ABC's of Money with Alan Akina - Lesson 10: Credit Reports and Credit Scores

Good morning or good afternoon, kids and parents. Thank you for joining us on another edition of the ABCs of Money. We have a winner for the dream boards. Okay, so remember I, I gave you a week to do your dream boards and there were a lot of cool submissions and thank you for doing it. I hope you had fun building your dream board. I did. I have gift cards again from Stockpile, so we buy stock, not stuff, and we're gonna give it out to the winner. And today's winner is Saimote! Saimote Moyai from Laie, Hawaii. Saimote, congratulations! Your board looks amazing, and you're from a cool town, so Thank you for that. Now, today we are going to cover lesson number 10. Okay, so this is an extension, right? I continue to end of May. So lesson number 10, we're gonna talk about credit reports and credit scores. Another very, very important topic. Let's start out with what is a credit report and a credit score? So I think most of you are in school, so I'm gonna try to relate this to yourself. I was trying to think of a way How do you explain credit to a 14-year-old kid, 12-year-old, even in high school? How do you explain credit to an adult? So if you're an adult listening, this might be very helpful. Okay. So if you think of credit, let's start with the credit report. If you think of credit reports as in school, as like a combination of all of your Homework assignments, your collective attendance, right? If you're showing up to class or not. If you think of a credit report as quizzes or tests that you take throughout the year, so you compile all of those things, they will go on to a credit report. Okay. Now, your teacher or the credit bureaus will take all that information And they'll create a score or a grade. Okay, so a credit report is all of the assignments, your attendance, quizzes, tests, everything combined to create this report. And then the score, very simply, is your letter grade, but in this case they use numbers. Okay, so it's, it's, it's looking at how Your assignments look? Did Taylor go to class every day? Or did she miss 20% of her classes? Did she turn her homework assignment in on time? There's some of you out there, some of you kids that you are very good at that, getting your homework assignments in on time. You're showing up to classes, which means you get better grades on your quizzes and your tests. And then some of us need to work on that, right? And that's the same thing in your financial life is we have to turn our things in on time, which is our bills. We got to pay our bills on time and we got to do certain things to maintain a good credit report, which now increases the chance of getting a good score or a good grade. Okay, so that's probably the easiest way that I could, I could do it. So school assignments is your credit report and school grades is your credit score. Now let's go to number 2. Why is this important? Okay, so why is having a good credit score and a good credit report important? So I wrote a story for you to, to help out. Okay, so in this story is about a 13-year-old boy named Bobby and a 14-year-old girl Named Leilani. So Bobby— and they both are in the same school— so Bobby wants to buy a new laptop, okay? And the laptop is going to be $500. Well, Bobby doesn't have the $500, and he knows that Leilani— he's— because he's seen her in school, doesn't know her very well, but he's seen her in school— and that she, she loans money out. And so he approaches Leilani and says, Hey, Leilani, I'd like to borrow $500 from you to buy a laptop. Well, Leilani only has seen him in math class a couple of times. That's it. No other interaction. She doesn't know him. So her question in her mind is, if I give you, Bobby, $500, how do I know you're going to even pay me back? And if you do, how are you going to pay me back on time? Because I, I worked hard for this $500. I'm going to give it to you. But I don't know you. You're not my relative. You're not my kid. You're not my brother or sister. So I want it back. But how do I know you're going to pay me back? So what Leilani does is she makes 3 phone calls. So she calls 3 people. So she calls first Bobby's principal from elementary school. We'll call her Ellie Experian. So Ellie Experian is the principal of Bobby's elementary school and She's checking on Bobby. Hey, did Bobby do his homework? Did Bobby come to school every day? How did he do on his quizzes and tests? And what kind of grades did he get? Was he an A student or was he an F student? Then she makes a second call to Bobby's middle school president— principal named Mr. Terry TransUnion. So she calls Principal Mr. Terry TransUnion and says, hey, Principal, I'm checking on Bobby, and Bobby wants to borrow $500 from me. And how was he in school? Did he come on time? Did he do all his assignments? What were his grades like? And she does the whole thing that she did with Ellie Experian. Then she makes her third and final call to the principal of Bobby's high school. Now, the principal's name is Miss Ellen Equifax. So Miss Ellen Equifax, she— Leilani calls Miss Ellen and says, hey, Miss Ellen, I'm checking on Bobby. And she goes through the whole scenario with all 3. Okay. Now she has all this information and she can see if, you know what, Bobby is actually a good kid and he looks like he's done all of his assignments. He's maintained really good grades from elementary through middle school, now through high school. You know, I think it's worth lending money to him. Or she might find out like, well, Bobby, Bobby didn't do his assignments. He showed up late. He was very delinquent in all of his assignments. Now it's, it's showing his real character that he might get this money and buy the laptop and not think twice about paying me back. So how does this work in the real world? Well, in the real world, Banks do the same thing. So we go to borrow money, right? Having a credit score is mostly about lending or borrowing money from banks or other financial institutions. You see, these banks, they don't really know us, what our life is like. So how can they