Introduction & Hosts

Madison: Hello, everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Madison. How are you today?

Madison: I’m good. How are you doing?

Mike: I can’t complain. What would I complain about?

Why Buying a Home Can Drop Your Credit Score

Madison: So today we’re talking about a Wall Street Journal article titled, “For Young Adults, a Credit Score is a Mystery, until it Suddenly Matters.” Let me start with this, the author talks about how their credit score dropped even after buying a home and improving their financial situation. Mike, how does that even happen?

Mike: Well, you know, it surprises a lot of people, and you think buying a home is a financial win and it is, but your credit score doesn’t totally see it that way. When you take on a mortgage, you’re adding a large amount of debt and your score is really measuring future risk not success. And this article hits home because I’m not like a young adult and I know about credit scores, but as you know, Rachel and I are in the process of buying a place at the beach. We came to an agreement in November, had to get a mortgage commitment. You know, we don’t settle till hopefully May. But during that process, you know, since we’re self-employed, we need to give them two years of tax returns, our pay stub, and the income statement for Yardley Wealth, you know, through October. We had to provide all kinds of documents. You know, probably uploaded like 20 documents. You know, they look through everything. They give us the mortgage commitment for the mortgage we’re going to need. And you know that process, like our credit scores, dropped like 20 or 30 points, like each one. And like, the crazy thing is, so you have an underwriter, you know, pouring through our data for a couple of hours and figuring we’re at risk. That is crazy to think that… And we haven’t borrowed the money yet. Right? So, we haven’t borrowed the money yet. So, you would think that our credit is really good, right? If somebody’s going to lend us so much money, but somebody who is not really sure of that says, oh, your credit score is like 20 points lower than it was two weeks ago or whatever the thing is. Which is surprising. The other part that I just shared with you before we started was, you know, Rachel, my wife is a part owner of this firm but doesn’t actively work too much in it. And she stopped being a nurse about 15 years ago when we had three teenage daughters. And it was really important for her to spend time with them. And my business, this business, was really taking off and I just had no time to spare. So, we really needed to figure out what was best for our family. And so, and we’ve been together for a long time, right, we’ve been together for over 30 years married. And so, we have a collection of accounts that, and credit card accounts that have, you know, maybe they’re joint, maybe she’s the primary, maybe I’m the primary. And we’ve gotten them over the years for whatever made sense at the time, you know and don’t generally close older ones because of the length of credit history is important. But one of the crazy things, you know, when we applied back in November and we get our credit scores from all three bureaus in the mail because, you know, they looked into our credit. Rachel scores were 20 to 25 points higher on all three than mine. That is crazy to me and humorous to both of us when I showed it to her. So, the whole credit score thing has resonance for me also because long time ago when I started this company, it was really important. You know, we started a company with no existing clients. And so we started from scratch, you know, zero. And it took a while and so we used savings and then some debt to start this business. And then the financial crisis happened right after we started in February 2006. The crisis really went gangbusters in September of 2008. And so all the debt that we used that was like 0.1% credit card became 30%. And so everything became so, so so much harder. And it was really a struggle. And so, you know, it took, you know, I didn’t have ton of money to start this business. We had some savings and, which we used and, you know, we had, you know, three kids and a mortgage. And so, I get particularly frustrated by the credit bureaus. You know, and I have great credit, and I’ve never missed a payment. You know, I’ve been an adult now for over 40 years and have never been missed or late on a payment. But still was greatly impacted because I needed to use it at the time when the world was going bonkers with the financial crisis. So anyway, that’s a big, long couple of asides here, but thanks for picking this article out and getting this prepped. This is a good one and hopefully we can help some people with it. All right. And so, yeah, going back to your initial question, yeah, it’s surprising that when you buy a house and get, you know, somebody looks at all your stuff, says, hey, you can afford this, and then your credit score goes down afterwards. It’s bonkers. But, you know, it’s measuring future risk.

Risk, Not Success: What Credit Scores Actually Measure

Madison: That’s such an important distinction. Risk not success. So even if you’re doing the right things financially, your score can still drop.

Mike: Exactly. You know, credit scores don’t entirely measure how responsible or successful you are overall. They look at specific factors like how much debt you have, your payment history, and how long you’ve been using credit. So, it’s, yeah, it’s not necessarily exactly what, what you might think.

Why Young Adults Don’t Know Their Score Until It’s Too Late

Madison: The article also mentions that a lot of young adults don’t even know their credit score or really understand it until they need it. Why do you think that is?

