Financial Literacy Class: Credit scores, budgets, and how to use both

All right. So here in Full Court Finance, we're going to talk to you about two different topics. We've got our Credit 101 presentation that's going to talk to you a little bit about credit scores, credit bureaus, the importance of credit history and how to improve your credit score. And then we have Budgeting 101 that's going to talk to you a little bit about budgeting and expense tracking, what are some different budgeting strategies, and how to manage expenses. So that is our focus for today. We'll start with Credit 101.

So in Credit 101, you know, I think everyone here has probably heard that they have a credit score. You may not know what your credit score is or how to influence your credit score, but you've heard about your credit score. But credit scores are really part of a broader credit ecosystem. So, you know, some of you are in school, I think. Some of you have kids in school. You think about school, you have a report card, you have grades, you have grades on a particular exam. You might take a test like the ACT or the SAT and have a score. Those are all different measures of how you're doing academically and of your knowledge and how well you take tests.

Credit scores are very similar. So they're part of this broader credit history concept, which is like your full educational resume — all of the things that you've done, what loans you've taken out, what loans you've paid back. All of that makes up your credit history. And that credit history is furnished on something called a credit report. So that's like summarizing all your academic career down into your transcript. And then your credit score is your grade, your GPA, your SAT score. And so all of those work together to give lenders and other people insight into your credit.

So why do we talk about credit history and credit scores? Well, credit history has become important to a whole lot of your life. It's not just about loans anymore. Some employers will check your credit history to decide whether to give you a job, particularly if you end up in a career in finance or where you have access to sensitive information, like if you needed a government security clearance. And so sometimes having bad credit can actually impact your career prospects. Your credit is also important when you go to rent a new house or apartment. A lot of landlords will pull your credit report. It can impact your ability to get insurance, the rate you pay for insurance and the coverage you can get for auto insurance or something like that. And then you all know it impacts the rates that you get and whether you're eligible to get a credit card, an auto loan, a mortgage. It can also even impact your ability to finance a cell phone or the deposits that you need to pay.

So credit history is important for a lot more than actually just financing. You access your credit history or your credit report through a credit bureau. So if you don't have exposure, there are three main credit bureaus in the US. Those are Equifax, TransUnion, and Experian. And you never know which credit bureau anyone's going to pull. So it's important to be aware that there are three of them and they're all slightly different. Not intentionally different, they just end up being slightly different.

There are also alternative credit bureaus. So beyond the big three credit bureaus, there are credit reports provided by other companies — companies like Clarity Services, which includes information about payday loans and lease-to-own performance. Some alternative auto finance companies might report to Clarity and not to Equifax. There's a company called Innovis. Chex Systems is a credit report focused on bank accounts and your history of overdrafting your checking account. Here in Florida there is Vertech. So Florida has a state payday lending database, so they have specific rules for people who lend under a payday loan license, and that includes reporting information to this state database operated by Vertech Systems. And lenders have to get information from Vertech to decide whether you can get a loan.

So each of these companies plays a different role in the credit ecosystem. So it's important to be aware that there are a lot of these companies out there that your information is with. And if you're having trouble getting a loan or getting an apartment, you may need to look beyond those main three credit bureaus.

One of the most important things that you can do is to periodically review your credit report, or credit reports, as I kind of just pointed out. So a number of years ago, a piece of legislation was passed called FACTA — the Fair and Accurate Credit Transactions Act — which gives you the right to get a free copy of your credit report from each of the three main credit bureaus once a year, totally free of charge. So you'll get this presentation later and you can access the actual URL of how to get your free credit report. And making sure that you access that credit report and review it, ideally every year, can be very, very helpful in making sure there's nothing inaccurate and you understand the information other people can access about you. The alternative credit bureaus I talked about also actually will let you get a copy of your report. So for example, for your Chex Systems report related to banking, you can go to their website and figure out how to get access to a free report.

