Earn Entrepreneurship

HerMoney Podcast Episode 236: How To Become An Angel Investor 

Kathryn Tuggle  |  October 21, 2020

Want to invest directly with an entrepreneur, and get in on the ground floor of a great idea? Angel investing is the way to do it.

Over the last few months, we heard a specific question from many of you — “How do I become an angel investor?” So, we decided to do a show on that very topic! 

If you haven’t heard the term before, an angel investor is someone who provides funding for small startups or entrepreneurs. The funding can be any amount, really, and sometimes the angels will get an ownership stake in the company for their investment, while other times there will be an agreement drawn up for getting your money back — plus profits — once the company gets off the ground. You may sometimes hear angel investors referred to as “private investors,” “seed investors,” or “angel funders,” but one thing is clear — no matter what you call them, angels can make a huge difference in the life of an entrepreneur, and they can also make some serious money in the process. 

This week we’re sitting down to talk about all of it with Brianna McDonald, President of Global Investment Network Keiretsu Forum, which has invested $750 million in over 1,000 companies since it was founded in 2000.

Listen in as Brianna gives us all a crash course in what angel investing really is, and breaks down how angel investing differs from crowdfunding and venture capital. We also explain what it means to be an “accredited investor” and all the different pathways to becoming an angel investor. While angel investors previously had to prove that they earned $250,000 per year in order to become an accredited angel investor, these days that’s no longer a requirement — as long as you can prove that you have investing skills, or pertinent subject matter expertise, you’re in. 

Brianna talks about how angel investors can find successful rates of return, and why now is a great time for women to consider becoming angel investors. Brianna also walks us through how she got started investing, how to find angel investing groups around the country, and the importance of doing your research. 

“The first thing that is really important to figure out is your investment thesis. What do you want to put your dollars towards?,” Brianna says. “So, aside from supporting these entrepreneurs, for me, what gets me up every day, especially as a mom of three young kids, is I’m helping to advance technology to make the world a better place, and that’s exciting.” 

Brianna walks us through the steps involved in becoming an angel investor, from conception to completion, and talks about some of the unknowns in angel investing that typically trip people up. She says there’s a reason why she recommends sitting in and observing the angel investing process and participating in “incubator” style environments for at least six months to a year before making your first investment. To determine whether an investment in a company will pay off, you should make sure to inquire about their capitalization plan, and how much they need to raise so they can go the distance. You should also seek to speak with the CEO and see how the communication flows — when you stop hearing from a company, that’s usually a sign that things have gone wrong. 

In Mailbag, Jean and Kathryn talk about saving for the down payment on a home for a child, how to rebuild credit after a couple of delinquent payment mistakes, and what to do in advance of a credit card losing its introductory 0% interest benefits. Lastly, in Thrive, where to find the best deals at Costco. 

This podcast is proudly supported by Fidelity Investments. You work too hard for what you earn to let it sit on the sidelines. Let Fidelity show you how to demand more from your money. Learn more at Fidelity.com/HerMoney. Fidelity Brokerage Services LLC Member NYSE, SIPC.

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

Transcript

Brianna McDonald: (00:02)
Now, the first thing that is really important to figure out is your investment thesis. What do you want to put your dollars towards? So, aside from supporting these entrepreneurs, for me, what gets me up every day, especially as a mom of three young kids, is I’m helping to advance technology to make the world a better place. And that’s exciting.

Jean Chatzky: (00:23)
HerMoney is supported by Fidelity Investments. We all have our own financial needs and goals. Investment advice from Fidelity can help you reach yours. Plus, they have tools like financial checkups and more to help you make smarter, well-informed decisions every day. Visit Fidelity.com/HerMoney to learn more.

