
Absolutely. Yeah. And there are, you know, again, there are rules in regards to mortgages where depending on your charge offs, your collections and your judgments, and there are three different things, guys, these are not all the same thing. You may not be able to get a mortgage, even if you qualify otherwise with those things reporting. We may, if some of them have rules, some loans have rules, you can't have more than $2,000 worth of charge offs. um, some, you know, the judgment we have to see that you're, you've entered a payment plan or you've satisfied the judgment. Cause again, why are we going to lend you money when you owe someone else money? And that's the banks, not that they're friends with each other, but they're kind of looking out for each other. Like, yo, you owe Wells Fargo money. Why is bank of America going to give you money? You already owe these people money. Um, and there are even some like creditors, like I always pick on American express, American express. If you mess up, you're dead to them forever. Like you mess up on an American express card. They're not playing. Yeah. But it's kind of the cumulative that people don't realize. And they say the same thing to me too. Like, Oh my God, that was so long ago. And I'm like, yeah, I get it. But like, we still care.
- Speaker #2
Right. And they have seven years to collect on that debt. So when that card goes into charge off that, that charge off date now creates a seven year window that they can go and try to collect on that. And people are like, well, yeah, like, Oh, that's three, four or five years. Yup. You're still within your seven years. You still have to resolve it.
- Speaker #0
Yeah. And I am. And I think this is where this is a Derek conversation, too, is I will sometimes get people in that like rebuilding stage, right, where they have mistakes, they have charges, they have collections. But then they realize that, like, oh, I also have to save for retirement. And it becomes a conversation of, you know, I have money. Where do I put it? And a lot of people want to not look in the past. They want to say, like, oh, well, that stuff's old. I want to put this stuff in my retirement or I want to invest this or I want to. save, but you still have a $5,000 charge off from something hanging around. And I would encourage you like fix the problems before you head. And that's like, I think as a financial advisor, do you see that? Like people kind of, or do they not really admit that to you?
- Speaker #1
I mean, well, just financial advisor, we're typically working with people that aren't deeply in debt and have horrible credit scars. So it's not something we see like on a day-to-day basis, to be quite frank. But like if you're kind of in that situation, I think the question you're gonna ask is like, when are you going to need the credit score to be high for you? And if they're like, I am not ever going to buy a house, I'm not going to get a car. I mean, that's the different conversation you kind of have to have too. And because I mean, that's part of it. I've had clients say to me, like, I'm never going to take on another mortgage or loan, but okay, like you're gonna pay cash for that car? Like, I don't know. So is that the best decision? So it's, I would agree with you. Usually to me, it's like a blend. Like we do both, like, let's take care of the past, but also we got to move forward.
- Speaker #0
Awesome. So I'm sure you get this a lot. I come to you. I have bad credit. Now what? What do we do? We got to look at your credit and we have to look at accurate credit. So many people send me, oh, look at here. Look at this report. I'm not looking at that. It's from a third party website. The scores they're giving you. Those are completely different than what any lender is going to use. They're not pulling all the information. It's only from two credit bureaus. What about a third credit bureau? Not every creditor reports all three credit bureaus. Yeah, these two might not have these two collections, but they reported to this creditor, this credit bureau. So we need to know about it. So first things first, myfico.com. Again, I'm not getting paid for it, but it's just the best website to give the most accurate information, go through it line by line and explain to them what exactly is in front of them along with what they're looking to do. What is your timeframe? Do you want to try to buy a house? Do you want to buy a car? Do you want to build your credit? Are you doing this because you just finished up a divorce and now you're kind of getting back on your feet? There's a myriad of different reasons, but I go through that line by line to really set up the proper expectations for it.
- Speaker #1
Now. I think the hardest thing for people with credit is right. And the kind of bury your head in the sand situation where we see a lot of it. We're like, yeah, I know I have bad credit, but what am I supposed to do about it? And I always tell people that like credit is fixable. There is no credit that is unfixable. What does it take to fix it? Time and money. Those are the two things you need to fix it. Now, somebody comes to you because I. I, for full disclosure, send clients to Steven all the time. I get a mortgage application. They really want to buy a house. Credit is too low for qualifying or too low to get into the product or program they want to be in. You need to talk to Steven. You know, what does that look like for you, right? You're a nonprofit. What is your sort of role in helping people to make these changes? Are you just reviewing? Are you kind of coming up with a plan? What does that look like?