Mike: I think because when you’re growing up, it’s invisible. Unless your parents have talked to you about it, you don’t know what it is. And then all of a sudden, it’s not invisible and it’s really important. You don’t think about it day to day, but then suddenly you want to buy a car or rent an apartment or purchase a home. And now all of a sudden, this number you don’t even know about is the most important number in your financial life.

Madison: Right. It goes from irrelevant to critical overnight.

The Pieces of the Credit Score Pie

Madison: The article describes your credit score as being made up of different pieces of the pie. Can you break that down for us?

Mike: Sure. Your credit score is primarily made up of a few factors, like your payment history, are you paying on time, the amount of debt you carry, and it’s not just, like, the amount that you carry, but it’s your credit utilization. So, like, how much debt can you take on and how much are you carrying of that? Right. So if you have a credit card that has a credit limit of $25,000, well, you know, what they look at is your utilization. And so, like, to get, like, the best score, you want to utilize less than 10% of that. So even if you have a $25,000 credit limit, you should be paying it every month, but then, you know, your balance should never get to, like, 24,000. It should be pretty low. So, it’s the amount of debt you carry, you know, also based on utilization, the length of your credit history, new credit inquiries, and your credit mix. Payment history is the biggest piece. So just paying your bills on time consistently does a lot of the heavy lifting.

Madison: That’s reassuring. It’s not overly complicated at its core.

Why Not Using Credit Can Hurt Your Score

Madison: But here’s something that feels counterintuitive, the article says not using credit can actually hurt your score.

Mike: Yeah. One of the biggest misconceptions in the U.S. you know, you have to use credit to build credit. If you avoid it entirely, like, say you pay everything in cash, which people a generation older than me did all the time. I don’t know if anybody my age or younger does. You don’t build a track record, and without that history, lenders don’t know how to assess you.

Madison: So basically, no activity equals no data, which equals lower score.

Mike: Exactly. You have to participate in the system to benefit from it.

You Don’t Need to Carry a Balance to Build Credit

Mike: I want to add something else here, though. Sometimes people think that they need to carry a balance to build credit, and that is not true. Like, you can charge stuff and then pay it on its due date, and then that is good. That is what you should do. You know, I’ve heard of some people who, like, pay down their balance every week or two. You don’t need to go to those lengths. You know, when you get your bill, you’ll have a certain amount of time to pay it. It’s probably like three to four weeks. Set up an automatic payment to go for the full amount on that date and leave it at that. Don’t try to overcomplicate it. Don’t try to make it more of a game than it already is.

The Risk of Maxing Out Cards or Opening Too Many Accounts

Madison: So, the article also warns against things like maxing out credit cards or opening and closing accounts too frequently. What’s the risk there?

Mike: Two big things. First, that high credit utilization that we talked about a little earlier. Meaning you’re using a large percentage of your available credit. That can signal risk. And second, opening a lot of new accounts or closing old ones can shorten your credit history and trigger inquiries, both of which can lower your score. You know, it used to be common you could open a credit card at, like, a store and get 10% off your purchase or 20% off. I don’t know if they still do that. Used to be really common when I was in, like, my 20s and 30s. And so, yeah, people say, oh, well, I’m going to spend $200 I might as well save 20 bucks or $40. But, you know, if you do that a couple of times, you know, it could really ding your credit and then say you need a car or rent a new place. Like, it could really be much more expensive than the little bit you saved at a retail store. I’m not saying you can’t do that from time to time, but I’m saying you have to look at the overall picture. You know, everything’s more complicated than it should be. Sorry about that.

Madison: It’s okay. So, consistency is key.

Mike: Yeah, consistency is everything. Use your credit moderately, pay it off on time, and avoid unnecessary charges.

Keep Older Cards Open and Active

Madison: One tip I liked from the article was keeping an older credit card open and using it for small reoccurring expenses, like subscriptions. Is that something you recommend?

Mike: Absolutely. You know, it’s. It’s funny, when I saw that in the article, I thought, my first credit card was just closed recently, so that’s something I had since 1989. I had it for so long. I got it when my sister was, Miss Teen Pennsylvania, and we went to fly out to California for the Miss Teen USA pageant. And, you know, I opened the card and got, like, $99 airfare, and then, you know, would use it from time to time and then really stop using it because it was old. It didn’t have any kind of points or no perks or anything. And I got a warning that I hadn’t used it in three years, so they were going to close it. And I thought, well, it’s really not going to hurt me. It’s not going to be a bother. But, you know, I guess if I had read the article and had some small reoccurring thing I put on it, probably could have kept that open. Maybe my credit score would be a little bit higher. But it’s fine how it is. But, yeah, it’s an interesting thing. It seems like a good idea to do that.

