credit & debt

How to Boost Your Credit Score

Kiplinger contributing editor Lisa Gerstner joins hosts Ryan and Sandy to discuss best practices for giving your credit score a boost. Also: Discover investment ideas for the "outer orbit" portion of your portfolio, and learn tax rules for renting out your home.

Ryan Ermey: Whether you've got a long robust credit history or a slightly spottier record, everyone could use a boost to their credit score. Kiplinger contributing editor Lisa Gerstner, tells you how to get your number up in our main segment.

Ryan Ermey: On today's show, I give out some fun money stock picks, and Sandy and I delve into renting your home and timing the market in a new edition of Financial Fact or Fiction. That's all ahead on this episode of Your Money's Worth. Stick around.

Ryan Ermey: Welcome to Your Money's Worth. I am Kiplinger's associate editor Ryan Ermey joined as always by senior editor Sandy Block. Sandy, we have an investing related opening segment today. I wanted to ask you, have you ever had any sort of humongously successful stocks that you've invested in?

Sandy Block: No, I haven't. But my husband often reminds me that he wanted to buy Apple at 10, and I said, "That company is over and nothing's going to happen." We don't buy individual stocks. We put all our money into index funds and our 401(k) plans.

Sandy Block: Now if I had taken that advice, maybe I wouldn't be sitting here right now. Yeah, I think that I have always been a little timid about doing that, but I've always been curious . . . stories about people who actually have pulled it off.

Ryan Ermey: Yeah, and it gets to something and I have written about a little bit in the magazine, which is you should really have a core portfolio before you venture into individual stocks. By the way, everyone has a story that they could have bought Apple or they could have bought Netflix. My sister claims to have come up with the idea for StubHub before StubHub actually came out. Everyone has stories like that.

Ryan Ermey: But I wrote about that because I only own one individual stock, which is Amazon. But I didn't buy that until I had already had an established, diversified core portfolio that is for my nest egg. That's in line with what a lot of CFPs that I've talked to have told me, which is that you should take a core and satellite approach.

Ryan Ermey: Your core portfolio should be diversified, low cost, buy and hold, a long-term portfolio that's going to make up the vast majority of your assets. Then you can use a sleeve of your portfolio to maybe get into some more actively manage stuff, some things that you are going to try to use to outperform.

Ryan Ermey: Let's say you have a big core of index funds that's going to track various parts of the market. Maybe here is where you try to outperform and you buy emerging markets funds, or you buy tiny microcapitalized growth companies. I would also advocate for having part of your satellite sleeve be fun money, money you're willing to lose on big bets. Call it your outer orbit, beyond the satellite, the outer orbit portfolio.

Ryan Ermey: The idea being that if you make good investments in these things, maybe it's individual stocks, maybe it's quirky ETFs, that's all gravy. That way if you get in on Apple at 10, you can buy your speedboat. But if you don't, you're still on track . . . to raise your goals.

Sandy Block: You still have your house.

Ryan Ermey: Exactly right.

Ryan Ermey: In that spirit, in our opening segment here, I wanted to recommend a couple of investments that have caught my eye recently, either because I've written about them or what have you. One of them I recommended as one of our deals, deals, deals in the July issue if Kiplinger's, and that's GE. I don't know if you've read this story, but off the top of your head, do you know what GE is going for these days?

Sandy Block: No, but I have a feeling it might be less than book value.

Ryan Ermey: It is $10.

Sandy Block: Oh my goodness.

Ryan Ermey: It's less than the value of whatever you have in your wallet.

Sandy Block: Well and it's certainly less than the value of everything. This is why we bought AOL years ago, because at that time it was trading for less than the actual things that AOL owned.

Ryan Ermey: Right. That was one of the things.

Ryan Ermey: I talked to a number of mutual fund managers when I was at the Morningstar Conference in Chicago. Multiple people brought up GE. One of the guys, who I think I quote in the story, I do, T. Rowe Price Value Manager Mark Finn said that even the sum of GE's parts is worth $15.

