Smart Money Podcast: 2 Ways to Improve Your Credit Score, Budgeting Tips, and Investing in 403b and 529 Plans

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Learn about two quick credit score tips, 403b and 529 plans, delinquencies on old loans, and budgeting when paid once a month.

This Week in Your Money: Hosts Sean Pyles and Sara Rathner provide two quick tips for improving credit scores. The first tip involves credit utilization, which is the amount of available credit that you're using. They also discuss the option of asking for an increased credit card limit. For their second tip, they discuss the benefits and risks of becoming an authorized user on a friend or family’s credit card. To wrap up their discussion, they advise on the benefits of checking your credit report for accuracy and why it may not be necessary to worry about your exact credit score if it’s already above 720.

Money Question Lightning Round: NerdWallet’s Liz Weston joins Sean to answer several listener questions. They discuss 529 plans and how they may impact eligibility for financial aid, whether a delinquency on my old loan will still show up on a credit report after the loan has been refinanced, tax-advantaged vehicles for retirement savings when a 401k plan is unavailable (like a thrift savings plan), how to manage money when you only get paid once a month, and how to decide whether a 403b retirement plan is worth using as opposed to alternative retirement plans.

Check out this episode on your favorite podcast platform, including:

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• Spotify

NerdWallet stories related to this episode:

5 Ways to Build Your Credit Score in 2023

529 Plans: Introduction and List of Plans By State

5 Tips for Lowering Your Credit Utilization

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

This transcript was generated from podcast audio by an AI tool.

Sara Rathner:

Do you need to get your credit score up in a pinch? In this episode, we've got the tips to help you do just that.

Sean Pyles:

Welcome to NerdWallet's Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I'm Sean Pyles.

Sara Rathner:

And I'm Sara Rathner. Listener, I'm not sure if you know this, but Sean and I are like the two retired folks sitting on rocking chairs on the front porch of a house, watching what all the neighbors are up to. We are nosy. We want to know what your money questions are, why you have them, and what getting a good answer to your money question would do for you. So send your questions our way. If you need us, we're on that front porch.

Sean Pyles:

That's right. We want to know all your business. You can email a voice memo of your money question to [email protected] or leave a voicemail on the Nerd Hotline at 901-730-6373. That's 901-730-N-E-R-D. You can also text your questions to the Nerd Hotline or write an email to [email protected]. This episode, Liz Weston and I answer a number of our listeners' questions in a lightning round.

Sara Rathner:

But first, Sean and I are going to give you two quick credit tips, fast, not one tip, not three, but two, a completely random number.

Sean Pyles:

Two tips. Yes, that's right. Because who doesn't want to bump up their scores every now and again?

Sara Rathner:

So Sean, start us off with tip number one.

Sean Pyles:

The tip is to play the credit utilization game. Utilization is a clunky word for the amount of available credit that you're using. The lower your utilization, the happier the credit bureaus are, and credit utilization makes up between 20% and 30% of your credit score, depending on the scoring model. So it's one of the biggest levers you can pull to build credit.

Sara Rathner:

So how do you win this game?

Sean Pyles:

It's actually quite simple. You want to keep your credit utilization ratio low. Below 30% is good, even lower is better. And there are a few key ways you can keep your credit utilization ratio low. One is to make strategic payments on your credit cards. If you make a payment before the end of your credit card statement date or make multiple payments throughout the month, like I typically do, your lower utilization will be reported to the credit bureaus, and your scores will reap the benefits.

Sara Rathner:

Here's another thing you can do. You can ask for an increased credit card limit. Call your credit card issuer, that's the number on the back of your card, and ask for this. You might also be able to do this within the issuer's app, so you don't have to sit on hold. But either way, this can help improve your utilization, because if your spending remains the same, that's the lower percentage of your credit limit.

Sean Pyles:

Right. I actually was poking around my credit card app a few months back, and I saw an option to ask for a raised credit limit. And so, I just punched in that I wanted $10,000 more on my credit limit, because I was like, "What are they going to do, say no? That's the worst thing that can happen?" And they actually gave me $6,000 more on my credit limit. So that was pretty nice. It took me all of 30 seconds to do.

