Keys & Credit

Credit Scores Demystified

• Bill Jerikovsky & Barb Miller

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Ever wondered why your Credit Karma score doesn't match what lenders see? Or why closing that paid-off credit card actually hurt your score? We're pulling back the curtain on the mysterious world of credit scores and their enormous impact on your mortgage journey.

In this straight-talking episode, we dive deep into what makes your credit tick and how lenders actually view your financial history. You'll discover why credit scores differ between mortgage lenders, auto lenders, and credit card companies—and which one matters most when buying a home. We explain the "credit decisioning score" (the middle score of your three credit bureau reports) and why it can make or break your mortgage application, even if you have an excellent co-borrower.

Beyond the technical aspects, we share actionable strategies to build and improve your credit, whether you're starting from scratch or working to boost an existing score. Learn why credit utilization should stay under 30% (ideally 10%), why your payment history accounts for 35% of your score, and why those old credit accounts should remain open. We also reveal powerful credit-building tools like secured cards and authorized user strategies that can dramatically accelerate your credit journey.

For homebuyers, timing is everything. We outline a 12-month roadmap for credit preparation before applying for a mortgage, including exactly when to avoid new accounts and how to position yourself for the best possible interest rate. This episode is packed with insider knowledge on how lenders actually evaluate your creditworthiness—information that could save you thousands of dollars over the life of your mortgage.

Building strong credit requires work and discipline, but with the right approach, you can achieve your homeownership goals faster than you might think. Listen now to gain the credit knowledge that most lenders won't share until it's too late.


0:00 Welcome to Keys and Credit

0:22 Understanding Credit Fundamentals

6:41 Credit Scores Explained

11:23 Credit Building Strategies

17:14 The Mortgage Pre-Approval Process

21:19 Final Thoughts on Credit Preparation

Speaker 1:

Welcome to Keys and Credit, your no-fluff, no-nonsense real estate and mortgage podcast. I am Bill, the no-bullshit realtor, and I'm Barb, your no-fluff lender. Whether you're a first-time buyer, seasoned investor or just real estate curious, you're in the right place.

Speaker 2:

What are we going to talk about today, Bill? What?

Speaker 1:

are we going to talk about today? Barb, let's talk about Credit. Barb, let's talk about credit. Let's talk about credit, all things credit, lots and lots of credit. How important it is, and how important I mean, yeah, honestly it's. The world runs off fake money. It's how you buy a house.

Speaker 2:

And what our score is. You know it's going to determine how likely you are to pay back the thousands of dollars we borrow you for a mortgage loan.

Speaker 1:

So the root of credit is to show your credit worthiness, to show lenders that you're okay to borrow money to. There are some people that are against it. They just want to use cash.

Speaker 2:

It's not going to help because we're not showing how you maintain your credit.

Speaker 1:

Cash is great. But Cash is great, it is king.

Speaker 2:

but when it comes to needing to borrow money, we need to show that you can pay it back.

Speaker 1:

Otherwise, Ray's not going to give you a dime. They're not going to give you nothing. It's going to be difficult.

Speaker 2:

So if you want to check your credit, you know, without um harming your score, you can go to annualcreditreportcom and you can get one free credit report per year. So and you'd want to do that to see kind of where your credit score is at and make sure that your payments are all applying on time.

Speaker 1:

Is that a okay? So let's talk about real quick hard pulls and soft pulls. Yeah, Is that going to affect your credit?

Speaker 2:

No, it's a soft pull. It's a way to maintain your credit and see what's going on with it. Okay, kind of know what improvements you need to do, yep, and where you're sitting when it comes to your credit score.

Speaker 1:

So I use Credit Karma right and Credit Karma right and Credit Karma is just so. Everybody knows it's a feel-good application, right? When my Credit Karma scores are, say, 750-ish, my real scores, from where you pull, are probably like a 730. Yeah, so the difference is it makes you feel good, yeah.

Speaker 2:

So Credit, Karma Credit, Sesame, annualcreditreportcom. They're just showing what your credit score potentially is, but you haven't applied for credit, but you can't so you can't use that to set it in stone.

Speaker 1:

It's just a really good idea.

Speaker 2:

Yeah, it's a good tool to use in your tool belt to know, kind of, where you're at. So, um, when you apply for credit whether it's a credit card or an auto loan or a mortgage loan they're going to use different scoring models to determine what your credit score is. There's three credit reporting agencies Experian, transunion and Equifax.

Speaker 1:

Wait a minute, let's back it up a little bit here. So you're saying there's a different score for car loans, a different score for home loans and a different score for just like regular credit cards?