- Speaker #0
Yeah, it's doing a deep dive line by line and laying it out for them. I'm all about the education. That's what I've been doing for the past 18 years is giving people the education and the correct education, not the TikTok, Instagram education. This is going to be stuff that I was trained by John Alzheimer who worked at Equifax and FICO. So this is coming from the horse's mouth. I peeked behind the curtain. I know how this sausage is made, right? So this is me saying, listen, see this line item? This is how we're going to have to address it. See this line item? This is how we're going to have to address it. I create that entire action plan for them. let them know exactly what they need to do, whether they decide to end up work with me or not, or versus just going and doing it themselves. Most of the time, I'd say 80% of the time, the clients can handle the work themselves. It's just getting themselves back on the right track and doing the right things. Even if they are going to do it themselves, though, there's certain pitfalls that they have to understand, right? So one of the biggest things, I just want to go back to this because this is one of the biggest things I get. Oh, yeah, I know about all these charge-offs. I know about all these collections. I'm just going to start calling, putting myself into a payment plan. I'm just going to start calling. I'm going to negotiate, wheel and deal, settle this account. I'll pay it over the phone by this afternoon with my debit card. I'll be good to go. Absolutely not. That's some of the worst things you could possibly do. You never want to go put yourself into a payment plan. You never want to give out your financial information. You would probably advise that also from a financial advisor. You don't want to give out a debit card, a credit card, a checking account to some collection company with all the scams that are out there. I mean, I can give you story upon story about people that paid things they thought they were OK, and now they're losing tons of money on top of the fact of how the system is built. Most people don't understand that if you have an open collection, and let's say it's from 2020, and now they go and they pay because they're doing the right thing, they're stepping up to the plate, and then it goes from open in 2020 to paid as of 2025, that's going to drop your score about 15 to 20 points.
- Speaker #1
Because you just made it live. You made it active.
- Speaker #0
Exactly. You took an old event and you made it more recent. And it's crazy to think about, well, but yeah, yeah, yeah, but I paid it. It doesn't matter. It's because it was old and now it's more recent. That's why you're going to see a drop in the scores. So you need to make sure that as you're addressing and paying these things, you're doing it in a way that gives you that financial protection, which to answer that question is money order or certified bank check, right? Because it gives yourself that financial protection. But then on the other side, making sure you're working with the credit bureaus to remove the negative data, not just update it, pay it and have it sit there and hurt you.
- Speaker #1
Absolutely. Now, I think the other piece to that as well is people sometimes come to me and they say, you know, I pull credit, their credit's terrible. And they're like, I've been working with, you know, a credit repair company or a debt settlement company forever. I don't understand why I've been paying them hundreds of dollars a month. What's the difference? What is debt settlement? What is credit repair? Why would you do one versus the other? Tell me a little bit about that.
- Speaker #0
Yeah, and I think you hit the nail on the head before when you said the bane of your existence. Both of those are the bane of my existence. I won't name names, but your typical credit repair company is somebody that says, okay, you owe this money, don't worry. You have $5,000, you don't have to pay anything. We're just gonna dispute it and make it magically disappear. And as I always explain to people, life's not like that, right? If somebody owed you $5,000 and they sent you some paperwork to fill out all that, The very next month as you're doing your accounts receivable, do you forget about that $5,000 or do you want to get paid?
- Speaker #2
You want to get paid. Of course.
- Speaker #0
Right. So by saying, oh, we're just going to dispute it and make it go away. That doesn't make sense. You have to pull your head out of the sand. You have to actually do the work. You have to have the conversation. Even though it's not a fun conversation, you have to find a way to resolve the debt if possible. That's a whole difference. And that's a credit repair company, right? That's a whole different situation than the debt management companies, which. I don't even know why they're legally able to exist, right? The other ones are just annoying. They're taking your money. They're saying they're going to do things. But this just seems evil because what they're doing is they're saying, oh, they come to me. Oh, yeah, I have 10 credit cards. They're all maxed out, but I'm paying everything on time. Okay, good. Well, like, let's pay it down. Let's work with maybe a financial advisor, like your budget, blah, blah, blah, things like that. Oh, well, I'm going to go work with a debt management company. Well, what does a debt management company do as soon as you start working with them? they stop paying all those credit cards. And as we just talked about, 30 days late, 60 days late, 90.