Sara Rathner:

Yeah, and if your income's gone up over time, you might want to go into your account and adjust your income in your account profile. Because that might make you eligible for a higher credit limit too.

Sean Pyles:

Right, and they may even increase your credit limit without you even asking for it, when you let them know that you have a higher salary.

Sara Rathner:

Yeah, your credit card issuer wants you to spend money, so that's one of the ways they make it possible. All right, what other tips have you got for us, Sean?

Sean Pyles:

My next tip is to become an authorized user. If you have a friend or a loved one with a credit card that has a high limit and they have a good record of on-time payments, think about having them add you as an authorized user to their card, which is basically when they add you to their credit card account. If they do this, their credit utilization and payment record is ported to your credit report, which can make you look pretty spiffy, if you find the right person to sign you on as an authorized user.

Sara Rathner:

But don't pick the wrong person, because negative information could also be carried over too.

Sean Pyles:

Yes. Also, note that this is a pretty generous favor, so if you do have someone in your life who will do this for you, be very grateful. Because impact-wise, this could be huge for your credit scores, especially if you have a thin credit profile. And it's also one of the fastest ways to build your credit. So that is what I have for my tip. Sara, what's your tip?

Sara Rathner:

So mine involves a little bit of homework, sorry, bear with me.

Sean Pyles:

Oh, great.

Sara Rathner:

But clean up your credit reports and make sure they're accurate, because your credit scores are based on the information in your credit report. So giving your credit report a periodic spit shine can help your credit scores too. So the first thing you want to do is go to annualcreditreport.com and get your credit reports from the three main bureaus, for free. Never pay for your credit reports. You are entitled to that information for free once a week. So you don't have to do it that often, if you don't want to, but it's there. It's there if you do want to, that's fine.

And you want to comb through and just make sure all the information on there looks familiar to you, there's nothing on there that makes you believe that maybe an account was opened in your name without your knowledge. So if you find something on the credit report that is wrong, that's incorrect, a late payment that was actually on time, an account that you didn't open yourself, then you want to report that information, that error, to the credit bureaus. And over time, that can help resolve these issues and remove them from your credit report. And that way, you're not penalized for things that are wrong, because who wants to be penalized for a mistake?

Sean Pyles:

It can also alert you to instances of fraud, which you will want to resolve sooner than later, if something fishy is going on.

Sara Rathner:

Exactly, and it's better to get that stuff removed ASAP, and it's really sneaky stuff. You might not realize that something is wrong. People think of fraud oftentimes as, all of a sudden, there's this $400 charge on your credit card, but a lot of fraud can be very quiet and sneaky and hard to notice. And it can build over time. And sometimes, those little instances of fraud are just to test to see if your account is favorable to the fraudster, if you're not going to do anything to stop them, and then they accelerate from there. So that's why you want to check on these things periodically and make sure that your credit report looks the way you would expect it to.

Sean Pyles:

Yep. All right. What else do you have for folks around cleaning up their credit reports?

Sara Rathner:

So if you've had any bills or debts go to collections, you want to resolve those, because paying off a collections account can save you from a lawsuit, number one. So that's important.

Sean Pyles:

Important. That's always good.

Sara Rathner:

Who wants that, right? And also, if you pay off the account, you might be able to get an agreement from the debt collector to remove that collections account from your credit report. And now, the impact of this will vary, when it comes to your credit score. Newer credit scoring models don't count collections accounts, but the most widely used scoring model, it's called FICO 8, does weigh collections accounts. So this can vary in terms of effectiveness for you, but even still, getting accounts that have gone to collections off your report is always good practice.

Sean Pyles:

And also, you can get your credit report and credit score at NerdWallet.com. So if you want to check out what's going on in your credit report and monitor your score weekly, that's a good place to do it. Okay, so those are two fabulous ways to manage your credit, but Sara, let's get a little meta and talk about the usefulness and also, limitations of fixating on your credit score.