Speaker 2:

Very likely, because once again, your mortgage is considered your long-term debt, so generally over 30 years, your car loans, student loans, credit cards those are your short-term debt, so they're using a different scoring model to determine how your credit performance is for those credit line types.

Speaker 1:

Sure, Okay, and you pull all three right. Not the three different types, but the three different bureaus. Yep.

Speaker 2:

Experian, TransUnion and Equifax and each one is going to give you a different score generally. Sometimes I've seen where it's the same exact score, but the reason why they're different is some creditors will only report to two bureaus or maybe even only one, because it costs that creditor money to report to the credit bureaus.

Speaker 1:

So we had a question on our closing last week before you got there. We were sitting there just getting IDs ready and stuff and they asked which one that rate used for their score. Do you just take an average? No, middle, Middle score. Yep oh so you don't take the low score.

Speaker 2:

No, oh, okay. So, let's just say someone their experience 700, transunion's 690, and Equifax is 680. It's going to be off the 690. Okay, the middle credit score of the three. That's kind of nice. When there's two borrowers it's the middle credit score, but the lower of the two borrowers. Oh, that's called your credit decisioning score, and that's what everything's based on.

Speaker 1:

A credit decisioning score. That is the first time I've heard that.

Speaker 2:

So your credit decisioning score will determine, like okay, this program requires a minimum of 640. If the credit decisioning score so the middle score between two borrowers, or even if it's one borrower, the middle credit score that would be their credit.

Speaker 1:

So if you have a middle, if it's below 640. So if you have a middle score of 820 on one and a middle score of 639 on the other, that's a decline if you need to see if it's 640?.

Speaker 2:

If their middle score is 639,? Yes, it would be Because you're taking the.

Speaker 1:

That's crazy. The middle, the middle, though, the middle, right, that's what I'm saying.

Speaker 2:

So then, their score better be below that 639, if that's what you're using.

Speaker 1:

Okay.

Speaker 2:

But if they had an 820, a 750, and a 629, we're taking the 750. Right.

Speaker 1:

No, I'm saying for two borrows, so say borrower. A had an 820 middle Borrower B had a is phenomenal. Yes, wow that sucks, okay, interesting.

Speaker 2:

So then we look at okay, um, what does borrower be bringing to the table, since their score is there? Because what also goes into credit score would be your interest rate. Okay, the higher your credit score is, the better your interest rate that's another thing people don't get.

Speaker 1:

so sorry, I don't want to mess up your flow, but that mortgage rate that you guys see and that people advertise, that is for good credit, uh-huh Fantastic.

Speaker 2:

Yeah, you have to look at the little disclaimers on the bottom. Sometimes it'll be with 800 plus credit score Right yep 50% down.

Speaker 1:

And that's so people want when someone's putting 3% down.

Speaker 2:

The more you put down, the better your rate's going to be, because you have more equity going in. You have more skin in the game.

Speaker 1:

I get that from people. They're like well, it says you know, mortgage rates are 6.7. It's like yeah, but your credit score is like a 6.10. It sucks. You don't get that good rate, they're going to make you pay a little more because your credit worthiness is not where it should be. You haven't proven that you can pay it back. They don't trust you, right, you know. So some suggestions.

Speaker 2:

Check out where your scores are at. Know where they are. Don't do hard credit pulls, because that's going to drop your score. Pay your bills on time Right, that's going to be definitely helpful, and that makes up about 35% of the score that you are given is your on-time payments.

Speaker 2:

Right. Have lower credit utilization, and what that means is, if the limit on your credit card is $3,000, don't owe more than 30%. So don't owe more than $1,000. Optimal utilization, though, would be 10%. So, once again, $3,000 limit. You would maybe try to not owe more than 300. That's going to give you a great score. It is for 10%. You're going to have a great credit score. 30%, it's still going to be good. Right, it's optimal 50%. Well, it's going to be trickling down 75% it's going down 90%.

Speaker 2:

You're almost to your limit. Your score is you's going to be trickling down 75%. It's going down 90%. You're almost to your limit. Your score is you're going to have the lowest score.

Speaker 1:

So mine right now, full disclosure. Well, it's not full disclosure, but because of my lawyer that I had to pay last year is up a ways.

Speaker 2:

For your divorce.

Speaker 1:

Yeah For my divorce, and my credit came way down as soon as I started using it.

Speaker 2:

It went from like an 820 down to like a 7 or something like that, which is fine it's. It just shows you're using, yeah, your cards. You know um, but I want to get to this one, the next one. So avoid. Another thing to um not do is avoid closing old accounts okay.