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Jean Chatzky: (00:56)
Hey everyone. I’m Jean Chatzky. Thanks so much for joining us today on HerMoney. I’m very excited about today’s show. And I just suspect that many of you will be as well, because this is one of those shows that was inspired by you, specifically inspired by our listener requests over the last few months. We’ve had several pop into the mailbag – I’ve also seen them in the HerMoney Facebook group – asking for a show on angel investing. Specifically, we saw you asking the question, how do I become an angel investor? If you haven’t heard the term before – although I think you’ve probably heard it from me a little bit cause I’ve dipped my toe in the waters of angel investing – an angel investor is somebody who provides funding for small startups or entrepreneurs. The funding sometimes can be any amount, but also there are some limitations depending on the particular deal. And sometimes the angels will get an ownership in the company for their investment. Other times there’ll be an agreement drawn up for getting your money back plus profits once the company gets on the ground. You may sometimes hear angel investors referred to as private investors or seed investors or angel funders. But one thing’s really clear, no matter what you call them, angels can make a huge difference in the life of an entrepreneur, and sometimes they can also make some serious money in the process. So, here today to walk us through the ins, the outs, the how-tos of angel investing is Brianna McDonald. She’s the President of Global Investment Network Keiretsu Forum Northwest, which has invested $750 million in over a thousand companies since being founded in the year 2000. Brianna’s also a board member for Zgirls, which is a mentorship program for teen girls and a member of the International Women’s Forum. Brianna, welcome.

Brianna McDonald: (03:08)
Thank you so much for having me Jean.

Jean Chatzky: (03:10)
So, I know I just gave our listeners a very, very brief crash course in what angel investing is, but I would love to hear it from you. What is an angel investor and how does being an angel investor differ from venture capital or even different from crowdfunding?

Brianna McDonald: (03:32)
So, being an angel investor is when you take your own hard earned money and you’ve put it towards a company. A private company. An early stage company. This company could be just in the beginning stages and having an idea, or it could be looking for capital support to really help accelerate growth. So, there’s many different areas in the company’s life cycle that you can choose to invest in. Venture capital per se is a less active, it’s more of a passive type of investing where you have a few individuals of a fund, that have raised typically hundreds of millions of dollars making investment choices on behalf of you. So, it’s a little bit different. It’s more active in terms of how you invest.

Jean Chatzky: (04:18)
And how about when you invest in crowdfunding?

Brianna McDonald: (04:22)
So, crowdfunding is also different as you’re putting very small amounts of money in. So, the goal of investing is to get a return. That’s ultimate. You want to make money. You’re an investor. And so, the smaller amounts of money you play with to put into different opportunities, whether it be crowdfunding or venture capital or private investing, you’re not going to be able to see those returns that you would otherwise see. So, crowdfunding is not something we do a whole lot of. We really focus on the private investment side and supporting individual investors through the process of vetting deals and investing in them.

Jean Chatzky: (05:01)
So, what do I need to do to become an angel investor? Can you walk us through the process. And maybe it would help to hear a little bit about your story and how you became an angel investor.

Brianna McDonald: (05:14)
So, there’s a lot of things you can do. There’s not anything you have to do. The biggest thing you need to realize is that the SEC determines whether you’re an accredited investor or not. So, it’s really the SEC, is the securities exchange of the federal government. And so, to be an accredited investor, you have to make, as an individual, more than $250,000 per year or $300,000 per year, if you’re married. Another recommendation by the SEC is that you have more than a million in assets, not including your home. So, basically, the government says, you have enough money that you can lose money and not get into trouble. And so, the government regulates that and the companies need to verify that you’re accredited to be able to invest. There’s no class. There’s no certification that you have to go through in a formal method to become accredited investor. That said…

Jean Chatzky: (06:14)
Either or Brianna? I mean, I know our listeners. We have surveyed them. And we know they’re really successful. A lot of them are on their way up. But some of them don’t make $250,000 a year or $300,000 a year. If they have a million in assets, does that alone qualify them?

Brianna McDonald: (06:36)
Yes. Yes. So, there’s seven different requirements and it’s a one or the other. So, you have to meet one of the seven. And the SEC just actually expanded the meaning of accredited investor about a month ago to be able to fall under expertise. So, if you have a specific discipline or study that you are very well versed in, and can research and look at these opportunities more in depth, that now expands to you as well.

Jean Chatzky: (07:03)
So, then, you don’t need to have that level of income or assets, as long as you have the know-how.