Sara Rathner:

Yeah, you don't have to check your credit score every second. Don't be that person. Nobody cares. But it does open a lot of doors to get good or excellent credit, and you're more likely to qualify for a greater variety of credit cards, including those rewards cards with all those fun perks like signup bonuses and points and miles. But you could also be eligible for better terms on other loans, lower interest rates for things like auto loans and mortgages. Especially now with high interest rates, it's important to qualify for the best loan terms possible, because it can really save you money over time. Be warned, I use phrases like "more likely to be eligible," because nothing is guaranteed.

Sean Pyles:

Right, and I'll say, on the other side of the coin, that credit scores above 720, which are considered excellent typically, can sometimes be vanity numbers. Because when you're above that number, you're already most likely to get the best rates on credit products. So if you are around 800 and you're really wanting to get to the highest number possible, realize that it's just for your own personal gamification of the credit scoring thing that we have going on in this country, and it may not make a huge difference in your day-to-day life. And also, as we talked about in last week's episode, even having a credit score over 800 isn't exactly a guarantee that you will get everything you want in the world of credit. And no, I am not over being denied for that credit card.

Sara Rathner:

Aw, Sean, Sean's ego.

Sean Pyles:

I know.

Sara Rathner:

It's not repaired yet.

Sean Pyles:

It's still a little bruised.

Sara Rathner:

We're talking about repairing credit, but what are we going to do to repair your ego if you get turned down for an application?

Sean Pyles:

I just don't know. I think I need to go on a walk on the beach and just think about my priorities, because obviously, I'm a little fixated on the credit scores, when maybe I shouldn't be.

Sara Rathner:

Yeah, so many people are fixated on getting that perfect 850 score. It's not going to get you anything bragging rights at a party, but honestly, if that's what you're spending your time doing, you need to go touch some grass, because you can still live a full and wonderful life if you have good or excellent credit, but not perfect flawless credit. Nobody needs to be perfect.

Sean Pyles:

Right. Okay, well, listeners, if you put any of what we just talked about into practice and see a jump in your credit scores, let us know. And if you have any other go-to practices for managing your credit, we would love to hear those too. Okay, well, before we move on, listener, a reminder, I want to hear about the best thing that happened to you financially this year, for a special end of year episode that we're putting together. We've already heard from listeners who accomplished some amazing things, but on top of being nosy, I am greedy. I want to include as many of your voices as possible. So my request is that you stop being so humble and take this opportunity to really celebrate what you did with your finances this year.

Sara Rathner:

Yes. And it gives us the opportunity to celebrate you too. Who doesn't want that?

Sean Pyles:

Absolutely.

Sara Rathner:

So if you're in need of an ego boost, leave us a voicemail of your money win on the Nerd Hotline at 901-730-6373. That's 901-730-N-E-R-D. And you can also text it to us there, if you'd like, or you can email it to us at [email protected].

Sean Pyles:

Now, let's get into this episode's money question lightning round with Liz Weston. Stay with us. This week, we are going through a few of our listeners' money questions in a lightning round. And just a heads up, we may mention a few partners in this conversation. But just because they are a NerdWallet partner, that does not affect the way we talk about them. Okay? Our first question comes from a listener named Nora, who reached out to us by email. Here is Nora's question, as read by Smart Money Producer Rosalie Murphy.

Rosalie Murphy:

"I can't seem to find answers to the questions I have about 529 accounts, and everything I hear about them doesn't cover it. We have a healthy combined income, but still one that is going to be extremely taxed by putting two kids through college. I can't figure out if going all in on a 529 makes sense for us, because I think we might be better off investing or spending in other ways that show us to have less disposable income when it comes time for financial aid. I can't find any statistics, like, if you make a certain amount, you should expect to pay full price, or any information regarding the drawbacks of 529s. But I believe that putting money in other places like real estate or retirement would lead to that money not being touched by colleges, while putting money in my kids' 529s shows us to have more money than we're ready to use for that specific purpose. And that will cause us to actually get charged more and be less eligible for financial aid. How do we do this in a smart way? Thanks. Nora."