When you're reviewing your credit report, the key thing here is to make sure everything is accurate. Do they have your correct name, or have they sometimes mixed your information with someone else's information? That's not uncommon if you have a name that's similar to someone else's. So is it your name, is it your address and phone number, do they have the right social security number? Are the accounts listed things that you recognize, or has someone else's information ended up on your credit report? Make sure the status of your accounts are accurate. Your accounts are going to be reported as open or closed. It might include your balance and a history of payments, whether payments were made on time or late. So you review all of that and make sure it's accurate, and if it's not accurate, you can go ahead and dispute that information.

So if the information is wrong, there are a lot of avenues to you. You know, again, we have regulation that helps put you in control of your credit. And you can dispute with the credit bureaus and tell them, you know, I wasn't late on this, this isn't my loan. You can also dispute with companies directly. It's a little hard to dispute something if you don't have a relationship with that company. So if there's a Bank of America loan showing up on my credit bureau that I didn't take out, it's hard for me to go to Bank of America and say you're reporting a loan that's not mine. But I can go to the credit bureaus and say I did not take out a loan from Bank of America — this is someone else's, please take it off my credit bureau.

One thing that you should avoid is disputing trade lines that are actually yours. So there are a lot of services out there that will help you dispute trade lines to help you improve your credit. Because once you dispute something it temporarily goes away from your credit report. But if you dispute things that are actually your debt, a lot of times the companies don't look very friendly upon that and they may not lend to you in the future. And so you can have a quick win if you dispute things, but it often is a negative for you in the long run. So dispute it absolutely if it's wrong, though.

Moving on to credit scores. So when you get this free credit report, it typically won't contain your credit score. It just contains your transcript information without those grades. So it tells you all about the credit accounts that you've had, but it doesn't summarize that into a score. If you're really focused on your credit score, there are services like Credit Karma, Capital One's Credit Wise — these days a lot of banks and credit unions will give you your credit score and access to your credit report in real time as a service of their online banking. So there are ways to get your credit score, just be aware that's probably not on that free credit report that you get.

So what is a credit score? You know, I likened it to your performance on a standardized test. Typically like a standardized test gives you a likelihood that you will do well in college. Your credit score is a prediction of how likely you are to pay off a loan. So they're predicting, you know, if this person takes out a loan, what's the likelihood that they will pay it back? That's all it is. It is not — just like the SATs aren't an assessment of how intelligent you are — your credit score is not an assessment of you as a person. It's just a model that says this is how likely you are to pay back a loan.

There are lots of credit scores. I think a lot of people feel like you have a credit score, like it's a singular number. But that's simply not true. You have a company called FICO, or Fair Isaac Company, that created some of the initial scoring models. And there are five or six different versions of your FICO score that a lender can access. There's also a company called Vantage that was built to be a competitor to Fair Isaac and they have their own scoring system and they have a number of different versions of their score. And these scores are all different. So just like there are three credit bureaus, there are actually a lot of different credit scores. So being overly focused on a couple of points change to one of your credit scores is not really a worthwhile activity.

But a little bit about these scores — both FICO and Vantage have chosen to use a very similar scoring system in which 300 is the lowest score and 850 is the highest score. A credit score outside of that range is typically an error calculation. So you're looking at a score between 300 and 850. Typically, once your credit score is over 700 or 720, that's considered very good. And there's not a lot of point in focusing on whether my credit score is 750 or 780. I was talking to someone who's like, oh, my credit score is almost 800. I'm like, that doesn't matter, right? Like that's the highest score, but no one cares. As long as it's over 720, you're going to get the best deals that are out there. If your credit score is less than 500, it's going to be very, very hard to operate in the credit ecosystem. And between about 500 and 720, there are loans and financing out there, they just may be a lot more expensive.

What makes up my credit score? Your credit score is a mixture of positive factors and negative factors. Things that positively impact your credit score are things like making payments on time. Having a history of on-time payments can greatly improve your credit score. Having accounts that have been open for a long time — so a long financing relationship, in particular with a credit card — can be a positive. And keeping your balances relative to your credit limit low. So that's utilization. If I have a $1,000 credit card limit and I only spend $200 on that credit card, then I have 20% utilization. I'm only using 20% of the credit they've given to me — that is generally viewed as a positive.