Brianna McDonald: (07:10)
Yes. And that is something brand new that just happened in the last month. So, yeah. It’s exciting to be able to open up the doors to the different opportunities with investors. Now, how I got started in investing, I was young. I was 26. I was selling real estate at the time with executive relocation with Microsoft. And my husband started Keiretsu Forum in Seattle in 2005. And he said, come, come, come. Come to this meeting and come listen to these companies. And I’m like, why am I doing this? I don’t belong here. And I sat at this table with a bunch of old gray-haired men. And I’m 26 years old and I’d listened to these companies pitch. And I sat for about a year. And I’d write down questions like, what’s your business? What do you do? How do you make money? What’s your product? And I would think, these are really simple questions. And if I don’t get this, I don’t belong here. But then as I listened to these men, ask their questions. They would ask the very same questions that I wrote down. And so it wasn’t me. It was the person presenting actually wasn’t clear about what they did, what their product was, how they made money. And so, one day I finally raised my hand and asked a question and one of my mentors still today, he looked at me and he goes, that was a great question. And that was all I needed in terms of reinforcement that I actually deserved this to seat at this table and had brought a different perspective.

Jean Chatzky: (08:41)
What exactly is Keiretsu Forum?

Brianna McDonald: (08:44)
So, Keiretsu Forum is the largest, most-active angel investment network globally, comprising of 55 chapters and over 3000 members. My husband, Nathan, founded the Pacific Northwest region in 2005, starting off with the Seattle chapter, and has grown it to four chapters up and down the Cascadia Corridor. So, we have chapters in Vancouver, Seattle Bellevue, and Portland, and we expanded into the Rockies region last year. And so, what we do is we have over 325 members in these different regions that helps support the growth and investment of early stage companies. And we do that by working together, leveraging backgrounds, expertise, because not everybody knows everything.

Jean Chatzky: (09:26)
Let me stop you there for a second. So, it sounds to me a little like Shark Tank, but without the big personalities, maybe, and without maybe the television platform. That people who have companies that are looking for money will come in and present to you. And you will decide as individuals whether to put money into these deals. Is that correct?

Brianna McDonald: (09:48)
That is correct. I usually say it’s like Shark Tank, but real. So, the thing is, is when you watch Shark Tank, you have to understand, and we’ve had companies that have gone through Shark Tank. It’s an hour long presentation that they cut up into 10 minutes, but we do look at these companies and it’s not there to shred the entrepreneur and to break them down. It’s there to lift them up, to support them, to provide them feedback, to help them know things that maybe they can’t see. And really advance them with capital, with resources, with connections and expertise.

Jean Chatzky: (10:22)
If somebody listening is thinking, will getting involved in some sort of a group might be a good way to get educated and to begin – I imagine there are lots of groups like this around the country. How do you find one?

Brianna McDonald: (10:35)
So, there are. There’s lots of groups. And really, when you start getting into this, it’s really important to do your research. And if anybody is thinking about getting into investing, angel investing in particular, for the first time, I recommend sitting and observing for at least six months to a year, because there’s a lot to learn and it’s really easy to lose your money. And so, the best way is to educate yourself on what’s going on. Now, the first thing that is really important to figure out is your investment thesis. What do you want to put your dollars towards? So, aside from, and you mentioned at the beginning Jean, supporting these entrepreneurs. For me, what gets me up everyday, especially as a mom of three young kids, is I’m helping to advance technology to make the world a better place. And that’s exciting, especially amidst COVID. We are seeing a leveraging of technology more than ever. So, looking at that is really important. So, for me, I need to be able to help support the advancement of people and the planet. And that fits my investment criteria. I also like to look at a wide variety of opportunities. And so, we focus, even though we’re a global organization, Keiretsu Forum in the United States focuses on North America. So, we do a lot of investing in the United and Canada. That said, there’s lots of different groups that are small, that focus on local deals, that focus on different segments, that focus on female CEOs. And so, really getting to know, introducing yourself to those groups, sitting in. They’ll usually let you sit and observe a couple of times to see if it’s a good fit for you. But finding your right group that fits your thesis is important. And it happens throughout the course of a year.

Jean Chatzky: (12:18)
How do you find a group? Is there an organization that you can go through to match you with a group or is there a network that you can look at? How would you go about finding a group if you were new to this?

Brianna McDonald: (12:31)
So, typically you can even research angel investing in your city and see what’s there. So, there are angel investment groups across the country. There’s also an organization called the Angel Capital Association, the ACA and that organization does comprise of many different investment groups from across the country. So, you could go to their website and look. But I would start local and meet with some of those people who are investing in your area, reach out to them on LinkedIn. There are ways to break into these different circles. That’s happening to be able to learn. You have to do some research, though.