Sean Pyles:

Okay, so on Smart Money, we talk about 529 savings plans a lot, but I realize we haven't discussed exactly what they are in a little while. So to get people up to speed, essentially, 529 savings plans are investment vehicles for college savings that are sponsored by a state or state agency. They offer tax-free growth and withdrawals for qualified expenses. And starting in 2024, folks will be able to transfer unused 529 balances to Roth IRAs for the account's beneficiary, up to $35,000, as long as the account has been opened for at least 15 years. Something to know is that each state has its own 529 plan, and there are some key differences from one state's plan to the next. To start, some plans give in-state residents tax benefits for contributing. Another difference to consider when shopping around are the costs associated with the accounts. And also, folks should understand the investments within each plan, contribution options, and withdrawal restrictions, which can vary.

Liz Weston:

Yeah, the good news is that whatever state you choose to put your 529 money in, you can use it in any other state and sometimes even abroad. So these are very, very flexible plans and could be a great place to start to save. Now, the reason our listener isn't seeing definitive statistics about who does not get need-based financial aid is that those statistics really don't exist. There's too much variation in college costs and in college generosity. But if you have income that's much over a hundred thousand dollars, you should not expect to get a lot of need-based financial aid, except at the most expensive colleges. Here's some important things to know. Financial aid formulas don't account for high cost of living areas, which is always a shock to us coastal elites.

They don't care how much it costs to live here. Most colleges don't meet 100% of financial need. So even if you have need, you still might be scrambling to meet that gap. Many colleges, however, do have merit aid and other discounts, and that's meant to attract higher income students. So think about going where they want you and are willing to give you a lot of merit aid. Also, talk to your kids early and often about what you can afford to pay. You don't want to wait until they get their heart set on a dream college, because as we know, dreams don't last, baby, but student loans do. And sometimes, those loans can last for life.

Sean Pyles:

Yep. Folks should also consider strategizing with a fee-only financial planner, because this can get so complicated. We would also recommend that people check out thecollegesolution.com and the book, The Price You Pay for College by Ron Lieber.

Liz Weston:

Just one final thing I want to drop in here. If you have a healthy combined income, like our listener does, and you can save for college, maybe you should focus on that, versus trying to manipulate the system to make yourself look poorer than you are. There really isn't enough need-based aid to go around as it is.

Sean Pyles:

Love that. Good old mic drop from Liz Weston.

Liz Weston:

All right, so let's move on to our next question, which comes from a listener's voicemail.

Listener #1:

Hi Nerds, longtime listener, first time caller. I'm refinancing a variable rate private student loan into a fixed rate loan right now, and my application was just approved, hooray. The old loan being paid off had a serious delinquency on it about five years ago, but my recent payment history has been perfect. Once the old loan is paid off, will the delinquency still show up on my credit report? Thanks for any help you can share. By the way, I'll be going from a 13% variable rate to a 7.25% fixed rate, saving me thousands of dollars over the term of the loan. Very exciting. Thanks, guys.

Sean Pyles:

First off, it's really great to hear that this listener is taking control of their student loans and finding a more affordable way to pay them off. So kudos to them for that. Now, concerning their question, negative marks on a credit report, like from a loan delinquency will generally remain on your credit report for around seven years. Unfortunately, even though the loan was refinanced, the negative payment history will remain until that clock runs out. And since our listener is interested in having good credit, they should think about a few ways to rebuild their credit, even if they do have a negative mark or two on their credit report. Number one is making on-time payments. It's the single biggest factor that affects your credit scores. Also, think about using credit sparingly. Most experts recommend keeping your utilization or the amount of available credit that you're using below 30% of the limit on a card. Lower is even better.