determine if we are a good borrower or a not so good borrower? Well, they're going to look at our, our financial history. So that's going to be our report. And in the report, there's 3. So number 3 is there's 3 money schools. Okay. They're called credit bureaus in real life. And these 3 money schools track everything we do with our, with our money. Anytime we get a credit card, every time we make a payment, if we buy a car, we get a house, We rent something, anything that has to do with money. These 3 money schools are tracking it and they're putting it on your report. Okay. And so these 3 schools, they are very, very aware of what's happening in all of our financial lives. Okay. And the 3 schools are— probably seen it here. Okay. Number 1 is Experian. This is the first school. Experian is a credit bureau. TransUnion is another credit bureau, or, or my school. And then Equifax. Those are the 3 organizations or 3 companies that track our score. And then we go to number 4, which is what we call a FICO score, or FICO. You're going to hear that word a lot, F-I-C-O. And FICO stands for Fair Isaacs Company. It's just a company that compiles all these scores to give, give us a grade. So the grading system in the money world, in credit, ranges from the low end of 350 points all the way up to 850 points. Okay. Now, in credit, the game is just like in basketball, my favorite sport. You want to get a higher score. You're trying to get more points. Okay, and so here's how the grading system works for FICO. If you want an A, okay, excellent, meaning you have, you have 800 points or more, 800 to 850, that is excellent, excellent. Okay. A B would be a score or points between 740 and 799 points. That would be considered very good. Now, a C, so you're the middle of the road, 670 to 739 points. That's good. A D is 580 points to 669 points. That would be fair. And then an F is 580 points or below. Okay, so again, these are the grades, right? The grades that these banks, right, these banks want to give you money. Okay, so these banks here, if this is the bank and this is you, you come to them for money and you want a certain amount of money. They say, well, what are the chances of us getting that back? And they know these, these, these companies are very, very smart. They got smart people and great software that can predict what a human possibly might do with the score. So they'll say, okay, the bank will call one of these 3. Okay, so the bank said, I'm going to call TransUnion, Experian, TransUnion, and Equifax, or they might just do 2 or 1 to see if this person— so that was Bobby— is going to be good and what kind of grades he has. And each company has their own grades. So they say, okay, Bobby has a B. Well, you know what? He's very good. So we can lend him money and we can give him the best rates. And the lowest interest rates. That's why it's very important. So I want to go into number 5. Okay, how are scores calculated? And then we'll talk about why, you know, what, what they're used for. Okay, 5 ways that they calculate. 10% of your score will come from new credit, so new loans. Okay, so they're looking at How many new loans? They're going to look at good and the bad, and that's going to go to 10% of your score or your grade. The second thing they do is they look at length of credit history. Length of credit. So how long have you had a loan before? Is this— are you brand new? Is this the first time you've ever had credit, or have you had credit for a long time, like Uncle, like 30-something years? Okay. And that is worth 15% of your score. Okay. 15%. Third, credit mix. What type of credit do you have? Is it all just credit cards or just mortgages, just car loans, or do you have a mix of all different kinds? That's 10% of your score. Now we start getting into the big stuff. 30% goes to amounts that you owe. So they'll look at how much do you owe on your credit card, how much do you have on your car loan, on a mortgage, and they start to look at the percentages and they have different ways of calculating it and how it goes into that 30%. And then the 5th way, the 5th thing that they use to determine your score is your payment history. This is worth 35%. So they are really putting a lot of emphasis on over time that you've borrowed money. So whenever you bought a car, did you make your payments on time every month or did you miss a month? Were you late? All those things affect your credit, right? Because they look at the history, right? Your past dealings with borrowing money from anywhere. Doesn't matter if it's from their bank or not. They're looking at what, what did you borrow You know, what kind of loans did you get? Did you pay it back on time? How much did you borrow? All those things go into calculating your FICO score and getting your grades. We're going to go into number 6. What are your credit scores and reports used for? 4 things that they use your credit score and your credit report for. Okay. Number 1, The top of my list is to determine if you can qualify for a loan. Okay, so the bank is going to look at you and say, okay, Bobby here— this is Bobby— Bobby wants to buy this car. Bobby also wants to buy this house. Bobby doesn't have money, so he's going to borrow money from us, but we need to see if he has a good credit score. If he has higher credit scores, then we can give him Lower interest rates, lower fees. Okay, why be— why do they give lower interest rates and lower fees to good students? Because they're more likely to pay it back. Now, if Bobby was a C student or lower, then they may not even give him a loan. But if they do, then the interest rate is going to be high. Why? Because the bank is taking more risk. Because Bobby doesn't have a good financial grade, they are going to take more risk giving money to him. And so they want to charge fees and up the interest rate just in case he doesn't pay it back. Okay. The second thing that they use credit for is if you're renting. So your landlord, if you're renting a house or an apartment, most landlords today are going to pull your credit report and your credit score. Why? Because they want to