On the negative side, not paying on time. Late payments, and in particular severely late or charged-off loans, are a negative factor. Recent inquiries — so if you're going out and you're applying for five loans in a week, that is viewed as a negative. Now it's a short-term negative. People often really focus on inquiries. Most lenders are only looking at the number of inquiries in the last 15 or 30 days. And so it will lower your credit score absolutely, but only for a very short period of time. So it's not something to overly focus on. But if you really, really want a particular loan, applying for three or four loans before that is probably not a good idea. And similarly, a lot of new loans — taking out a lot of different loans in a short period of time very recently — is going to cause lenders to not want to give you more money.

Your credit score is made up of a mixture of things. So about 35% of your credit score is your payment history — so on-time versus late payments. About 30% is total debt. And then the rest is a mixture of how long your credit history is, whether you have new loans, and the total amount of credit you have used. So they all play slightly different factors, but payment history — those on-time payments — are really the most important thing.

So if you want to improve your credit score, where possible pay your bills on time. That's the most important thing you can do to keep your credit good. Dispute any errors or inaccurate information. Wherever possible, keep the utilization on your credit card low. The general rule of thumb is that utilization under 30% is good. So that means when your credit card statement is generated, the balance is 30% of the credit limit or less. Now, if you need to use more of your credit limit, if you can pay down some of that before your statement is generated, you can keep your utilization low because typically credit card companies are going to report your balance when they generate that statement. Don't open a lot of credit cards, but also consider keeping at least one credit card open for a long time. You can use products like secured cards or cards designed for building credit history — there's nothing wrong with that. And where possible, use a mix of products. Not just having installment loans, but having some credit cards and some installment loans is viewed as a positive for your credit history.

So some people may not have a credit score. What happens if you don't have a credit score? There are some companies that specifically focus on consumers with no credit score. They may have products designed for young adults or people who are new to the credit market. Companies like Possible Finance don't rely on credit information as the main way that we decide to approve or decline someone — we use your cash flow, your banking information. But for other reasons as I pointed out, it is important to have a credit score. And so there are some products like Experian's Boost product, and Experian's Boost product can let you furnish your on-time payments for bills and utilities to the credit bureaus to help create that history and create a credit score.

If you already have bad credit, the most important thing is to continue to pay your bills on time. So if your credit score is low, it will slowly improve over time if you make all on-time payments. So if you still have credit cards or loans open, even though a late payment is going to lower your credit score, that's not a permanent thing. If your last five payments are on time, that's going to start to improve your credit score. And so your credit score is really like a long game. There are things you can do in the very short term to improve your credit score or hurt your credit score, but the key is that consistent repayment performance over time is going to cause your credit score to be good. It just can take a few years to rebuild from a credit score that's not in a good spot.

A couple of common credit myths, and then I'll pause and pop into the budgeting. Should you — if you are able to pay off your credit card in full every month — should you still carry a balance from month to month to improve your credit? No. Please do not do that. If you're able to pay your credit card in full, then you don't pay any interest. If you carry a balance from month to month, then there's interest from day one on every new purchase. There is no benefit to your credit score of carrying a balance from month to month. Now, that said, some people try to pay off their credit card before their statement cycles, and then the credit bureaus don't know that you've been using your card and paying it off. So don't pay it off before your statement shows up in the mail. But definitely pay it off in full if you're able to do so.

Should you take out a loan that you don't need to improve your credit? I would recommend no. There may be certain circumstances in which that is what you need to do, right? I need to improve my credit so I can qualify for this apartment. I don't need the loan, but I know it's going to bump me enough to qualify. And if that's the decision you make — but loans cost money. And so you just need to recognize that to take out that loan is going to cost you some amount of money. Is that worth it to you? So generally I would say no, but I do recognize circumstances are always a little different.

Be mindful in use of credit and debt. I want to buy a new $500 TV, I want to put it on my credit card. Great. My example here assumes a 20% interest rate on the credit card, which is kind of low these days — most credit cards are close to 30%. If you put the $500 TV on your credit card and you just pay $10 a month — the minimum payment towards that TV — it's going to take you eight and a half years to pay off that TV. You may not even want that TV in eight and a half years. And it's going to cost you over $1,000 to purchase that TV. But just a little change — if you just increase what you're paying on that credit card by $50 a month — you're going to pay off that TV in 11 months, and it's only going to cost you $542. So only $42 more than it would have if you purchased that TV outright. So that really small behavioral change of instead of paying the minimum, paying $50 more than the minimum, can save you a lot of money and get you out of debt much faster.