Why Time Plays Such a Big Role

Madison: So, let’s go back to something else the article emphasized, time. Why does time play such a big role in your credit score?

Mike: Really, because lenders want to see a long track record of reliability. The longer you’ve been responsibly managing credit, the more confidence they have in you. That’s why older individuals often have higher scores. It’s not necessarily that they’re better with money, they just have more history. Another reason why it doesn’t make sense that Rachel’s scores are higher than mine. Right? I’m four years older, and I know that she didn’t have a credit card when she was, you know, in her senior year of college like I did. So my credit history has to be more than four years older than hers. Makes no sense. Not that I’m too fired up about that.

Top Tips for People in Their 20s and 30s

Madison: So, if you had to boil this down for someone in their 20s or early 30s, what are the top things they should focus on?

Mike: Yeah, I’d say a couple of things, Maddie. Pay every bill on time. No exceptions, right? Pay it. If you have to do something to pay it, figure it out. Keep your credit card balances low, you know, other than in emergencies keep it that it’s easy for you to pay it every month. Don’t open accounts impulsively, like, have a reason for it. Is there some reward with that card or something about that card that makes sense before opening something. Keep older accounts active, you know, like we just talked about. And be patient, your score will grow over time. It is a long game.

Madison: Yes, it is. Thank you, Mike. That’s a great checklist.

Don’t Panic: Managing Score Fluctuations

Madison: And one final question, for someone stressing out about their credit score fluctuations, like the author, what would you say to them?

Mike: Okay, a couple things. I’d say don’t panic. Right. Small changes are normal. I see small, you know, I kind of stay on top of them because I still haven’t borrowed that money, right? So, I need it to make sure it’s good. And I see changes, on the different things all the time. My score will go up or down 9 or 10 points regularly for no reason. You know, if we spend a little bit more one month, maybe it’ll go down. We’re not keeping a balance on anything. There’s plenty of money saved in the bank for the down payment. It’s just the way that it works.

Set Up Free Accounts with the Credit Bureaus

Mike: One other tip I would give is, you know, there’s the three credit reporting bureaus. I would recommend that people get accounts with them, right, so you can go to their websites, create accounts so you could see what your credit history is. Check it. They often will have little things that are wrong. Go through, check to make sure the information they have for you is right. You can for free get like credit monitoring. So, they’ll tell you what the score is. I’ll just shoot you an email, say, oh, your score went up, your score went down. You don’t have to pay anything for that. Every time you log on, they’re going to send you a big promotional ad that says, oh, just pay $5 for this constant monitoring. And you scroll down and say, no, keep my current free membership.

Freeze Your Credit for Protection

Mike: And then, I would say as a safety precaution, freeze your credit. So, like our credit is frozen. So, we have like my three and Rachel’s three. It’s six, it’s frozen. And so, what that means is, if I need to, when I go to actually take the mortgage loan in April or May, I have to unfreeze my credit for a time. But you know, we’re not looking to do any other kind of financing, so that’s fine. It doesn’t affect like your day-to-day purchases or anything. But somebody can’t open credit, you know, in your name if your file is frozen. So, it’s a great way of keeping yourself safe, safer from like some sort of fraud or identity theft. Right. So, I think it’s a great idea to, you know, like login, create accounts there, you know, for free, you know, yeah.

Madison: That’s, that’s great, Mike. Thank you for explaining all of that. It’s a great perspective and honestly a relief.

Mike: Oh, good. Thanks so much for breaking this down and thanks for indulging me in this, my credit, rants. But yeah, it is a nutty system we have, but it is the system we have, and we don’t have a choice but to play by the system. And so, the more people know the rules and how to make sure that they can do what they want and need to in their life within the within the rules that are set by those three credit bureaus. It’s important, so do it, play the game.

Madison: Awesome. Thanks for breaking it down, Mike.

Mike: You got it, Maddie. Anytime.

Closing & Contact Information

Madison: For more information on Yardley Wealth Management or Yardley Estate Planning, you could visit our websites yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to subscribe to our YouTube channel. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.