see, hey, have you been bad with money? Are you making payments on time? If you have a good credit score, then most likely you'll be a good tenant and you can pay your rent on time. Now, if you're the landlord, right, you own the house— we talked about owning houses— you own the house, you want to make sure that you're renting to someone that has a good credit score so they pay you so you can continue to earn an income. The third thing that they use to determine or use your credit score for is insurance companies. So insurance for cars, like your car, every car needs to have insurance on it. You need insurance for your house and other things. And so they're looking at your credit report to see if you've made your payments. Because they— the better score, the lower your premiums or the lower your payment is for your car insurance, for your homeowners. The lower your grade, the higher your payments are on insurance. Okay. And then lastly, the 4th thing that people are using credit scores for is when they hire you. So your new boss. So bosses, They are pulling credit on employees that want to work there. Why? Because companies want to hire people that are good with their money. If people aren't good with their money, how can they be good with their company's money? And that's the general thought process when hiring people. Now that we've gone through the majority of this, I want to talk about how to build your credit. So I'm going to give you a few techniques, and this is really only relevant To any adults, obviously, but any of you kids or probably young adults that are in high school getting ready to go to college. If you're still like in middle school or, you know, a freshman or sophomore, this, this doesn't really pertain to you yet, but it's good to know. But if you're a high school junior, senior, you're in college, you're an adult, you need to listen to some of these techniques. Okay, so just Very, very simple. I got 4 things for you. Okay. Number 1, first way to build credit is to get a secured credit card. Okay. So you go to a bank and get a secured credit card. So what this is, is you can get a credit card and let's say you want a card with $200 on it to be able to charge up to $200. You're gonna give the bank $200 in cash. So that's gonna secure the $200 that they give you on the card. Okay? So that secured card will start to build up credit history for you. It's no risk to the bank, 'cause if you don't pay 'em back the $200, make payments on time, then they keep your $200. So this is a very easy way to get started. The only problem is you need to give them money up front. Okay. So secured credit card. Number 2, you can get added on as an authorized user. Okay. Authorized user from, let's say, your parents. If your parents have a credit card, they can call that card credit card company and ask to put their kid on, put you on as an authorized user. And some cards will give them the flexibility of having a certain amount that you can use. But what happens is for most cards, as an authorized user, you can immediately piggyback on the cardholder's credit. So your parents' or your siblings' credit. Now you want to make sure that if you're utilizing their credit, that they have good credit as well. So you don't start out behind the 8-ball. The next thing is This is for you college students or going to college. You can try for a student card, credit card, and sometimes they'll give students the credit card when they attend a certain university. You can apply for it and they give you— they'll give you a certain amount on that card, and that could be a way to start. Now, as with all of this stuff, You now are responsible because you are getting money from someone else, a bank or lender, or using someone else's credit. So you have to be, you have to be responsible. And so here's a couple of things that I'm going to suggest when you take this on is make sure you pay it on time. Whatever that credit card statement comes in, pay it, pay it off, pay it in time, on time. If you do have a balance on that credit card, I would say pay it off. In full every month. So if you if you got a $200 secured card and you use $100 this month, pay it off. Don't keep a balance. There's a myth out there that says you have to carry a balance to build your credit. That's not what it had here. The five ways it didn't say carry a balance on your credit card to build credit and account. It does not say that credit history. So another thing is when you build your credit history, you don't want to cancel credit cards. You don't have to use some of them. You can get them and not use it. But if you cancel it, then you lose that credit history. So those are just a few techniques. There is, there's 100 others out there, but I have limited time and, and I don't want to bog you down with all those things. But this is a few ways that you can start to build Credit. Now, I want to go to number eight, and these are going to be your financial projects. Okay, so I have a just one project for you today. Some of that's simple, but it's going to take a little bit of effort. Okay, so write this down, kids. I want you to call your local bank or a credit union and ask what kind of credit score that you would need. To get the best or the lowest interest rates and lowest fees on a mortgage in your area. Just tell them that you're doing a research project for your school, for classes, and you you look around in your neighborhood everywhere there's banks. Every neighborhood there's a bank or credit union. Just call one, and I want you to talk to them on the phone and just say, "Mrs. or Mr. Banker." My name is Alan Akina, and I'm doing a school project, and I'm calling to find out what credit score number I would need to qualify for the best interest rates with the lowest fees. And hopefully they give you that number. I hope some banks are crazy. That's why we fight these banks every day. But some are really good. Some are some really good people. And I think if you tell them that this is for a school project, Then you will be able to get the response. Now, what questions do we have? Johnny, come over here.