Moving on to budget. 78% of Americans report that they are living paycheck to paycheck. We think about paycheck to paycheck as this shameful thing that only a few people are experiencing. That's not true. The vast majority of Americans of all income levels are living paycheck to paycheck. One of the things that you can do to break that paycheck-to-paycheck cycle is to think about having a budget.

So what is a budget? A budget is a plan for your money. It is a plan where you think proactively about what money you're going to receive and how you're going to spend that money. I've in my past worked with a lot of high school students on financial management and putting together a budget. And sitting down with them — what income are you going to get? Do you have a job? How many hours do you think you're going to be working in the next month? Is that impacted by finals? Are you going to have to cut back on your hours? Do you expect Christmas and some cash gifts from some of your relatives? There are lots of different sources of income even a high school student may expect. So thinking about where does my money come from, and for a particular period of time, what do I expect to happen? Because it's not always the same.

So a budget — what is it? It's creating a plan for your money before you spend it. Its purpose is so that you can intentionally direct your money towards your priorities — not my priorities, your priorities — so that you can have proactive control over your finances. So you're going to use your budget to tell your money what to do.

Now there's also a related concept called expense tracking. So expense tracking can sometimes be confused for budgeting. But expense tracking is recording where your money has already gone. That's going through your bank statement and your credit card statement and figuring out where your money went. It's reactive rather than proactive, but actually plays a very important role in budgeting and money management. So how do these work together? Budgeting helps create control while expense tracking creates awareness. You need both of those to manage your finances. Expense tracking tells you how you've spent your money, while budgeting gives you that plan for the future. So expense tracking can provide an initial foundation for your budget.

But think about this example here. Sarah's put together a budget. She likes eating out, but for this month she's only allocated $150 towards eating out. So she has a budget for eating out. And so as she goes through the month, she realizes that's her budget and she pays attention to how many times has she eaten out, what has she spent. And once that $150 has been used up, she focuses on cooking at home and using the groceries she's purchased. If all Sarah is doing is expense tracking, well, she may intend to only spend $150 eating out. But because she didn't set that as a goal, she didn't write that down — she looks back over the course of the month and realizes she spent $300. And now she's short and she can't use that money for something else.

So how do you get started on a budget? First, you need to acknowledge that the first budget you put together is not going to be perfect. This is going to be something you need to iterate on. Make adjustments over the first two to three months. Expect this is something you'll put together and you'll need to change, and that's okay — give yourself that space. Start by calculating your take-home pay. What money do you expect to get in the next month? For some people who have a monthly salary, that's very easy to predict. For other people where you're working a particular number of hours and that may be variable, you've got to think about what's going to impact the hours you work over the next month. When you're calculating your take-home pay, what's very, very important is the fine print there. You want to look at the take-home pay, not your gross pay. Particularly if you're going and getting a new job, you can be wowed by that headline number. Oh, they're paying me $18 an hour — that's great. But they're going to take out Social Security taxes, they're going to take out state taxes and federal taxes, they might take out health insurance. That $18 an hour may very quickly become $12 an hour. So what is your take-home pay going to be? What's going to hit your bank account?

You'll choose a budgeting system — I'll introduce budgeting systems in a second. You'll make a budget, and then you'll start to track your progress. You're going to pay attention to how much are you actually spending eating out. Once that's all underway, you can start to think about automating your savings. If your budget has a $50 savings goal each month, figuring out how to automatically move that $50 into your savings account so that it's not there — it's disappeared. But only do that once the rest of your budget's working and you know you have that $50. And then every so often — once a quarter, once a year — practice regular budget management. Go revisit your budget, figure out if it's still working for you.

