How to kill, rescue or secure your credit history and financial future
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Term
credit score
A credit score is a number that shows how good you are at paying back money you borrow. Banks use it to decide if they will lend you money for things like cars.
Term
credit history
Credit history is a list of how well you have paid back money you borrowed before. It helps banks decide if they can trust you to pay them back again.
Term
FICO score
A FICO score is a special kind of credit score that banks look at to see how good you are at paying back money. The higher the number, the better.
Term
MSRP
MSRP is the price the car maker says the car should cost. Dealers might sell it for more or less than this price.
Term
charge off
A charge off means a company thinks you won't pay back some money you owe, so they mark it as a loss. This can hurt your credit score and stay on your credit report for a long time.
Term
buy here, pay here car lot
It's a car dealership that sells cars and also lends you money to buy the car, even if your credit is bad. You pay the dealer directly instead of a bank.
Term
interest rate
Interest rate means how much extra money you have to pay back when you borrow money. It's like a fee for borrowing, shown as a percent.
Concept
title loan
A title loan is when you borrow money by using your car's ownership papers as a promise to pay back. If you don't pay, you can lose your car. These loans usually cost a lot in fees.
Term
annual percentage rate
APR is how much it really costs you each year to borrow money, including fees and interest. It helps you see which loan is cheaper.
Term
learners permit
A learners permit is like a special permission slip that lets someone practice driving with some rules before they get a full driver's license.
Term
credit bureau
A credit bureau is a company that keeps track of how people borrow and pay back money, helping banks decide if they can lend money to someone.
Term
0% financing
0% financing means you can borrow money to buy a car and not pay extra money as interest for a certain time, making it cheaper to buy.
Term
loan approval tiers (A, B, C, D, E)
When you apply for a loan, lenders put people into groups from A to E based on how good their credit is. If you're in A or B, it's easier to get a loan for a car; if you're in lower groups, it can be harder.
Term
credit tiers
Credit tiers are groups that show how good your credit is. If you have better credit, you get better loan deals when buying a car.
LIVE
Hey, folks, Lenny Lawson, the car guru here again.
You know, I'm going to have to put together a blooper reel someday.
All of my false starts when I'm recording this program.
It used to be that I did one live show, which was on WJCW radio.
And then I was sitting down and record four more back to back.
That was exhausting.
So now I just do a fresh one every day.
Three o'clock, pretty much on the nose.
I'll sit here in my office at Gateway Ford and cut a new episode
like I'm doing right now.
Had some interesting issues last week and towards the end of the week,
I had an embarrassing one.
You know, it really shouldn't be embarrassing for me.
I had a customer who's a friend.
They're not frequent customers, but.
They do come here for service on a regular basis, and they wanted to buy a car.
And they wanted to finance the car and they had to trade in.
It was paid for.
And it was probably worth, I can't remember the ACV.
I think it was about $10,000, so not bad.
That would make a pretty good down payment on a new vehicle.
And I couldn't get them finance out of the 20 or so different financial
institutions that we use on a regular basis.
None of them would loan these people money on a new vehicle with $10,000 down.
Just not right, is it?
Well, that's just the way it is.
You know, that's based on more than just their credit score.
It's their credit history, which is the credit score is a reflection of that.
Credit scores normally range from 300 to 850.
So a good FICO scores, what they call it, is typically between 670 and 739.
While scores above 800 are considered exceptional.
Those people can walk into a car dealership by anything, probably finance
130 percent of MSRP, like if they're way upside down on something
and they need to finance more than the car actually retails for.
Can you believe some people have to do that?
But yeah, exceptional is 800 to 850.
Very good 740 to 799.
Good 670 to 739.
This is at about the US average, considered a dependable borrower.
Then you get below that 580 to 699.
You got credit issues.
There are some definite blips on the radar screen.
It could be that you are behind on credit card payments or on your existing
car loan or on your mortgage on your house.
Or you could be current on everything.
But in the past year, you've had a lot of issues, a lot of late pays.
You've had a couple of charge offs.
You know, a charge off can be $10 at a hospital bill that you know,
you paid everything except $10.
What do they do with that $10?
They charge it off and that goes on your credit report.
You know, that's why you need to look at your credit report once a year,
maybe every six months and see if there are any charge offs because you can
be, you can have outstanding credit and you just didn't know that a certain
amount was left over on a bill.
And this happens a lot when it comes to hospital bills and doctors visits
and stuff like that.