Liz Weston:

Yes. And because our listener has variable rate loans, that means they were private rather than federal. Federal loans are the most common, and a public service announcement for our other listeners, federal loans have many more consumer protections and options to avoid serious delinquencies. Even if you stop paying and go into a default on a federal loan, you can opt for something called rehabilitation. So after nine on-time payments, the default is essentially erased from your credit reports, although the late payments will remain.

Sean Pyles:

That's super helpful, and that's why we often talk about the additional benefits that federal student loans have versus private loans.

Liz Weston:

Which is why at NerdWallet we say, "Consider exhausting all your federal student loan options before you look at private loans."

Sean Pyles:

All right. Next, we'll hear from a listener named Jay, who reached out by email. They wrote, "Good morning. I have a question about retirement savings vehicles. My new employer offers no employee sponsored plan, i.e., 401(k). However, I am curious if there are any other taxed advantaged vehicles for me to save specifically for retirement, other than a non-tax advantaged stock brokerage account or a 529 plan that I could self-fund and eventually roll over to a Roth. I am not really sure how else I can best save and invest for retirement long-term. Additional info, I do not have an HSA, because I do not have an HDHP, also known as a high deductible healthcare plan. I only make about $80,000 a year. I have a Roth IRA that I already funded for 2023. I do have the option of contributing to a TSP account. I'm a military reservist and have a TSP account with about $120,000 in it currently, but only make about $500 a month from the military that I could contribute. Thanks. Jay."

Liz Weston:

Oh, my ears really pricked up when I heard about TSP. TSP is the thrift savings plan that's offered by the government, and it has low cost investment options, including lifestyle or target date funds. And people who are covered by the TSP can contribute up to 100% of their pay, including incentive or special pay. And that's up to the usual deferral limits, which this year is $22,500 for people under 50. So if our listener could contribute 500 bucks a month, that's $6,000 a year. Also, TSP now has Roth options, so if you want to put in money after tax and be able to spend it tax free in retirement, that's an option for you as well. And since we're mentioning military service, there are many other benefits when you are in the service, including pensions, although you typically have to serve for at least 20 years to get one of those.

Sean Pyles:

One thing I'm thinking about is that our listener may not have access to a 401(k), but a thrift savings plan functions just like a 401(k). It has pre-tax contributions. Between the $120,000 balance in their TSP and funding the Roth IRA, it sounds like this listener is doing things pretty well. They're putting a good amount of money into those retirement accounts and getting tax diversification. Also, just to clear up some jargon, tax diversification means having money in different accounts, that will give you different tax treatments in retirement, and that can help control your tax bill once you get to retirement.

Liz Weston:

Now the final thing our listener mentioned is putting money in a 529 plan, which as we said before, that's a college savings plan, with the explicit goal of rolling over the money into a Roth after 15 years. And that's an interesting approach. We want to emphasize that while you can do that, the maximum that you can roll over is $35,000 and you are still subject to the Roth contribution limits, which means you could only roll over the annual limit each year. So with those restrictions, I'm not sure this is the best approach, but it's definitely something to look into. Next, we'll hear from a listener named Joanie, who emailed us with a question about budgeting. Here's their question, as read by NerdWallet writer Spencer Tierney.

Spencer Tierney:

"Hi, there. My name is Joanie from Bend, Oregon. My new job pays me once a month, and it's been a massive learning curve trying to budget around that. It feels so different than getting paid twice a month. I'm finding it more difficult than ever to put aside money, even though I'm making more now than I ever have. What advice would you all have for making my money last throughout the month? Thank you. Sincerely. Joanie."

Sean Pyles:

All right, Joanie, we're practically neighbors. Great to hear from you. One thing I'm thinking about is that, if folks are having a hard time getting a grip on their budget, it's really important to start with the fundamentals. And that can mean pulling out bank and credit card statements from the past few months to know what you're spending money on in your day-to-day life. It can be so easy to just have money flow through your fingers like sand and who knows where it's falling.

Liz Weston:

Yes.