Sandy Block: Yeah, exactly.

Ryan Ermey: What's going on with that company is they've had a new CEO take the helm over the last few months here, late last year. This guy came over from Danaher, which is a really well-run company. He's been selling off parts of GE's business in order to pay down the company's debt. The company really has been mired with a lot of poor business decisions.

Ryan Ermey: If you're into a fallen angel type story, and I know a lot of people like these kind of things, if you're looking to buy a stock at a discount, that's the type of stock that's worth considering.

Sandy Block: At $10 a share, you can go out . . .

Ryan Ermey: Right, worth taking a flier on.

Ryan Ermey: Another kind of stock that might make sense for this sleeve of your portfolio is making a big bet on a company that you think has massive growth potential. A good example of this might be Uber, which is back above its IPO price. The reason that that company is so speculative is that it's losing money. It's expected to lose over $2 billion this year.

Sandy Block: Those aren't cheap for a reason, folks.

Ryan Ermey: It's expected to lose two billion in 2019, another billion and a quarter in 2020. Obviously earnings aren't there, but if you go by sales, it's trading at 5.5 times sales, which is much higher than the broad market. It's higher than Amazon. Not higher than Netflix though.

Ryan Ermey: The idea behind investing in a company like that is that you believe in its enormous future potential. A number of analysts, like this one, all single out Justin Post from Bank of America Merrill Lynch, as one who has written about it and saying that it should benefit from a stock market buzzword here, secular, which just means long-term and permanent, secular shifts to the sharing economy in its ride sharing business, and to time saving services with its food delivery business Uber Eats. Of course, the stock currently trading at about $43 a share at time of recording. Bank of America has a price target of $53 on it, and that's over the next year.

Ryan Ermey: When I talked to Josef Schuster from IPOX Schuster, which is a investing research firm that specializes in IPOs, before Uber's IPO, the point he was making was that the company's enormous valuation could be justified down the line when we move to autonomous vehicles . . .

Sandy Block: I was ... Yeah, if you want to make a bet on driverless cars, this seems to be the places to do that.

Ryan Ermey: That dove tails into the last thing I'll mention, which is maybe your outer orbit sleeve is where you want to take a bet on a theme, something that you've seen emerging in the marketplace and want to ride the coat tails of.

Ryan Ermey: A good example is the ROBO Global Robotics and Automation Index ETF. ROBO is the symbol.

Sandy Block: Which is fun.

Ryan Ermey: Yeah, who doesn't love a good ticker symbol.

Ryan Ermey: I talked to the guy who runs this ETF at the conference and I was really impressed. But it's essentially a play on the emergence of AI, which is virtually everywhere. It's a cool ETF. It starts out as equal weighted but then doubles the weighting in the portfolio of companies that are "pure plays" in robotics and automation. If that was something that you're interested in, another thing worth exploring.

Ryan Ermey: I guess we wanted to say obviously we want you to have low cost, diversified, broad investments. We want you to be on track to reach your goals, but that doesn't mean you can't have any fun. Take a few fliers out there, just with a portion of your portfolio that you're willing to lose.

Sandy Block: Good advice.

Ryan Ermey: Up next, Lisa Gerstner gives you the playbook to up your credit score. Don't go anywhere.

Ryan Ermey: We are back and we're here with Lisa Gerstner, a contributing editor for Kiplinger's Personal Finance magazine and our expert on all things credit. Lisa, thank you so much for coming on.

Lisa Gerstner: Thank you for having me.

Ryan Ermey: I think something that's on just about everyone's mind, especially dealing with issues of credit is their credit score. We see commercials for getting your credit reports, for boosting your credit store, all of these things constantly. If you're looking to boost credit score, something that factors into so many facets of your financial life, what's the most important thing that you can do?