- Speaker #1
Because they settle the debt for you. I'm making air quotes for the audio. Settle the debt for you.
- Speaker #0
Exactly. And they're going to say, okay, yeah, well, we're just keep paying us money. Keep paying us money every month. And the client's like, well, they must be doing something. All they're doing is letting all the accounts going to charge off into collection. And these programs are three to five years long. So it's going to take a while for you to just keep dumping money into. an account and eventually they're going to try to settle it but when they settle it they don't settle it properly and now you're left with all of that charge-offs collections and now the balances are down to zero and that's if they could actually do it numerous times i've hit people call me and say i try to do debt management for the past five years and at the end of the five-year program there was two accounts that were still didn't get settled because i didn't put enough into it I'm doing air quotes too. I didn't put enough into it. So now I have to put even more money into it to try to make it viable. So debt management companies destroy your credit. You're basically just paying a fee to not pay your bills, which that doesn't make any sense. Yeah,
- Speaker #1
that sounds painful. Well, and I think the real piece for people, and we could do a whole episode on bankruptcy, is that a lot of times if you're in a situation where you're now looking at this debt management, bankruptcy is probably really the solution you should be doing to... Because then there's an end date, right? You know what's going to happen. There's an end date. And that's a dirty word for millennials. And we'll get into that again. But I think this has been really, really helpful. I don't know, Derek, what questions you have.
- Speaker #2
No, I mean, I learned a ton listening to you, Stephen. I guess I think the one thing we haven't really touched on yet was you mentioned there's going to be a new credit score update coming out. Can you give us a little idea of how that's going to be different?
- Speaker #0
Absolutely. So with all these new iterations that they keep passing out to the public. What it all comes down to is Fannie and Freddie, who buy all the back-end loans basically, have finally said in November 2022, we understand we have one very old system, FICO Classic, that's been around since 2000. We know newer systems are out there. We need to make some changes. So the changes that they're making that were supposed to happen as of December 24, which they then pushed out to December 25, and now there's rumblings that they're going to push out to December 26. but it is coming.
- Speaker #1
Someday.
- Speaker #0
Someday. But sooner than later is the concept of FICO 10T and Vantage 4.0. So we have already talked about FICO. We understand they're kind of the monopoly of the world, which is going to be changing because when they do flip the switch, Vantage is the main competitor to FICO. And what is Vantage? Vantage is Equifax, Experian, and TransUnion coming together and building their own scoring model. So now they're directly competing. competing with FICO. So now you have FICO and Vantage that are about to come into play either December 25 or December 26, but both of them include trending data. That's what's going to be the game changer. And the reason I'm talking about it now is because of what it is. Trending data doesn't care about what your credit card balances are this month. They want to know what have you been doing the past 24 months with your revolving accounts? So if you have somebody, if you're out there and you're like, well, I use my credit cards a lot. I like to get my points or just because I have to, because I'm surviving in life. And every month I have a thousand dollar credit card limit and I have a thousand dollar credit card balance because that's how I have to live my life. When trending data goes live, your scores are going to fall off a cliff.
- Speaker #2
And so that's where the percentage of credit is going to matter more.
- Speaker #0
Exactly. Because right now you could say, well, I have a high credit card this month. Let me pay it down. I'll wait my 30 days because I want to go buy a house in the next two or three months. My score is boost up 100 points. In the new system, that's not going to work.
- Speaker #2
So is the better thing to do is maybe pay your credit card like bi-monthly or- Absolutely.
- Speaker #0
Make multiple payments because by the time the billing cycle goes through, you want that balance to be as low as possible. And you want that utilization to be as low as possible. So if you do have to use your credit card for a thousand dollars- start paying it down. So I paid down 200 here, 300 here, 400 here. By the time the billing cycle comes through, I only owe $200. That's going to be a lot better versus if you have 100% utilization. And the reason I'm pointing it out today is, let's say it goes live by the end of this year or next year, how you're paying your credit card this month is going to dictate what your score looks like over the next two years.
- Speaker #2
And that you said is going to make up 30% of your credit, right?