Speaker 1:

So here's a myth. Here's a myth. So if you close a credit account, you assume that it's good. Say you pay off something, close it down, it's like hey, I paid this off, why is that a bad thing?

Speaker 2:

Well, because now you've closed that account, that old account, is helping lengthen your credit history.

Speaker 1:

History, the credit history Showing your ability to pay back money that's borrowed. So if that account is still open say it's a revolving credit card, right, say that account is still open you brought it up to say four grand, brought it down to zero, brought it up to three grand, brought it down to zero. This is all history. Okay, it's. It's tacking up that credit score and then you pay it down to zero and then close it. That history goes away.

Speaker 2:

It does it goes away it does now your old cards. You're gonna want to make sure you use them, because if they're stale they'll close them. They'll close them on you. That's happened to me before.

Speaker 1:

Yep I get a notice saying, hey, your credit card is closed. I'm like, but that one that was I think it was one of my amazon cards, right? I was like but that's what I like, that one. I just didn't use it for like a year and a half because I just wasn't paying attention and they just shut it off. I just guess what Fucker you're out. Hang on. Another helpful thing we are not doing good today, we swear.

Speaker 2:

Another helpful thing, though, is limit new credit applications. Now, if you have a lower score and you're trying to increase your credit score, then, yes, you should open a credit card or two, but not 10. Okay, because if you open a credit card, or two, or maybe even three, you've got three cards. That okay, you're using it very minimally, but you have to use it.

Speaker 1:

You have to use it. Here's a problem that some people run into is they'll open this credit card because we're building credit. We have a lot of people right now that are building credit, getting ready for their first home. Okay, what you have to do, or what people think you do, is you open it and you leave it like no, you have to use it you have to put, say, 20, 30, 40 bucks on it.

Speaker 1:

Let that statement turn. Let it show that it was used, then you pay it off. Yep, okay. So now it shows that it was used and it was paid. You do that three, four times and you are off to the races because it shows you're utilizing credit right, you know, and using credit well, and then two okay, so you open it.

Speaker 2:

And let's just say you opened it in july. Well, in august you're not automatically going to get a score because you haven't used it, or maybe you have used it but you haven't even paid yet and it takes them forever to report anything Unless it's delinquent, right Right now.

Speaker 2:

But they only report once a month, on a certain day each creditor. Usually by the ninth of the month, all creditors have reported to the credit bureaus, but they're only doing it once a month. So I get a lot of questions like well, I just paid my bill last week. Well, when do they report? Why can't you see it? Why can't we use it Right? So they I mean because it costs them to report to the credit bureaus once again. So that's why sometimes they only report to one or two and sometimes not three.

Speaker 1:

Now this is something this opening new credit cards or new credit accounts this is something you need to do pre-mortgage, pre-approval. You don't do this during the process. This is getting ready to jump into the pre-approval process.

Speaker 2:

Yeah, so people will call me and their scores won't be where they need to be and I'll give them suggestions on how to improve their scores. Opening new credit lines I think what you're referring to is when you're in the process, under contract no opening, no new credit Sounds very, very familiar, doesn't it?

Speaker 1:

Yeah, it's Cody just poking around the corner.

Speaker 2:

Yeah, because we dealt with that actually two days ago. So during the process your credit is going to be monitored. Not that we're nosy, but we want to make sure that if you have opened up new credit, what that payment is to be able to include that in your debt to income ratio, to make sure you still qualify and here's another thing I say too.

Speaker 1:

So it's not the fact that these people, when you're in the mortgage process, it's not the fact that they want to delve into your lives. They don't care what you're doing. They want to delve into your lives. They don't care what you're doing. They want to make sure that when they give you that $300,000, $400,000, $500,000, it's going to be paid back, Right? So they're going to watch the entire time you're in that pre-approval process, before they give you the money, to make sure that you are still using your credit correctly. You're not making any payments different, Right?

Speaker 2:

And you can still afford it. Well, right, and because my job and the underwriter's job is to prove your ability to repay and if your debts are too high versus your income, it gets harder and harder to prove your ability to repay to be able to lend you the money. And nobody.

Speaker 1:

Nobody wants to default, especially a lender. A lender does not, a lender does not. So there's a thing I've heard too here and there. This is from people that had a foreclosure. They think that the lender wants your house. They want you to foreclose so they can take. A lender wants your interest. They want to make sure that you pay your mortgage, pay your loan, so they can collect the interest. They don't want your house. If you are having trouble, they will work tirelessly, night and day to make sure that you can keep your house Right.

Speaker 2:

They're not in the business to own your home, yeah, and it's going to cost them too much money.