There are a lot of different ways to budget. There are three popular budgeting methods out there. One approach is called Four Walls First. This is a budgeting method where you really focus on making sure your needs — and those needs of shelter, food, transportation and utilities — are met, and everything comes after that. And that can be a good budgeting technique for people who already have established expenses. It's not really the ideal budgeting technique if you're just starting out. So if I'm working with a high school student, that's not what I'm going to focus on. But for people who already have a lease, already have a car payment, Four Walls First is often what you'll start with.

On the other side here is the 50/30/20 method. This is an approach where, if you don't already have expenses, you might want to think about allocating 50% of your income for needs, 30% for wants, and 20% for saving. Not possible for a lot of people, but it's an interesting framework to think through and see if that works for you. And then zero-based budgeting is really the idea in which you want to give every dollar a job to do. So every dollar that you take home gets allocated somewhere.

We'll walk through some examples. So on the Four Walls First method, let's think about someone who makes $1,950 per paycheck, or $3,900 a month. This person already has a lease for $1,500 and a car payment of $600. So they've already got locked-in expenses that we need to work around. So the 50/30/20 approach probably won't work. But here we can lay out shelter costs of $1,500. Food is going to cost, let's say, $600. Their transportation — we've got that $600 car payment, but we also need to factor in gas and car insurance for that car to work. So we've got $900 a month here for transportation. And utilities of $200 a month — maybe they have a roommate, and that's how they're getting these costs down. So those expenses, right — the four walls — eat up $3,200 of their paycheck. At a minimum, that's great, right? They've got their four walls covered. And they have $700 a month that they can allocate beyond that how they see fit.

So for this person, if we're going to practice zero-based budgeting — taking that budget we just saw — we're going to take that $700 and give that $700 a job to do. In this example, we're going to allocate $300 a month to savings, and that's working toward a $5,000 emergency fund. $200 for enjoyments — eating out, going to the movies. $100 a month to donations, and $100 a month towards paying down debt. Now that $700 is allocated — this person has now practiced zero-based budgeting.

Now let's say another person, Jessica, is about to get her first apartment. So first job, and she's trying to figure out what her budget should be. How much can she afford to pay in rent? So for Jessica, maybe we want to try the 50/30/20 budget. She doesn't have a lease, she doesn't have a car payment. She gets to start from scratch. So in this case, with her $3,900 a month salary, she can put $1,950 a month towards her needs. So that's going to be shelter — rent, utilities, food, transportation, etc. Now you go back to that other example — she can't afford $1,500 a month plus a $600 car payment. So if she's going to only allocate 50% to needs, she's got to think about is this doable. Depends on where she lives, it depends on her tolerance to having roommates — a lot of things. But you can see how that same salary can go to a very different budget, which is why there's not a one-size-fits-all budgeting technique. She gets to allocate 30% to her wants, so she gets about $1,170 for eating out, streaming services, buying new clothes, etc. And then if she sticks with this, she would save $780 a month for that 20% savings goal. She can also customize this — maybe she doesn't have many wants today, but is hoping to save for a car in the future. She can use part of her wants budget to save for a car and reduce her eating out.

Now it's a very different picture than what we saw on the Four Walls. It all depends on what's going on in your life at the time — it's a different budget. Which one is right for me? Well, it depends.

You also have to consider how often you get paid. Some people get paid bi-weekly, some people get paid semi-monthly, some people get paid monthly. There are pros and cons to each of these. If you get paid bi-weekly — every two weeks — that means you might get paid every other Friday, but you're not always getting money on the first or the sixth, right? The day that you get paid moves, which makes it really hard to align when your bills are due with when you get paid. The benefit of being paid bi-weekly is a lot of us mentally think about two paychecks per month. But you actually have a couple of months in which you get three paychecks. So you get bonus paychecks and you can use those bonus paychecks to create an emergency savings or to pay down debt. If you get paid monthly, you have a mismatch between when your income arrives and your bills. By the time you get to the end of the month, you may be out of money if you didn't budget properly. If you get paid semi-monthly, sometimes your rent eats up your entire first paycheck and again you can very quickly be out of money. And so you have to be mindful of that when you're budgeting.

