In this video, Paul Sydlansky, CFP®, tackles the myths surrounding credit scores and offers actionable tips for effective credit management. Watch now to learn how to optimize your credit and enhance your financial planning strategy.

Topics Discussed:

• Understanding and improving your credit score
• Debunking common credit score myths
• Managing different types of credit effectively

Transcript:

Hi everybody. I’m Paul Sydlansky and welcome to episode 23 of the Build our 24 part planning series where we take you through the life of a plan with Lake Road Advisors. In today’s episode, we’re going to talk about credit and credit scores and some myths to be aware of when it comes to your score.

A credit score is a three digit number, generally ranging from 350 to 850 given by multiple agencies. That really tells you how good you are, a credit risk to counterparties, no matter what model you use to determine your score, whether that’s FICO or Vantage score. The main premise for determining this score is how well you are at paying back your liabilities. These scores also reflect your breadth of liabilities as well as the length of some of these loans that you’ve taken out. Most of the time you can attain a score through your credit card company. You might see the score on a statement, but we recommend checking out something like Credit Karma where you can get free access to your score.

Now that you have an idea what a credit score is, let’s talk about some common myths. Myth number one, checking your credit score will hurt it. You might’ve heard that somebody who checks their credit score frequently will cause it to drop. Well, that’s kind of true. You need to understand the two different types of inquiries. There’s soft inquiries and there’s hard inquiries. A soft in inquiry is you checking your score maybe on your credit card statement or going to a Credit Karma, or maybe when you get a pre-approval letter from a mortgage broker that says you are approved for an alone amount, those really don’t affect your credit score.

What does change your credit score are going to be hard inquiries. These are inquiries that you make when maybe you’re buying a car or when you are starting the process to get your mortgage. These will drop your score, but it’s usually only for a short period of time and only for a small amount, five, 10 points. What we suggest is that if you’re going to have these hard inquiries, do them within two weeks to, let’s call it three or four weeks, all at once, because generally speaking, a bunch of credit inquiries done within a short period of time will only have a minimal negative impact. And like we said, with these types of queries, after a while, they will be removed from your credit score and your credit score should rebound after a few months.

Number two myth. You need different types of credit in order to have a good score. Now, there’s all different types of credit. You can get installment loans. That’s maybe for a car. You can get a mortgage, you can get a HELOC, which is a revolving credit. You can have credit cards while showing that you can manage different types of credit. It doesn’t mean you can’t have a good score if you only have one or two of these types of loans. Instead, focus on paying these loans back in the time that you are allocated to pay them, so not being late on any of your payments. That will have much more of an impact on your credit score than your ability to have a breadth of different types of loans.

And then finally, carrying a balance can help your credit score. Now, taking a step back, we don’t want to carry balances, number one, because that costs us interest and that interest will compound over time. Just like your investments compound for the positive, the interest on your loans will compound for the negative and you’ll owe more and more.

Having a balance is okay in the short term, but it’s not something that you want to carry. You want to show these agencies that you have the ability to pay these loans off over time. So carrying a credit card balance is not a good thing for your credit score.

So to quickly recap, what are the three most impactful things you can do to help your credit? Number one, pay all of your cards and balances on time. Number two, avoid inquiries in a drawn out manner. If you have to make inquiries about buying a new car, do it in a short period of time. Don’t close a lot of accounts out at once or open a lot of accounts at once. And then number three, try not to carry large balances for large periods of time.

We hope you found this helpful and we look forward to seeing you on our final episode of the Build where we wrap it all up and bring it together. Have a good day.

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.