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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of three questions you should ask yourself before buying crypto or investing in the industry.
Then we pivot to this week’s money question from Linda, who wrote us an email:
“We would like to buy a home within a year. However, my husband's credit score needs work due to his high utilization. Should he get a new card with an introductory rate of 0% and do a balance transfer?
Check out this episode on either of these platforms:
Before you jump into the world of crypto, make sure you are ready. To start, ask yourself if you are in a position to take on such a volatile investment. If you have high-interest debt, aren’t saving for retirement or don’t have much in savings, think about tackling those areas of your finances first. Then do your homework. Learn what a digital wallet is, how blockchain works, and which cryptocurrency you might want to invest in and why. Lastly, think about how you’ll diversify. Volatile investments should generally account for no more than 10% of your entire portfolio, according to many financial advisors. Even within crypto investments, think about investing in blockchain companies rather than pouring everything into cryptocurrencies.
When it comes to preparing your credit to buy a house, understand what factors lenders are considering when you apply for a loan. In general, a credit score of 620 or higher is needed to qualify for many home loans, although government-backed loans may allow for lower scores.
Credit utilization, or the amount of available credit you are using, is another factor lenders look at. Keeping your utilization below 30% is a good benchmark, but a utilization of 10% or lower is even better. To lower the amount of credit you’re using, you can have someone add you as an authorized user on their account, or ask for higher credit limits on your accounts. Long term, though, paying off your debt is likely the best approach.
Prep your credit before homebuying. That means disputing erroneous information on your credit reports and working to get your credit scores above 620.
Understand how credit utilization comes into play. Higher utilization can drag down your credit scores, which might worry potential lenders.
Take steps to lower your utilization. You can ask someone with a high credit limit to add you as an authorized user, or ask for higher credit limits on your own cards, but paying off your debt is likely the best approach for your long-term financial health.
More on NerdWallet about improving credit and homebuying:
Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.
Liz Weston: And I'm Liz Weston. To send the Nerds your money questions, call or text us on the Nerd hotline, at 901-730-6373. That's 901-730-NERD. Or, email us at [email protected]. Hit that “subscribe” button to get new episodes delivered to your devices every Monday. If you like what you hear, please leave us a review and tell a friend.
Sean: Before we get into this week's episode, Liz and I have a question for you, dear listeners. What was your greatest financial accomplishment of 2021? Did you get a new job? Maybe you moved to a new city or bought a new house. Liz and I want to hear about what you did this year with your finances for a special episode of the podcast that we are putting together.
Liz: Yes. This is your opportunity to brag. So, leave us a voicemail on the Nerd hotline, by calling, again, 901-730-6373. That's 901-730-NERD. You can also send a voice memo to [email protected]. We want to include as many of your actual voices as possible in this episode, but we'll also accept a written email of your accomplishments.
Sean: Let's get on with the episode. This week, Liz and I answer a listener's question about how to improve credit with the goal of buying a house. One hint is that, if you are having trouble managing your debt-to-income ratio, you might want to think about improving your finances overall before buying a house. But, first, in our "This Week in Your Money" segment, Liz and I are talking about three questions you should ask yourself before buying cryptocurrency.
Liz: I feel like we could have this statement on a loop, but a lot of activity around crypto. A lot of volatility. It hits another record high, then it drops. One of the bits of news, though, is that there is now an exchange-traded fund, or ETF, that's tied to bitcoin. It recently debuted on the New York Stock Exchange. That's kind of a big deal.
Sean: Yeah, this development was pretty wild to me, because think about it. People can now buy shares of an ETF that speculates on the future value of a highly volatile cryptocurrency. But, people who buy this, they won't even actually own any bitcoin. That's just kind of mind blowing to me, but I think this development does underscore how normalized crypto is becoming, which might make folks think it's safer than it actually is.
Liz: So, we got to say this, Sean and I are not investment advisors. We're not telling you how to invest your money, but we do want to talk about the three questions you should ask yourself before you sink any money into crypto.
Sean: Yeah. A quick shoutout to NerdWallet investing writer Andy Rosen, whose article inspired this segment.
Liz: Thank you, Andy.