- Speaker #0
That's 30% is debt utilization, but it's now going to be... a lot more focused on not the instantaneous, but your 24 month trailing revolving account. So your credit card account. So this doesn't account for your mortgage or your student loans or your auto. That's fine because those are installment loans. But if you're using revolving accounts a lot, your scores are going to tank.
- Speaker #1
Yeah. And we've had discussions on the mortgage end that like, will we see a shift because so many people's credit scores are going to go down? Are we going to see a shift in what? credit scores we consider good, maybe, right? Those 800 credit score people, there may be way less of them than there were. Will we see a shift? The problem though is like mortgage companies, again, we're still using FICO Classic. We're very slow to move. We are very slow to make changes. We're very slow to keep up with kind of, again, consumer habits and trends. We are old school. Mortgage companies are old school. Even the most modern sort of mortgage company is old school. So I do have some worries for people in that. Like we use these things called LLPAs, low level price adjustments. It's how your credit score impacts your interest rate. And there's buckets. So we use, you know, if your score is a 700 to a 720, you're in this interest rate bucket. If you're a 720 to a 740, you're in this interest rate bucket. Well, if everybody's scores all of a sudden drop 40 points, is no one going to be in the good bucket anymore? Are they going to move the buckets? Like we just don't know. We don't know what's going to happen.
- Speaker #0
Exactly. And that's kind of why they keep delaying it is because they keep going out and they're doing industry research and the banks and the mortgage companies and the underwriters are saying, we don't know what to do with this. We don't know how those adjustments are going to take place yet because that person at 760 that we gave a loan to, well, now they're at a 715. What does that mean? How do we sell that loan now? Because it's going to be a completely different product. Yeah.
- Speaker #1
Well, and I think, again, if we go back to the very beginning where we talked about risk. right? That all of this is related to risk and mortgage companies use data to figure out risk. So every mortgage that we take in is related to the risk of somebody else in a similar profile to you. Did they default on this loan? Did they pay it on time? What did that look like? If you fit a profile of somebody who may default on a loan, you're going to have kind of a stinkier loan than somebody who fits a profile that isn't going to be someone who defaults on a loan. And this because of this shift in the way that the data is being collected and the way that the data is being shown to us, we don't have any history to know the risk profile anymore. Like we've lost our profile.
- Speaker #0
Yeah. And so that's why it's kind of a little bit of a wild west of how are they actually going to implement this? And there's a lot more changes and they're actually, some of them are good. Just for an example, non-traditional trade lines right now, they're not helping you. The people that put cell phones on your credit report. or you put rent, or you put utilities, that's not impacting your FICO classic score. Because the way John explained it, we weren't prepared for that. So we didn't include it into being able to do that. The newer scoring models can do that. So those people that do have those non-traditional trade lines will be getting that help that they're starting to be able to say, well, I pay my cell phone bill every time, even though I don't have a credit card, at least now I'm building my positive credit history. So there are some things that are helpful, but this trending data really is the biggest issue with it.
- Speaker #1
Big thing. All right. Any last minute questions, Derek? No,
- Speaker #2
I think the last one is just where do we learn more about you in case we need to get you?
- Speaker #0
Yeah. Bedrockcreditamerica.org. So you think bedrock like the Flintstones, right? So bedrockcreditamerica.org. You can go there. Feel free to reach out. I offer a free consultation to talk about, review your credit. And I also do events like this. And I speak at schools. I speak at home buying seminars. I'm everywhere. The more credit education I can give to the public, the better because everybody. If you're over the age of 18, and even my son, he's 11 years old, and he'll be here in the background. He'll be like, don't use that website. I trained him already. But if you're over 18, you need to know about credit, and you need to get the correct information. So reach out at bedrockcreditamerica.org. Steven Robert, and I'm happy to be here. Thank you.
- Speaker #2
Thanks, Robert. Thanks for coming.
- Speaker #1
Awesome. Yeah, and we'll put Steven's contact information in the show notes. So if you need anything, it'll be in the description. So thank you. We appreciate it.
- Speaker #0
Excellent. Thank you, Brad. Bye,
- Speaker #2
everybody.
- Speaker #3
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. This guest and their company are not affiliated with or endorsed by LPL Financial or Advisors Business.