You know, you didn't pay your copay is 30 bucks and they sent you some
statements either through the mail or by email and you didn't pay it.
So they charged it off and it hit your credit and it drops your, your FICO score.
And then if you have a score below 580, you're just a high risk to the lenders.
That's the way they look at you.
They look at your payment history.
They look at the amount of debt that you have, the existing debt and they
just don't want to finance you.
And that was the case with these folks.
So their only option is to find some independent business that will
finance them like a buy here, pay here car lot.
That's what, you know, that's why there are buy here, pay here car lots.
It's for people who have horrendous credit.
And that's about the only way to say it.
I mean, why go and pay 18 to 28% interest?
Can you imagine that?
And today's market, that's what those, that's the interest rate those people
are paying.
And you think that's high.
You ought to see what the check cashing places charge for interest.
I mean, these title loan places, it can be over 100% interest.
That's annual percentage rate is what I'm talking about.
So if you keep that loan intact and don't pay it off for a year, if it
was $500 before and now it's $1,000 that you have to pay back.
Okay.
That's enough about that.
You may be saying, Hey, Lenny, your voice sounds different and it does.
It's lower.
I'm horse.
I'm not sick.
I got to go to the UT Alabama basketball game the other night and I got
to sit on the sidelines with a good friend of mine who, who has deep enough
pockets that he can afford to buy seats on the sideline.
And when I say on the sideline, if I stretch my legs out, I'm about one
foot from the sideline of the basketball court.
And it had been a while since I had done that.
And the game really hasn't changed that much.
It's just that I lost my appreciation, I guess, or my knowledge about how hard
these guys play and what unbelievable physical specimens they have to be to be
able to take that kind of a pounding.
I mean, the, the college game at the division one level, it's physical.
I mean, if they put high school referees in there, instead of SCC referees, like
for this Tennessee Alabama game, they'd be calling a foul about every two seconds.
You'd never get the game over with.
And the difference between a foul and just shoving, you know, what out of
somebody is just a little bit.
And then they'll call these little touch fouls when they go for a shot or something.
I mean, it's, it gets kind of frustrating.
And that's when the yelling happens.
Are you crazy?
You know, and that, I must have said, are you crazy?
Are you kidding me?
You know, that type of thing.
I must have said it louder than I thought I was.
I wasn't yelling at the referees.
I was just making a point, expressing my freedom of speech.
Maybe a little louder than I thought.
Okay, I'll be back in just one minute.
Okay, I am back.
Isn't it interesting how young people think that they're done with school
when they graduate, either from high school or college.
They're not done learning.
They're just getting started.
They just got their learners permit.
And somebody, namely a credit bureau, is going to keep on scoring them
as they go through life and as they borrow money, as they get credit
cards and buy cars and buy house and finance furniture and other things,
boats, jet skis, what else are waste of money, campers.
When they do that and that that becomes a part of their lifestyle,
it's all going to be tracked and it will impact their ability to borrow
money in the future and lots of them will still be able to borrow money.
They'll just pay a higher interest rate.
I've had people come in and say, well, you guys are offering 0% financing.
And under my breath, I'm saying, yeah, but that's not for you.
Because of your credit score, you don't qualify.
You see the credit bureaus score you for, you know, any type of bank,
you know, banks use these car dealers use them, you know, any place you go
to borrow money, they're going to look at your credit score or, you know,
take a loan out on a stereo.
Somebody's going to check your credit.
But when you come in to borrow money for a car, not only are they going
to check your credit, that score is going to be related to a table.
And that table says A, B, C, D, E. And if you're A or a B, then you can get
that 0% financing.
But if you're a C, you probably won't unless somebody is willing to like
some loan officer at Ford credit or Toyota credit, somebody gets involved
and they talk it over with the dealership and they move them up a tier.
But if you're a D tier, you know, if they have E and F, you can forget
about 0% financing.
You're going to either have to pay regular rates, which are going to be
in the 7% to 8% still, or not financed at all.
And if they can get you financed, you're going to have to go with one
of these quasi banks, you know, these loan institutions that charge rates
in the 12 to 25% range.
Isn't that awful?
People say, well, that's not fair.
Yeah, it's fair.
And you did it to yourself or your circumstances did it to you.
And I say that and it hurts my heart to say it because a lot of people
that have terrible credit scores are there at really no fault of their own
in that they had a sick child or they got sick and couldn't work or they
lost their job and couldn't find another job.
So there's all kinds of circumstances.