Sean: Yes. Let's get into these questions. The first one that folks should ask themselves is, are you in a position to buy crypto right now? There's a CFP that Rosen quotes in his article that suggests that people should cover other financial bases first, before investing or buying any kind of crypto. This means things like paying off high-interest consumer debt, making sure that you are investing for retirement — getting that company match if you have one available. Also, try to have at least a few hundred bucks in an emergency fund.
Liz: Yeah, this is really speculative. Anytime that you're putting money into crypto, it's more like gambling than it is like putting money into the stock market, which has a long, long history of returns. There's ups, there's downs, but we know that there's value there. With any given crypto, you don't know that.
Liz: Which segues into, have you done your homework? Do you really understand what this is? Do you know what a crypto exchange is? Do you know how blockchain technology works? Do you understand digital wallets? You need to understand these terms, what they mean and how they work before you dive in.
Sean: Folks should also know which coins are legit and which are scams, because some are just straight up scams. Also, different coins work differently. Bitcoin is intended to be a currency. Ether, the second most valuable cryptocurrency, can be used for transactions, but its network is designed to execute something called smart contracts, using blockchain technology.
Sean: Then, also, there's this interesting thing happening right now with dogecoin, which is a meme currency that I have — full disclaimer — and there's also Shiba Inu coin. For folks who don't know, dogecoin is based off of a meme of a Shiba Inu, and then Shiba Inu coin was created to kind of ride the coattails of dogecoin in a way.
Liz: Oh, interesting.
Sean: Yeah, so dogecoin is what? At this date of recording, I think it's probably around 25 cents. Shiba Inu coin is a very small fraction of that. But, for people who don't know the difference, they might think that Shiba Inu coin is dogecoin.
Liz: Again, there's no guarantees with any of this. You also have to figure out how you're going to keep track of your cryptocurrency. If you haven't heard, billions and billions of dollars of crypto have been lost. Basically because people have lost their passwords or they can't access their wallets.
Sean: Of the existing 18.5 million bitcoin, around 20% — currently worth around 140 billion — appear to be lost or otherwise stranded in wallets. That's according to an article that was published in The New York Times.
Liz: My friend, Mark Frauenfelder, wrote a wonderful story for Wired Magazine about how he lost his password, and his attempts to get it back.
Sean: Was that the story where he was one password attempt away from losing everything he had?
Liz: Yes. Yes-
Sean: Oh, what a nightmare.
Liz: It really was. It was like, oh, your heart is beating. "Oh, my god. What's going to happen next?" We were getting the blow-by-blow updates from his daughter, on our carpool rides to school. She just thought it was the funniest thing in the world. I don't think he thought it was that funny.
Sean: No, probably not. Did he end up getting into his wallet?
Liz: You got to read the story.
Sean: OK. Cliffhanger. I need to go back and check that out.
Liz: Mark Frauenfelder, Wired. Go read it, before you invest in any cryptocurrency. Definitely.
Sean: Yeah. Well, the third question that Andy Rosen mentions in his article is, how will you diversify? If you do invest in crypto, some financial advisors recommend that it be a small part of your portfolio, like 5 to 10%. Kind of how you would treat any sort of risky investment.
Liz: They usually recommend that you diversify — that you don't just buy one type of cryptocurrency. But, you diversify across cryptocurrencies or sections of the crypto industry. Or, let me throw this in, maybe just invest in blockchain technology and skip the crypto altogether. By the way, buy with cash. I'm hearing about so many people who are borrowing money to buy crypto. Using leverage can magnify your gains, but it can also leave you with a bunch of debt and nothing to show for it. I think people are doing this because they feel like they have to get in; they're in a rush to buy. That is never, never a good idea. You really want to know what you're into. Again, don't borrow money to buy cryptocurrency.
Sean: Yeah. The hype train has kind of gone off the rails a little bit. People want to get in on the action while it's hot. Which leads me to my fourth bonus question, which is, what goal will buying crypto help you accomplish? If you can understand your motivations for buying crypto and how it will or will not help you meet your goals, that can help you understand whether this is something that is a wise investment of your money.