Lisa Gerstner: Yeah, so your number one thing should be paying your bills on time. Payment history is the most influential factor in your credit score, so that really should be number one, just do what you can to get those bills paid on time.

Lisa Gerstner: There's some different ways you can go about doing that. Using auto pay can be a nice way, just so you don't have to worry about it too much, it happens for you. I would still suggest just keeping an eye on those bills, and making sure your auto pay is working and you know what you're paying. That's one way to try to get in on time. Sometimes, especially larger institutions, offer options. You get text messages or emails when you have due dates coming up. Good to help you stay on top of that.

Lisa Gerstner: I would also mention that how late you are matters. A 90-day delinquency is going to be worse than a 30 or 60-day delinquency on your credit report. If you realize that you're overdue, pay the bill as soon as you can. If it's less than 30 days overdue, that shouldn't even show up on your credit report. Especially if you can get in that 30-day window, you still might have to pay a late fee, you stay may have a penalty APR on a credit card, which is definitely no fun and you want to avoid that. But at least when it comes to your credit and trying to get it within 30 days is important too.

Ryan Ermey: Now if I'm not paying down the entire amount, is that the same as paying late? If I'm making regular payments, is that problematic for my credit score?

Lisa Gerstner: What you really need to do is just make sure you're paying that minimum amount due. Yes, if you're not paying the full balance, you are probably going to carry some interest, which is not ideal. You don't really want to do that. But in terms of your credit score, as long as you're taking that minimum payment in, you should be okay.

Sandy Block: Even if you're paying your credit card on time and maybe you're making the full payment, does it matter what you're actually spending on your card? If I go out this weekend and really do a big blowout, buy a motorcycle or something with my American Express card, is that going to hurt my score?

Lisa Gerstner: It can. That's where we get into another area of credit scoring, it's called your credit utilization ratio. Basically that just means it's the amount of credit that you're using on your credit card as a percentage of your card limit. Say you have $1,000 limit on a credit card and $100 balance, your utilization would be 10%. That's calculated both across all your card accounts and on individual accounts. The rule there in general is just the lower the better that you can keep it.

Lisa Gerstner: There's a study FICO did that's interesting. It showed that those with scores at 800 or higher, which would be considered excellent credit, only use 7% of their limit. Just keep it low. If that's a little lower than you can manage, a lot of experts say up to 20%, 30% should still do pretty well for you on that.

Lisa Gerstner: There's some interesting ways you can try to keep utilization down. Your obvious one is just pay down your debt, keep your balances low, that's the best way to do it. But other interesting little things you can do, one would be to ask for a higher credit limit. You could go to the issuer if you have been a good customer and everything checks out, they might raise your credit limit a little bit. As long as you keep your balances the same or low, that can you keep your utilization a little bit lower.

Sandy Block: I think I've also heard that that's a reason you shouldn't close credit cards even though you're not using them very much because that could affect the ratio of the credit that you have versus the credit that you're using.

Lisa Gerstner: That's a good point, Sandy. If you decide you no longer want to use a credit card, it's a good idea to leave it open because then those card limits will still count into your utilization. That helps keep your utilization down, too. Unless you're just really having trouble with the card and you can't avoid spending more than you should be on it, in that case it may be better just to close it. But in terms of your credit score, good idea to leave it open.

Ryan Ermey: I know an anxiety that some people have, especially June tends to be moving season, a lot of times you're applying for apartments or whatever, and a lot of people are pulling your credit scores or pulling your credit reports, I should say. Is there a difference between the different types of entities that might be pulling your report and can that affect your score in different ways?

Lisa Gerstner: Yeah, so inquiries is what we're talking about here. Each time a new entity checks your credit report, particularly lenders for a new credit account, they're going to pin a report and it's called an inquiry. In this case, it would be called a hard inquiry. A few of those added up can be a problem, especially with credit cards because if you're applying for several cards at once, that can look risky to lenders, like why do they want so many cards at once? Are they desperate for credit?