Um, Erica says, can you go to FICO and see someone's credit scores, or how do you check someone's credit score?

Oh, okay. So there, if you want to check your credit report, you can go— you can do it for free. And the government made all 3 of these credit bureaus, Experian, TransUnion, and Equifax, give us a free report. Okay, and you can get it at annualcreditreport.com. You'll get your free credit report from all 3 of these. Okay, and then to get your credit score, there's some free, but a lot of these guys charge. So you can look at Experian, go to their website, TransUnion, or Equifax to see. And if you're, if you're a young kid, you, you most likely don't have it. Now, if you're watching my show this morning, On KHON Fox News in Hawaii, I did a report this morning for for them on setting up a credit freeze, and you can put a freeze on all of your accounts. Okay, so some of you, you might even need to do this as a kid. So so these scammers—it's unfortunate there's a lot of bad people out there, scammers that try to take over people's credit. So they open up loans in other people's names, so they don't have to pay it back, and it and it can do some damage. So. I'll get these reports. They're, they're like a minute and a half each on how to do it. So very, very simple.

What happens if you cannot raise your credit score?

If you can't raise your credit score, then, then you're going to be stuck getting lower rates or excuse me, higher rates and higher fees. So this is something you got to work on, right? It's like you want to get good grades, you want to get good grades in school, you want to get good financial grades. So you got to keep trying. You got to keep doing all the right things. And there's certain things you can do to improve it.

If you have a bad score, how long does it take to raise it?

So if you, if you have a bad score, sometimes they're mistakes, sometimes they're your mistake, but you can check back every month. The credit bureaus typically update every single month when you start to fix things and do things. So it could be a year, could be a month. It just depends on what's wrong with your credit.

How do you protect from credit scanners?

Yeah, so what I do— how do you predict? That's a great question. What I do is I put a freeze. I have a credit freeze on all 3 bureaus. It's free to do. It's pretty simple. I'll post a YouTube link to my Fox News, my KHON News segments so you and your parents can follow it. That's the easiest and cheapest thing to do, and it works. And so when you put a freeze, nobody can open up credit in your name until you lift that freeze, and you have to have passwords. You got to log in. So This very good thing. All right, kids. This has been great. Like I said, I love teaching you. I hope you're getting a lot of value out of this. For some of you that are younger, sixth grade and under, this probably is a little bit overrated, but it's good to know. But for everyone else, there's the tremendous value in having good credit reports and good credit scores. I hope this story has helped you. I want you to be safe. I want you to be healthy. Listen to your parents. Continue to finish strong in school. A lot of all of you are. Doing online school, do your homework, finish strong because you want to get if you practice now getting good grades in school, guess what? You're gonna you're gonna you're most likely gonna get good financial grades. So they they all correlate. Okay, kids. Anyway, thank you so much. I'll see you next week. I'll see you this week Thursday. God bless you. Aloha.