For me, I mentioned earlier that I have some dogecoin. My goal was just to learn more about crypto with that. I purchased a small amount — largely as a joke — as a way to dabble a little bit. It's been cool to see how it's grown. I purchased it for under a penny and now, as I mentioned, it's around 25 cents. But, I'm not planning on buying ice cream with it at the store down the street, because I can't do that. I'm just sitting there and watching it go up and down.
Liz: Yeah. With any investment, you want to know your goal before you get in there, because that determines your timeline and that determines how much risk you want to take. I would say anytime you're going into crypto, it's definitely speculation. You should be prepared to lose everything and you can't be guaranteed of any kind of gain.
Sean: OK. Well, with that, I think we can get onto this week's Money Question segment.
Liz: All right. Sounds good. This episode's Money Question comes from Linda, who wrote us an email asking, "We would like to buy a home within a year. However, my husband's credit score needs work due to his high utilization. Should he get a new card with an introductory rate of 0% and do a balance transfer? Thank you."
Sean: Interesting. To help us answer Linda's question, on this episode of the podcast, we are joined by credit pro Bev O'Shea.
Liz: Hey, Bev. Welcome back to the podcast.
Bev O'Shea: Hi, Liz. Thanks for inviting me.
Sean: Great to have you on, as always. There are a few different things going on in Linda's question. She wants to help her husband improve his credit score so they can buy a house. She's really focused on utilization, which I think is interesting. This is something that a lot of people may not be really familiar with. So, can you start by explaining what utilization is and why high utilization could be a problem when someone's trying to buy a house?
Bev: Sure. What credit utilization is, is the percentage of your available credit that you're using. Like if you have a credit limit of, say, $10,000 and you've got a balance of $5,000, that's a 50% utilization rate. That's high; that's too high. You want to keep your utilization under 30%, and lower is better. The reason it's so important is because, next to payment history, nothing is as big a factor in determining your credit score.
Sean: Also, utilization can fluctuate a lot from one billing period or even one week to the next, right?
Bev: Sure. Depends on what you spend.
Sean: You mentioned the 30% rule, for keeping your utilization below that amount. Can you talk about why that's important and the veracity of that? Because some people think it's a myth. Some people follow it really closely. I want to hear your thoughts on that.
Bev: Well, it's a guideline, because people want a guideline. It is not a bright line. There's not something wonderful that happens when you reach 29%. I wish that there were, but really, lower is always better. If you're watching it, you can do things like pay online and pay early. But, if you're in a situation where the reason that your utilization is high is because you have charged up your credit cards, and you don't have the money to pay them back in full, you may have to look at some other options for trying to get that down.
Liz: It seems like the people with the best credit scores have utilization in the single digits. Again, it's not something wonderful that happens as soon as you get under 30%. The lower you can drive that down, the better, right?
Liz: One other thing we should mention is we've been talking about balances, but that doesn't necessarily mean a balance you carry month to month, right?
Bev: No. It's usually your statement balance. Even if you pay it off every month, you can have a high utilization if you're using a good bit of your credit limit.
Sean: What's interesting about this question is that we're left to doing a little bit of guesswork, because Linda hasn't let us know what the utilization is on her husband's accounts or what his credit score is. So, I will also put out a pitch for our listeners, to send us as much detail as you want and can give us when you're trying to send us a question. Because, it helps us answer your questions. All right. Now, I want to talk about some ways to lower utilization. There are a few strategies that come to mind, like just paying off the debt, maybe asking for a higher credit limit. Potentially adding an authorized user. Bev, What are your thoughts on different strategies and how much they could be effective?
Bev: The authorized user option, I really, really like. If your husband or you know somebody who has a high credit limit and is willing to add your husband as an authorized user, that can be a really useful and powerful thing.
Liz: We should explain what an authorized user actually is. So, let's say I have a credit card and I want to add you to that card. You would be the authorized user. Now, the cool thing is, is that my good history with the card and my credit limits are exported into your credit file — into your credit report and used to calculate your credit scores. It's a way to really give somebody a bump if they're trying to build credit or rebuild credit.
Bev: One of the things that I like about it, is that you don't have to apply for the credit. There's no hard inquiry. Another thing that I like about it is that primary user doesn't necessarily have to give you a credit card. That's something that you can make clear to someone as you ask for that big favor, is that you won't have the card. You won't be using it and you won't be charging. All that you want is the additional credit limit.