Speaker 1:

And that's not because they're nice, like when they grant you forbearance or something like that. It's not because they're nice, it's because they want to.

Speaker 2:

But unfortunately, if you don't pay your loan back, you are going to be foreclosed on Yep they're taking it Yep for sure and you kind of want to have, if you can, a mixed bag of credit, meaning you want credit cards and maybe a small personal loan Diversity right? Yes, because that's going to help build your credit score as well.

Speaker 1:

Right, you can't just have one prepaid credit card for the past 20 years. You can, but it's not going to look that great. If you have a car, a motorcycle, a credit card, two houses paid off, another car paid off, a lease on your Ferrari that you just paid off last year, it's going to look pretty good. You know, it really is Fucking, cody.

Speaker 2:

So there's some fast track tools, Bill. He's like sorry, there's some fast track tools that can help build your credit one would be.

Speaker 1:

What would be fast track tools?

Speaker 2:

with rate inc. A secured credit card. Um, do you know what a secured credit?

Speaker 1:

card is. I do, but I'm sure there's some people out here that don't know that there's a difference okay.

Speaker 2:

So a secured credit card would be where you apply for a credit card and if your credit score is in the 500, say, you're likely to be approved for a secured credit card. What that is is you're going to give that creditor the balance, so the amount of your credit line that they then hold. So let's just say your credit limit's $300. You're going to give them $300 for them to give you the credit card. Now, because you've given them the $300, you still have to do the work of charging.

Speaker 2:

Once again less than 30% optimal is 10% and then paying it off, and you need to do that for probably three to six months, right, and that's going to build your credit score and then the credit issuer will report that yeah, correct as a credit card. It'll show as a secured secured card, but it shows that you're using yep, yeah that money correctly. Yep, right, absolutely yeah, because that's what it's all about is showing that you have good credit performance.

Speaker 1:

So us bank has a program. Um, I've used it many years ago. Some of our clients have used it as well. They'll start you on a secured you know, say, a three to five hundred dollar card. After six months or a year of using it, paying it off, using it, paying it off, they will transfer that to an unsecured card. Give you your money back, put it back in your account and now you have an unsecured credit card. So it's an automatic switch Right.

Speaker 2:

It's a great credit builder. Yep, Yep. Another option would be an authorized user. So you, if you have a family member that has a good credit score, if they were willing to, they could add you as an authorized user to their credit card and then they're making on-time payments. You're an authorized user.

Speaker 1:

You could use the card, but they're making the payments real quick. Card holder is parents too. So this is what I do with my kids been doing it since I would. They were 15. They just don't know it yet they're authorized user on two of my cards. They don't know it because they're too young, but when they, you know, become an adult and they need to start using credit, they're gonna have it right. Right, proactive, like you wouldn't believe, because I wanted to make this. How this world runs is off fake money, you know so as an authorized user. They have a card. They use it every now and then in their name, but it goes off my credit to build theirs. That's what you're saying, right?

Speaker 2:

correct. My two youngest are two cards and they don't know it either, so they don't have access to the cards and that.

Speaker 1:

so parents think about that if your kids are, you don't have to give them the card. No, just put them as an authorized user.

Speaker 2:

They came in the mail and then they went and shred it.

Speaker 1:

So mine are very frugal and they're very trustworthy, which is I can't believe my kids are trustworthy. It just blows me away. But they have their own, you raised them all Right, and they have their own cards with their own name on it attached to my account and they just, you know, they call me say dad, can I use it?

Speaker 2:

they use it and then we just now keep in mind um, authorized users are not gonna. They'll build their credit and they'll get a credit score and that'll be great. We can see that it's an authorized user, though on the lending side.

Speaker 1:

Yeah so it's not like an actual account, right?

Speaker 2:

yeah, we can see that they're an authorized user. We can see that it's trying to help build this person's credit right because they're an authorized user. Because an authorized user is only authorized to use the card, they're not obligated to pay it back, and once again, we are looking at what their credit performance is. So it's going to help their score, but you should have a secured card.

Speaker 1:

This is common sense to us. Can you imagine, if so, if you had two secured credit?

Speaker 2:

cards and you were an authorizer on two cards for your parents for, so now you've got four. That's enormous, because there's going to be four cards reporting to the credit bureaus once a month and your score is going to go up and that's so when my girls hit 18, I'm going to get them a prepaid so they'll be authorized, and a prepaid so they're ready, right.

Speaker 1:

Who knows what they're going to use it for. I don't care. They can destroy it if they want once they're older, but I want them to start. So when it comes to pre-approvals mortgage process, it's the same, pretty much concept.