So what can you do? Calendars are beautiful things. So creating a calendar in which you mark all of the due dates of your bills and how much they are, so you can visually see when that is versus when your income comes in, can be a great tool. Creating a weekly budget — we talked about budgeting, those were all monthly examples, but actually budgeting down to the week. Which week is your income coming in, knowing a chunk of that's going to have to go to bills next week. Use those extra paychecks for emergency savings. If your bank allows you to create sub-accounts — a lot of banks these days allow you to create sub-accounts within your checking account — creating a bills account. And so for example, if you're paid bi-weekly, putting a chunk automatically of that pay into your bills account, and then that bills account is where that money comes out so you don't actually accidentally spend it. Also creating a weekly needs account — so you've got this is where all my automated bills come out, this is where my weekly needs, that's maybe where my groceries, medication expenses — I'm going to pay for that. It's a little bit more variable. But you're creating buckets. In the old days people would have the envelope method, right? They'd put cash in envelopes — this is my grocery cash and this is my cash for this. People don't use cash that much these days. If that method works for you, that's great. But this is kind of the envelope version using bank accounts.

Emergency funds. The best thing that you can do for yourself is to create an emergency fund. Even a $500 emergency fund can protect you from having to take out a loan. People will recommend you should have an emergency fund that's three to six months of your expenses. That's really intimidating. That's really hard to put together. It's a great goal, and I would love everyone to get to that place, but really a $500 emergency fund can really be a lifesaver. And so how to do that? If you get a bonus at work — I know when you get a bonus, it can be nice to use that to go on a vacation or go out to eat or have a nice bottle of wine — but putting that into your emergency savings is really the best thing you can do. Even splitting it, half into your emergency savings and half to a reward. Or if you're paid bi-weekly, those extra paychecks. Or maybe your neighbor needs to go out of town and needs a dog sitter for a week — taking that money and putting it in your emergency savings. So if you have this opportunity to get some cash that wasn't part of your budget, that can really help you create that emergency savings.

And again, the impact here — Lisa's car needed a $600 repair. She can either put it on a credit card at a 28% interest rate, increase her payments, pay it off in six months, and that costs her $50 in interest. That's not too bad. But her alternative is she can pay cash from her emergency fund and then over the next four months rebuild that emergency fund and it doesn't cost her anything.

I'm not going to tell you to give up Starbucks or avocado toast or whatever the trendy thing is. I'm not going to tell you to cancel all of your streaming services. I'm going to tell you to Marie Kondo your expenses. I don't know that Marie Kondo is that trendy anymore, but again that's like go through your stuff, figure out what brings you joy and only keep the things that bring you joy. Do the same thing with your expenses. Does Netflix bring me joy? No, not really. So why not cancel Netflix, right? Now some things — my car insurance also doesn't bring me joy. Can't really cancel my car insurance. But I can shop around. And by shopping around — I just added a teenager to my car insurance, it was crazy expensive — but shopping around, I was able to save $1,000 every six months. So every year or two, shop around for new insurance, see if you can save some money.

But a great example here. I used to eat out for lunch. I work in an office. It's nice to leave the office, go find a restaurant, have lunch. But it's expensive. And it didn't bring me any joy. And my waistline really did not appreciate me going out for lunch every day. And so packing a lunch. And even if getting out of the office is part of the appeal, I can take my lunch to the park if the weather is nice. I can take my lunch to the mall food court — I don't have to buy my lunch there. So I can pick something that's healthier and cheaper. And that saves me some money and I don't feel the pain of not eating out anymore. That didn't bring me joy and was a big cost. So a small change can actually save quite a bit.

A bunch of ways to pay down debt. As I pointed out earlier in the TV example, even a small change — even just paying an extra $50 a month towards your credit card — can really reduce the amount of interest you're paying. And so there's a bunch of debt reduction strategies in which you focus on paying down your highest rate debt first, and then paying down your lowest balance — different psychological reasons there. But just one takeaway: if your minimum payment is $25 a month, paying $50 a month doesn't feel like that much more, but can have a huge impact on how much you pay in interest and how long that debt is outstanding.

So the tools and resources — you'll see all of these resources when we send this deck to you. And I'll move on to questions.