If a bank or one of these lenders understands the circumstances going in,
then sometimes they'll help somebody get back on their feet.
And that will happen more often than you think.
The best thing that a person can do if they are in that type of credit
situation is to go to the car dealership where you want to buy a car and ask
to speak to like one of the sales managers and just talk to them, explain
to them upfront what you know your credit situation is.
And what they'll do is they'll pull a credit bureau report.
They'll look at that at your score at all of your circumstances and they
will do their best to build a case that, you know, you're on the right track now.
Yes, you had some trouble six months ago or a year ago or even five years ago.
Your credit report goes back seven years.
And, you know, so if you file bankruptcy, then it's very possible that if you've
been really good since the bankruptcy, like over a year or two, that you'll be
able to qualify for a good rate.
You know, when you file bankruptcy, what happens to your debts?
Well, it depends on if you file chapter seven or chapter 11.
But let's say chapter seven bankruptcy or your debts go away, except for
those that you affirm.
What does that mean?
Well, let's say that you have, you file bankruptcy and you've got all these debts,
credit card debts and stuff like that.
But you also, one of your debts is your mortgage.
You want to keep your house.
So you affirm that debt and then you have a car loan.
And you can affirm that debt.
Now some of the other creditors may take an issue with you affirming certain debts.
They say, why not us?
Why not affirm our debt?
And a bankruptcy judge is going to be the one who determines who gets what, who
gets paid and who doesn't.
So nobody wants to go through that process, but a lot of people do.
And you know how they end up there because they could not control their
purchases or because, like I said, they had some type of life altering event that
they couldn't pay their bills.
And I feel for those people, I really do.
And if those are the circumstances, then lenders are more willing to look at that
and say, okay, they've reestablished the last six months to a year, year and a half.
They've been good.
They've paid everything as agreed.
You're going to get financed.
You may have to pay a higher rate that first time.
Like when you buy a car now, you might have to pay 12%.
But the next time, if you do really good on that loan for, for a couple years,
you're never late.
Everything is paid as agreed.
The next time you go to get a loan, your score could still be lower than it needs
to be, but you could get that 0% financing.
And, you know, life gets better when you have a lower cost of funds, when it
comes to your debt.
So when it comes to factors that impact your score, payment history is 35% of
your score.
So if you make your payments on time, you improve your score.
If you miss a payment, then that hurts it.
Now, one thing that people don't think about, and this is very important.
Let's say you have a 60 month loan and you've made 20 payments on time and
then you have a bad month financially or a bad couple months.
And so one payment, you just skipped, you didn't pay it.
Of course, the bank calls you, you know, threatens all kinds of things other
than bodily harm, but you just don't pay it.
And then the next month comes up and you start paying again.
So every time you make a payment from then on out, because you skipped a payment,
every payment from there until you get to 60 months is 30 days late.
And it's because you didn't make the payment that you skipped.
If you had made double payments when you had the money, then you would be
current all the rest of that time.
So we've seen this a lot on People's Credit Reports is, you know, they'll
miss one payment real early in the loan cycle.
And for the next three or four years, every single payment is late because
they never caught up on that one payment.
So payment history is 35%.
The amount that you owe is 30% of your score.
And if all of that is revolving credit, you know what that is?
Credit cards.
That's called revolving credit.
If all of your debt is credit cards, that's going to hurt your score a lot.
And if it's, if you're just paying the interest and you're not paying the
principle of that loan, I mean, you're hurting yourself definitely, but
you're also hurting your credit score.
And then another type of debt is installment credit.
And that's where you're making monthly payments, like on a car loan,
like on a boat loan, camper loan, any of those where you have a regular
monthly payment mortgage.
If you were late on your mortgage, that is weighted very heavily because
the way the lenders look at that is if you won't pay for your house, you
won't pay for anything.
And then of course, length of credit history.
You know, a lot of young people, they get frustrated because, you know, they,
they say, well, I've had a credit card all through college.
Yeah, but who was paying it?
And then you have those folks who have 15 different credit cards or even
five different credit cards.
How many should you have?
That's right.
One, that's all the credit cards you need.
The only reason people have more than one credit card is because they sign
up for them all the time.
We'll give you 10% off or 20% off.
If you sign up for the American Eagle credit card, when you, you know, buy
these blue jeans, oh, that sounds great.
Don't do that.
That is a terrible financial move to have a bunch of credit cards out there.