Sean: I realize this might be a hard question to answer, but how much do you think this could actually impact their credit scores and overall utilization?
Bev: A whole lot, depending on how much extra utilization that they have. I did this for my children, to help them with their credit scores. In their cases, it dramatically dropped credit utilization. I believe one of them had a score that went up about 40 points, but I have high credit limits.
Sean: Are there any limits on who you can add as an authorized user? I'm thinking, I have friends that have been working really hard to improve their credit over time. It's often quite a long process. Could I add them onto one of my cards, or is it only people that you are related to?
Bev: It's not necessarily just people that you're related to. There's a business I don't particularly like, of what is called credit piggybacking, where people actually pay to be added. You can pick a credit card that has a very low utilization — a long history. That's not something I recommend. I would suggest using somebody that you know well.
Liz: I think each credit card has different policies on this. Sometimes, they'll only do it for relatives; sometimes they will do it for anybody. I also think it can be an issue if you have a younger person on the card. I seem to remember, when I added my teenage daughter to a credit card, it wasn't reported to the credit bureaus until she turned 18. Then, all of a sudden, it showed up. We do have information on the site. You can do a little research to find out which cards will report authorized history to the credit bureaus and which have limitations on it.
Bev: I want to go back to what she is suggesting, which is having her husband apply for a 0% card. I want to say no. It's probably not the best idea, because: a) you're going to have a hard inquiry — which can ding your credit score just a little bit; b) you don't know what his credit limit would be. That's kind of a dicey way to get it down.
Sean: It seems like that would potentially be a better option if they're focused on really paying off the account, to have utilization be as low as possible.
Bev: Well, with the applying for a card, oftentimes, the 0% requires a pretty high credit score. I don't know what his credit score is, but I have some other ideas that I think might help them achieve the same goal.
Sean: Sure. What are they?
Bev: Well, one would be getting a personal loan and then paying it off. A personal loan does not affect your credit score the same way that high utilization does.
Sean: OK. Why is that?
Bev: Regular installment debt — as long as you're paying it on time — has almost a neutral effect on your credit.
Sean: That could actually potentially help in some way, because it'd be adding to the diversification of lines of credit on their credit reports. Is that right?
Bev: Well, if he doesn't have an installment loan — definitely.
Liz: It gets that revolving credit off the table, puts it over in the installment category. There would be the same hard inquiry hit, probably, when he applied for that personal loan. But, going forward, it would be better for credit utilization to have that moved over to the second category.
Sean: One thing that comes to mind is that it wouldn't actually address the core issue of the balance itself, because they would have the same debt-to-income ratio if they haven't actually paid off the amount in the personal loan. That could potentially raise a red flag for a lender, if they have a high debt-to-income ratio.
Liz: Right. That isn't part of the credit scoring formula, but lenders do, obviously, take a look at that. If they haven't paid down the debt or made it disappear, one way to make it disappear is to use a 401(k) loan. This is getting a little confusing, but we don't typically recommend you borrow against your retirement. But, if they did — if he did — and he moved the debt from the credit cards to his retirement account, through a 401(k) loan, it would effectively disappear. It would go off the credit reports, and I don't think the lender would ask about it. It's a way to make debt invisible. It's just super risky, because if you lose your job, and you can't pay that loan off, that becomes a withdrawal and that's bad for your future.
Sean: I keep coming back to the fact that there is this debt that our listener and her husband has to pay off. No matter how you try to disguise it through having a new balance transfer card or a personal loan or a 401(k) loan, it still should probably be wiped out, so that they are in the best financial position possible to become homeowners. It brings me back to the question of whether they might actually have a cash flow problem — if they're having trouble keeping utilization low.
Liz: Yeah. That's a really good point, Sean. We don't know enough about their situation to know if they're otherwise in a good position to be homeowners or to be buying a house. That's a bigger question than what she actually asked. The thing with paying off debt — especially if you're in the market to buy a home — is you might need that money. For your down payment, you might need it for closing costs. It's a good long-term strategy, and we're all in favor of paying off debt, but there are situations where maybe you want to hang on to your cash, and maybe the better solution is to go the authorized user route.