Speaker 2:

It is. It will also help them if they choose to go to school Right. If they choose to go to school right, if they choose to go to higher education after for student loans. It will also help them buying an auto and having an auto loan. It's just a start.

Speaker 1:

It's just a start, right.

Speaker 2:

Because we all have to start somewhere. Because people will say, well, and this would be someone in their 20s. Well, my mom has an 800 credit score. Well, your mom has had credit for 30 years and you've had it for three. So our credit scores develop and grow with us over time. The one in their 20s, they haven't had it long enough, so the credit history isn't there. Mom's credit history is there because she's had it for a long time.

Speaker 1:

And this is so back to mortgage. We're seriously going left field here. Back to mortgage pre-approvals, all that stuff. When it comes to credit, barb can walk you through this stuff, oh yeah. Or any good lender can walk you through this. We always told ourselves here but whatever, if you don't know where to start, you want to buy a house, you don't have credit, it doesn't mean that you can't.

Speaker 2:

No, we can show you how to get on the road to get there.

Speaker 1:

Yep, Instead of going well, I'm just going to try and figure this out myself. How many times have we done that? Oh yeah, I mean, you know what. Let's have a conversation about how this works. Figure out where you're at, because when we, when rate pulls it, or whoever when rate pulls it, they'll do a soft pull. Yeah, I do a soft pull.

Speaker 2:

And then we do a hard credit inquiry when you're under contract, when you're ready Right and under contract meaning a purchase agreement we want your score to be able to bloom and blossom during that period, and so a soft credit pull is going to give us the big picture of where you're at.

Speaker 1:

And you can start paving the road for them. Absolutely, instead of saying well, because we've had this before too. Well, the last lender said call me in a year when you figure it out. Fuck that, we're going to figure it out with you, we're going to show you how to do it. And then, in six to what do you?

Speaker 2:

got in here Six to 12 months, you'll be ready, and we'll know you're going to be ready because we helped you do it Right, you know I mean so so, about 12 months before applying, you're going to reach out to a lender, kind of see where you're at, see if there's anything that needs to be proved, uh, improved like, such as paying down debt or building up a credit history. Then, about six months before, you're going to avoid any new accounts or big, large um. So why? Well, you knew that was coming, because that will harm your debt to income ratio.

Speaker 2:

Okay so so a new account actually pulls it down, it can, yes every, every credit inquiry, and when it is granted to you so a new credit card, your credit score is going to drop, at first because we haven't seen your payment history. Then as you've made purchases, small purchases.

Speaker 1:

Everything is about this history, this good history of doing things correctly. Yep, you know that's yep, yep, okay.

Speaker 2:

Yep, and then about three months before you're going to want to keep your balances as low as possible and then also double check your reports and this is before you're doing a pre-approval process, right, yep, now, if you're ready.

Speaker 1:

So, since we're on the pre-approval process, if you're ready, you can get them pre-approved in minutes in, yeah, in minutes, yeah, right. So, say you we? You went through this entire process with barb. You started with zero credit. You got a secured, unsecured card, went to a secured card, found your dream car, bought that, paid that down. Barb's got everything ready to rock. And you call and say, hey, you know what? I want to buy a house. She can approve you like that. Right, because you went through the process, paved the road, we did everything correct, correct, right. I mean that's and there's a lot of people that we've done that to those closings are awesome. We're like doing high fives and shit. That's just yeah. It's awesome when we start from that long?

Speaker 2:

Well, because they've done all the hard work right and now they're getting the payoff, the reward, the new home.

Speaker 1:

Right, yeah, and it's-.

Speaker 2:

Helping them achieve their goals.

Speaker 1:

It's work, it's work. So I was that other people have, whether it's a house, a car. Somebody worked for it. Oh yeah, right, it's nothing is given, no, nothing. Well, there are some silver spooners, you know, but most of the time you have to put in the time, you have to put in the effort, this is how this works and people are like well, I want this house, it should just be given to me. You know, it's not you, nobody's going to give you anything. Nobody's going to give you hundreds of thousands, nobody's going to do it for you. We'll show you how to do it right, but we can't do it for you, right?

Speaker 2:

it's hard work.

Speaker 1:

It is right, totally worth it, totally worth it right, I mean right, yep.

Speaker 2:

Well, it is the american dream uh, barb, with rate inc.

Speaker 1:

One of the most wicked lenders out there, get her talking good, it's good, there's not much she doesn't know. Thanks for tuning in Keys and Credit, where the only thing inflated isn't the market, it's your knowledge. If you found this helpful, share it with a friend or leave us a review. It helps more than you think. More than you think.