And all these lines of credit, you know, I mean, your credit limit may only
be $1,000, but you've got that credit card and it's on your credit report.
And if you owe $50 on it or 500, they're going to count all of those credit
cards that you have, and that's going to destroy your credit score.
So please, every time you're given an opportunity to sign up for
another credit card for a discount, tell them, no, thank you.
So how many credit cards does the car guru have?
Two, one, American Express card since I've had since 1979.
It used to be a big deal when I got out of college to get an American
Express card, it was an aspirational thing.
And so I got it and I pay the fees to have it and I have a really good
cashback offer on my American Express card.
So I keep that.
And the other one is a visa card because there's a lot of places
they won't take American Express and that's it.
That's all you need.
And if you need more credit cards than that, you're probably spending too much.
This is primarily for young people.
Okay.
They need to listen to this because they're getting ready to graduate
away from college or they're getting out of high school and going to be
going to work, you know, and they want to be responsible citizens and they
want to be financially responsible.
And one of the ways to really get off track is to get too many credit cards
and start charging things on them.
You should pay that balance every month.
Don't ever charge more on a credit card than you can pay.
And there's a lot of people right now, they say, well, I can't live.
If I don't charge something on a credit card, we don't make enough money to
support our monthly expenses.
Then you're going to have to reduce your monthly expenses.
You know, you bought that car and your payment's $840 a month.
Maybe you need to get rid of that and get you a card that's $400 a month.
That's just, it's tough.
It's tough love.
Sometimes that's what we have to do.
Okay, I'll be back in just one minute.
I'll give you a goal that I think that every young person should have.
And it's a financial goal.
And that's by the age of 50.
I know that might sound too far out there, but by the age of 50, you never
have to borrow any more money for anything.
So you've got approximately 30 years to get yourself to that position.
And I think one of the best things you can do is early on, once you get a
little bit of money in the bank and you got to start saving young is to get a
financial advisor, get some type of financial guru to help you plan your future.
And you may be able to push that down to 40 and you don't have to borrow
anymore money, but you can then walk into a car dealership and buy a car and pay
cash, want to buy a camper, want to buy a boat, fine.
Just don't buy one until you can pay cash for it.
Never go in debt for a recreational item, whether it's a four wheeler, motorcycle,
some kind of a toy like that.
If you can't pay cash for it, you don't buy it.
So in order to be able to do that, you've got to match up your income with your
expenses and make sure that that one exceed that the income exceeds the
expenses enough so that you can save anywhere from 10 to 15% of your income
every year, save it.
I mean, stick it in a bank and when it gets up to a certain level, start buying
CDs and when it gets even a higher level, start blending in some mutual funds.
But all of this is under direction of a financial advisor who is going to take
one to one and a half percent of the value of your portfolio going forward.
So whatever you have every year, they get one to one and a half percent to help
you make good financial decisions.
They don't get a commission because you don't need to pay somebody a commission
to invest your money.
You just pay your financial advisor a flat fee and then they will they will manage
your money for that fee.
And so when you buy a share of Apple stock or Exxon or whatever, you're not
paying a commission on that.
But all of this is a plan that you put into place so that when you're 50, you've
got no debt and you're not going to add any debt.
You want to buy a beach house?
Don't rent it.
Buy one if you want to, you know, because of increasing values, but not
if you can't pay cash for it.
I mean, that's just the rule that you live by.
And it has served the World War Two generation very well.
They were savers.
You know, I mean, people are still alive.
Soldiers that fought in World War Two, 66,000.
You know how many served 16.4 million Americans served in the war.
So they're going away.
My parents are gone.
My dad was in the Navy.
Those people knew how to live within their means.
And that's something that this generation just doesn't seem very good at.
Well, thanks for listening to this edition of my car guru.
Sorry if I lectured a little bit, but I think there's people out there that
need to hear this message and take it to heart.
Well, I'll see you on the next edition of my car guru.
About this episode
Lenny Lawson dives into the complexities of credit scores and financing, especially when buying a car. He explains how credit history impacts loan approvals, interest rates, and financing options, including the challenges faced by those with poor credit. Lenny also discusses the importance of monitoring credit reports for charge-offs and how life events can affect creditworthiness. He offers practical advice on working with dealers and rebuilding credit after setbacks like bankruptcy. The episode blends financial insights with personal anecdotes, making credit management relatable for car buyers.
Original notes
Email Lennie at [email protected]
My Car Guru Podcast
My Car Guru...Lennie Lawson
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22:29