Sean: But then, you have to find someone to do it, which makes me wonder whether the asking your credit card issuer for a higher credit limit could be the easiest one for some people. Because, all you do is pick up the phone — sometimes even just log on to your portal online — and see if they can raise it. Then, the worst they can do is say no, right?
Bev: Well, no. That's not the worst they can do-
Sean: No. OK.
Bev: The worst they can do is say no and add a credit inquiry to your file, so that you lose a few points on your credit score, and you're in the same situation that you were.
Sean: Well, then never mind.
Bev: I think, if the reason that you're applying for additional credit or asking for a higher limit is because you're not able to pay off what you have, your chances of a yes are not as high as you might hope.
Liz: In this case, we know he has a spouse — who obviously has good credit or better credit — who probably could add him to a bunch of credit cards, or at least one. He does have a pretty good route to getting his score up.
Sean: Because our listener is really focused on buying a house, I want to talk about a few options that they might have for strengthening their credit, as they look to buying a house. There are a few main tactics that we think about and that we know, that are pretty reliable for improving credit. One of which is paying all bills on time, since credit history is the biggest of all factors that affect your credit score. I'm wondering what other options you think they should look into when they're trying to manage their credit?
Bev: Checking your credit report, preferably a year before you apply for a mortgage, is a really good idea. Because, you don't want to find out that there is erroneous information that is holding your score down when you apply for a mortgage. The sooner that you take a look at this and clean up any problems, the better.
Liz: Right now, you can get weekly access to all three of your credit reports. You need to go to annualcreditreport.com and you can pull them from Experian, from Equifax and from TransUnion. That will give you the reports that the lenders are using to create your credit scores.
Sean: This ability to get your credit reports for free weekly runs currently through April of 2022.
Liz: If they ask you for a credit card, you are on the wrong site. People will type in annualcreditreport.com and just go to their first result and those are typically ads. So, they're going to a credit monitoring site, not the actual site. Actually type this into your browser bar: annualcreditreport.com.
Sean: Even some of the credit bureaus have services where they will try to charge you. It seems like you will have to pay to get your credit reports, but that's typically a credit monitoring service as well. When you're just getting your credit report, you do not have to pay. That's really important to know. Another thing that people who are looking to maintain and build good credit in the lead-up to buying a house should think about, is keeping their credit cards open. Because, closing a credit card can reduce the amount of available credit that you have, which can then lower your utilization and ding your score. Any other factors that you think people should be thinking about when they're trying to manage their credit, as they hope to buy a house?
Bev: One more thing is avoid applying for other credit. If you're going to apply for something big, like a mortgage, just, at least for six months — and I would prefer even longer — don't apply for any other credit.
Liz: Bev, don't personal loans also ding your credit score?
Bev: They do. They can take off two or three points. It could be more than that, if you have just recently applied for credit. But, if you're able to pay off the balance there and move that to the side of the ledger that is loans rather than credit cards, you may see that the gain in points offsets the deduction that you get for applying. If that's the route you want to go, apply as soon as possible, so that you have more time between applying for that and applying for a mortgage.
Liz: If nothing else, you're having trouble qualifying for a regular conventional mortgage, you could also look into FHA, VA, those kind of mortgages, right?
Bev: Those are good options.
Sean: That's good, because they tend to have a lower barrier to entry, in terms of your credit score, to get approved, right?
Bev: Right, and often allow you to get in with a lower down payment.
Liz: Oh, that's a good point.
Sean: We'll include information in our show notes post, about how to shop around for these loans. Well, Bev, thank you so much for joining us.
Bev: Thank you for having me, Sean.
Sean: With that, let's get onto our takeaway tips, and I can kick us off. First step, prep your credit before homebuying. That means disputing erroneous information on your credit reports and working to get your credit scores above 620.
Liz: Next, understand how credit utilization comes into play. Higher utilization can drag down your credit scores, which might worry potential lenders.
Sean: Lastly, take steps to lower your utilization. You can ask someone with a high credit limit to add you as an authorized user, or ask for higher credit limits. But, paying off your debt is likely the best approach for your long-term financial health. That is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. Be sure to subscribe, rate and review us, wherever you're getting this podcast.
Liz: Here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but 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: With that said, until next time, turn to the Nerds.