Sean Pyles:

I recently started using a pretty handy piece of budgeting software on my computer that tracks everything I'm spending my money on across all of my accounts, categorizes it for me. That has been an eye-opening experience for me. There's some way to get a grip on all of that, because like I said, it can be easy to not be very mindful about that. So that's one thing I would recommend, because it seems like Joanie is having a hard time understanding where their money is going.

Liz Weston:

Yes, and you can use NerdWallet's app for some of this, if you want some basic budgeting software, it's built right in. If you find out that a different strategy works better for you, obviously use that.

Sean Pyles:

And then, a good next step might be knowing your bare bones budget. And that's the absolute necessities each month. Things like housing, utilities, other loan payments, groceries, all of that.

Liz Weston:

And once you've done that, look at your monthly income and see, is it enough to cover all your bills? If it is, now you can work on a system to manage the money that you have coming in.

Sean Pyles:

And Joanie says that they're making more money than ever before, which is really exciting, but also poses some unique challenges. Because spending money is fun, and I think that we're all entitled to a little bit of lifestyle inflation. But it's a matter of categorizing what you do want to spend your money on and what you don't. And something we talk about a lot on Smart Money is the savings bucket strategy. And this is where you have different accounts for different goals. I have one for student loans, I have one for a wedding, I have one for taxes, I have seven different accounts, but I won't list all of them right now. But that's a great way to gain control of where your money is going and the purposes for it. So Joanie might have monthly expenses, like housing, utility payments, etc,, go into their regular checking account, so that can pretty easily go out toward these bill payments. And then, they may have a fun money account for things like going out. Another for their emergency fund, etc.

Liz Weston:

Yes. And automating these transfers can take a lot of the annoying administrative work out of this process and ensure that their money is going where they want it to. But the most important thing is paying yourself first. That's especially important if you're being paid less often or irregularly. If you wait to save what's left over, there may not be anything left over to save.

Sean Pyles:

Yep. And finally, here's a question from our listener, Tatiana, who reached out to us by text. They wrote, "Hi, Nerds. My name is Tatiana, and I am a high school teacher in Massachusetts. My question is about opening a 403(b) account. One of the main pieces of advice I've heard on your podcast is to max out your 401(k). So I felt a sense of urgency around opening a 403(b), but after doing some research and meeting with a financial advisor, I have become wary of opening a 403(b) account. My school doesn't match my contributions, and the company that manages the 403(b) has some pretty bad reviews online. Am I better off building up my savings or investing on my own? Are there better options for my 403(b)? For context, I've been maxing out my Roth IRA, I have an emergency fund, and I'm contributing toward my pension, although it's very possible that I won't work in Massachusetts long enough to qualify for a pension. Thanks so much."

Liz Weston:

Okay. Well, 403(b)s are similar to 401(k)s, but there are some really important differences. They're offered by schools and government entities. The plans are often run by insurance companies, and they are plagued with high fee, high commission investment options. And this is a national scandal, by the way, the person who is advising you likely makes a commission and could be steering you into some very high cost options. So first of all, ask your benefits office for a vendor list, and you can look for low cost vendors, such as Fidelity, Vanguard, T. Rowe Price. It might be okay to invest in your 403(b) if you have at least one low cost option. Otherwise, you might well be better off on your own. And I would suggest going to 403bwise.org and getting more information, because a lot of teachers are banding together to share information and share their frustration and lobby for better options for their retirement.

Sean Pyles:

Yeah, these high fee 403(b)s are especially awful if you won't be around long enough to earn a pension. Your employer is severely restricting your ability to save for retirement. So folks might want to think about talking with their coworkers and lobbying their employer for a change. They have better retirement options.

Liz Weston:

Amen.

Sean Pyles:

Okay, well, that is it for this lightning round of our listeners' money questions. Listener, if you have questions that you want us to answer on the podcast, send them our way. You can turn to the Nerds by calling or texting your questions to us at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Tess Vigeland and myself. We had editing help from Liz Weston. Kevin Tidmarsh mixed our audio. And a big thank you to NerdWallet's editors for all their help.

Liz Weston:

And here's our brief disclaimer. We are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: