Richard Barrington Discusses Building and Rebuilding Credit and Saving More

Woman using credit card and mobile phone

MP recently chatted with Richard Barrington, a chartered financial analyst with over thirty years of experience in the financial industry. He has appeared on Fox Business News and NPR, been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC, and many other publications for his insights and expertise. Barrington currently serves as a financial analyst at Credit Sesame.

Richard Barrington
Credit Sesame Financial Analyst Richard Barrington / Photo courtesy of Richard Barrington

Credit Sesame

What is Credit Sesame?

Founded in 2010, Credit Sesame is a financial wellness platform leveraging the latest technology, AI, and analytics to help consumers achieve better financial health and stability and create better opportunities for themselves and their families.

How does Credit Sesame help people achieve their financial goals?

Credit Sesame helps consumers improve their credit scores, increase their approval odds, lower their cost of credit, and save money. Strong credit health leads to better financial health and stability, and with Sesame Cash, Credit Sesame helps accelerate consumers’ credit and financial wellness in one place. 

Building Credit

What are three mistakes most people make when looking to build credit, and how can they be avoided?

Overly Cautious About Using Credit

Newcomers to credit are often overly cautious about using it. They assume having no debts is the same as having good credit. To build credit, you have to prove you can use it responsibly.

Jumping in Too Fast

It’s also a mistake to jump in too fast. Open too many credit accounts at once, and you may be at a higher risk. This could be reflected in your credit score.

Using the Wrong Kind of Credit

Using the wrong kind of credit can also be counterproductive. Mainstream forms of credit like credit cards and loans report payment histories to the three major credit bureaus; this is how your credit record is built. Less formal types of credit, like some store credit or payday lenders, are less likely to be reported to the credit bureaus and thus do nothing to build your credit history. 

What are the best ways to build credit, and why? 

Regularly Use a Moderate Amount of Credit

A good credit record is built by regularly using a moderate amount of credit and making full and timely payments. You’ll need to start by opening one or more credit accounts but choose carefully. You don’t want to open too many accounts simultaneously, so choose one with the most competitive interest rate and no annual fee.

Pay Your Bills on Time

Payment history is the most significant single component of a credit score. Using credit regularly will allow you to build a payment history, but you need to make sure it’s a good history by making your payments on time.

Budget Before You Borrow

The way to use credit successfully is to plan how to repay what you borrow. Don’t just borrow first and worry about repaying later. Have a plan for where the money will come from and how you can afford it.

What should be avoided when looking to build credit, and why? 

Missed Payments

Whether through carelessness or because you can’t afford to make them, missing payments on a credit card or loan is going to be a red flag for other lenders. The damage to your credit history will cause you to pay higher interest rates and make it more challenging to get approved for credit in the future.

Making the Minimum Required Payments

Making the minimum required payments on your credit cards is a costly way to use credit. Minimum payments are designed to be relatively low to prolong the time you have to pay interest over. You can and should pay more than the minimum payment whenever you can.

Carrying Balances on Credit Cards

You win when you use a credit card as a convenient substitute for cash and then pay off the balance immediately. The credit card company wins when you carry a balance and have to pay them interest. Credit card interest is relatively high – higher than the interest on most types of loans. So, if you need to borrow money you can’t immediately pay back, you’re better off looking for a loan than simply putting it on your credit card. 

Rebuilding Credit

How difficult is it for someone to rebuild credit after experiencing a significant hardship, and why?

It’s time-consuming to rebuild credit because you must replace bad history with good history. That can take years. Late payments and written-off debt stay on your credit history for seven years. A bankruptcy can stay on your credit history for as much as ten years.

Besides the time it takes to put that negative history behind you, rebuilding credit is difficult because borrowing becomes more costly when you start missing payments. You will incur late fees, you may see your interest rates increase, and you’ll have to pay interest for a longer time. Those added costs make it all the more difficult to catch up with your payments. 

There are many types of credit scores. Which ones should be focused on when looking to rebuild credit, and why?

While there are different credit scores for different purposes, payment history is the key to all of them. Use credit regularly enough to establish a payment history and responsibly enough for it to be a positive history. 

Which methods should be used when rebuilding credit, and why?

The ideal way to build or rebuild credit is by using a no-fee credit card and paying the balance monthly. That way, you can use credit without paying interest. 

If you need to borrow longer-term, loans are generally more cost-effective than carrying a credit card balance. Loans are also easier to budget because they have a clearly-defined payment schedule. 

Saving

How can entrepreneurs save more without significantly impacting their daily lives or the amount of money they can put into their businesses?

It’s vital to compartmentalize your personal finances and your business finances. This matters from the standpoint of both legal liability and managing your investment in the business.

The best way to save money is to budget for it. A specific amount of money should be earmarked for savings each month. If you only plan to save whatever’s left over after you’re done spending, all too often, there is nothing left. Budget set amounts both for personal savings and investment in the business. This will help you maintain the desired balance between both. 

Your business plan should include a clearly defined payback projection. That means you can plan out how long before you recoup any investment in the business. Too often, entrepreneurs get sucked into continually putting money into the business without a clear plan for how and when those investments will pay off.

What are three mistakes most people make when saving money, and how can they be avoided? 

Too often, people plan to simply save what’s left over after expenses. The problem is that saving can quickly get crowded out by spending. A specific savings goal should be as much part of your budget as an expense.

Consumers don’t pay enough attention to shopping for savings accounts. There are significant discrepancies in the interest rates offered by different savings accounts, and often the largest banks pay some of the lowest rates. Making the effort to shop around can help your savings earn more for you.

It’s a big mistake to leave money on the table by not participating in an employer-sponsored benefits plan if one is available. Besides tax advantages, if your employer offers matching contributions, you’d simply be forfeiting that money if you don’t contribute enough to the plan to qualify for the entire match available. 

Other

Is there anything else you would like to share?

Cash flow is the life’s blood of a business – and too often the cause of a venture’s failure. The timing of your receipts relative to your expenses and investments in the company needs to be carefully planned out. Otherwise, you can run out of cash before the money you’ve put into the company has had a chance to pay off.