Lisa Gerstner: It can be tempting to do that. Say you're out on a shopping spree. Every store you go to is offering you 20%, 30% off your first purchase and you get a credit card, which sounds great, but when you get all those inquiries added up, that can be hard on your score. Especially with credit cards, just be careful about that. Only apply for one card. Every once in a while that okay, just don't do a lot at once.

Lisa Gerstner: But there are some exceptions. With FICO scores, the good news is that if you're shopping for a mortgage, or a student loan or an auto loan, there are special rules about those inquiries because they want to encourage you to shop for a good rate on those type of loans. FICO, when it calculates your score, it looks at the last 30 days before it calculates that score. It just ignores any inquiries in those last 30 days of those types, so that won't even hurt you.

Lisa Gerstner: Then a newer scoring model with FICO, any of those types of inquiries within a 45-day span are just counted as one inquiry. One inquiry is not going to harm you too much. That's good to know if you're looking for a mortgage or something like that. Don't worry too much about checking with different lenders for the best rate.

Sandy Block: Lisa, what if you're a young person without a lot of credit history, or maybe you're a parent and you want to help your child build a good credit history? Can adding someone to another account help with that?

Lisa Gerstner: It's a good trick, especially in that case. Say you're a young person with a thin credit file, they're just trying to get started with credit and it can be hard to get a card sometimes when you're doing that.

Lisa Gerstner: One way that can boost your score, fairly significantly and quickly if you don't have much on your report yet, is to have your parent add you as an authorized user on their credit account. As long as that parent is being smart, paying all their bills on time, if they have a long credit history, they're keeping that utilization low, that can have a nice bump for your credit score if you're that authorized user on that account.

Gerstner: It doesn't necessarily have to be a parent-child relationship. Most issuers let you add just about anyone as an authorized user. Of course . . . the question, well who do you really trust? You want to think about that too.

Sandy Block: No roommates. No.

Lisa Gerstner: Exactly.

Sandy Block: The other thing I wanted to ask you, Lisa, I often hear ads for credit repair, I hear on the radio if I stay up late at night. They claim that they can fix your credit or improve your score. Are these legitimate?

Lisa Gerstner: Some of them are and some of them aren't. You have to be careful with those services. Some of them are a little scammy. I know the CFPB recently sued a couple of them, like one was Lexington Law and for charging some upfront fees that they shouldn't have been charging the customers, allegedly at least.

Lisa Gerstner: I think you just have to be really careful with those. I think the moral of the story there is there's nothing they're doing that you couldn't do yourself, typically, especially if you have errors on your report or you think there's fraud on your report, there are process that you can go through. It might be a little bit of a headache, but you don't necessarily need to pay someone to do these things that you could do yourself just as well.

Sandy Block: Well and if your credit report is bad because you've made late payments, there's really nothing that a credit repair outfit can do to fix that, right?

Lisa Gerstner: Yeah. Aside from maybe going to the company in question and negotiating with them possibly, and then that's also something you can do yourself. You could call them and say, "Hey, I messed up this one time. I was having a rough time in my life." Sometimes they might be amenable to that and take it off, but again, that's something you can ask for yourself. You don't necessarily have to go to this other company to do that.

Ryan Ermey: Yeah, sometimes a good sob story works.

Ryan Ermey: If someone has damaged credit history or even just wants to boost their score, is there anything else that you would say to keep in mind?

Lisa Gerstner: This one is not particularly helpful when it comes to being actionable, but just the passage of time, that helps your credit score as long as you're practicing all these good habits we've talked about. If you do have a delinquency on your report, it becomes less impactful on your score over time as it passes and eventually it just falls off. It's typically after seven years. It's not even going to be on your report anymore and won't factor into your score any longer.

Lisa Gerstner: Then just average account age is a factor in your credit score, too. Just naturally the longer you've had accounts, the better your score is going to get because of that account history. That same FICO report I was talking about . . . people with scores of 800 or higher, they had an 11 year average account age, and their oldest account was opened 25 years ago. The benefits of aging.

Ryan Ermey: Yeah.

Sandy Block: So be patient.

Ryan Ermey: Essentially be patient . . .

Lisa Gerstner: Yeah, exactly.

Ryan Ermey: . . . have good habits, and once you establish good habits, if you can keep them going over time, time will heal all wounds.

Ryan Ermey: Well listen, Lisa, thank you so much again for coming on. Everyone, be on the lookout for all of Lisa's forthcoming content in the latest issue of Kiplinger's Personal Finance.

Ryan Ermey: After the break, Sandy and I tango with the truth. It's Financial Fact or Fiction next.

Ryan Ermey: We're back. Before we go, Sandy and I wanted to play another game of Financial Fact or Fiction, where we try to stump each other with financial facts of dubious provenance. That's . . . phrase I used in the last podcast. I kind of liked it. Anyway, Sandy, what do you have?

Sandy Block: Okay. Fact or fiction, if you rent out your home for 14 days or less, you don't have to pay any taxes on the income.

Ryan Ermey: This is something I've put in the calendar before as a go on vacation to make a little extra money. I think it's still true.

Sandy Block: It is still true and it is a great tax break for people who aren't going into the rental business, but maybe live in a city that has a big event.

Sandy Block: I did a story a few years back about retiring to Augusta, Georgia, and interviewed retirees who rented out their homes during the Masters Tournament. There's no limit on how much you can make. These people were pulling down thousands of dollars, just moving out during the tournament and renting out their house. As long as you stay within that window, you don't owe taxes on the money.

Sandy Block: If you live in a place that has a special event, that's a really good way to take advantage of this. Maybe the Super Bowl. I remember a few years ago when the Pope was in Philly and everybody who lived within the radius left, well they could have rented out their house, and not worried about the traffic and made some money.

Sandy Block: The key again is to stay within this window. If you go past 14 days, then you do have to pay taxes on the money. You can start deducting your expenses, but that can get complicated, thus, maybe when you're getting into Airbnb. That's when you really want to start thinking about how dedicated you are to this.

Sandy Block: But if you live in a city this summer that is having a big event, or just a city that a lot of people like to visit and might want to stay for a couple of weeks . . .

Ryan Ermey: Cool beach town, whatever.

Sandy Block: Yeah, open up your house, go stay with your relatives and pocket the money.

Ryan Ermey: I'm all for that.

Ryan Ermey: Mine is fact or fiction, properly timing the market can drastically boost your returns over time.

Sandy Block: I got to say that's fiction, Ryan, because we're always telling people that they can't time the market.

Ryan Ermey: Well, so the way I put it there, it is a fact. Numerically, if you can properly time the market, your returns will be drastically boosted over time. I have that shown in a chart in the upcoming issue of Kiplinger's, the August issue. But of course, the problem is in the spirit of the game you're quite right, your extremely unlikely to be able to properly time the market because you have to make two perfect decisions.

Ryan Ermey: It's quite possible that the market gets volatile and things look rocky, and you pull the plug and get out of all your stocks. Maybe you've timed that right, but then it's well when do you get back in? The problem is, when you're on the sidelines, the chances are you're missing some of the most important days for your returns.

Ryan Ermey: Our friends at Dimensional Fund Advisors (DFA), spell this out perfectly. From 1990 through 2018, if you exclude the single best day for the stock market, the return of the S&P 500 falls from an annualized 9.3% to 8.9%, which maybe doesn't sound like that huge a difference. But on just a $1,000 investment, that's the difference between earning $13,137 and $11,773.

Ryan Ermey: Miss the best 15 days, your return is down to five grand. Miss the 25 best days, and we're talking about 28 years, if you've missed just the 25 best days, obviously you're not likely to, but this is the point, if you miss the 25 best days over 28 years, you're at $3,000 on a $1,000 investment, over 28 years.

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