Jean Chatzky: (13:09)
I love that you said, sit there and listen for six months before you do one thing. And I want to hear about the first deal that you invested in. But before we do that, let me remind everyone that HerMoney is proudly sponsored by Fidelity Investments. Whether you’re looking for a turnkey way to save and invest, or you need to tap the support of an experienced pro for a more complicated financial picture, Fidelity can help you meet your goals. In addition to investment advice, Fidelity also has online tools like financial checkups that can help you make smarter, more informed decisions every day. Visit Fidelity.com/HerMoney to learn more. I am talking with Brianna McDonald – getting a lesson in angel investing. So, you mentioned at the top of the show that this is risky. And I have to say from my own perspective, and I have invested in probably a half dozen startups over the past few years and have lost some money, have made some money, have been sitting waiting to find out if I’ve lost or made some money, because you don’t always know exactly where these companies are. I mean, we would all love to find the next Google find the next Amazon, but you know, this is really, really risky. And I want people to understand that.

Brianna McDonald: (14:32)
It is very risky. So at Keiretsu Forum, that is why we work together as a group – supporting one another, leveraging backgrounds and expertise to conduct due diligence. We have a strict process that our companies move through, embedding them. So many of the companies that are out there today, shouldn’t be raising capital at all. They should be finding other means to help support their venture. But because they go watch shows like Shark Tank, they think, oh, I just need to go raise money. And that’s what I need to do to go start my business. And so, it ends up pulling money out of the ecosystem that investors could otherwise put some place. But, that said, looking for the next Google, Amazon, those are exciting deals. And I let the VCs and the venture capitalists go unicorn hunting. Unicorns are hard to come by. They are not easy. And if one crosses my path, that’s exciting. I would rather invest in companies that are going to cycle through quicker.

Jean Chatzky: (15:33)
What does that mean Brianna? Cycle through quicker.

Brianna McDonald: (15:37)
Well, so, the life cycle of the company. If you hear a company pitch, every single company you hear pitch will tell you it takes three to five years for them to exit and deliver an ROI. It gets really redundant after a while. In all honesty, your money is probably going to be tied up for seven to 10 years into this investment, before you see an exit. Now, with those unicorns, there’s substantially more capital put in and the exit takes longer. So, even though they’ll exit at a higher multiple, you have to take into account dilution and all the other follow-on rounds that come in and squish down your shares to not have as much ownership in the company that you would have fewer investors we’re in. So, if you’re able to have a company that can exit in really that three to five year timeframe, that’s great. So, looking for those early acquisitions is better to keep the money moving. Because when I get a return, what I typically end up doing is I reinvest it into the next opportunity. And I find that exciting. And that’s what we enjoy.

Jean Chatzky: (16:41)
What was the first deal that you invested in?

Brianna McDonald: (16:44)
So, my first deal, I was 26 years old, and I saw this chocolate company come through in Seattle called Theo Chocolate. And they were the first organic chocolate maker in the United States. And so, there was only 11 different chocolate maker companies out there at the time. And so, they were the first one. And they are still around today. I was able to get a return on that investment a couple of years ago. And I was allowed to divest my shares, which was great, cause I was in the deal for about 12 years. So, it was nice to be able to get a return on that investment. And so, my first investment was successful. Would I invest in a food company again? I don’t know. You’ve got to think about all the things that go into it. So, there’s so many lessons that are learned while you’re investing as well. So, if you’re able to talk with those angel investors, talk with those people out in your community that are doing these things and learn from them, the chances of you losing money, go way down, to be able to learn from other people’s experiences.

Jean Chatzky: (17:49)
What are some of the unknowns that people need to be aware of if they’re going to do this? You know, what do you wish you knew when you started?

Brianna McDonald: (17:58)
Well, there’s a couple of things. One, due diligence is underrated. Due diligence is critically important and you need to be able to dig in. You know, got to look at their financials. Look at their cap table. Look at their capitalization plan. So that is the entire plan from beginning to end of how much money they think that they need to raise to be able to go the distance. So you can understand what their exit strategy is and how they’re going to get your money back to you. Talking with the CEO. And the most important thing is communication. When you stop hearing from a company, that’s typically when things are not going well. So, the entrepreneurs want to provide you with good, happy news that this is great and everything’s wonderful. When I talk to my investments, I usually ask them how they’re doing and their response is, I’m great. Things are great. And I’m like, okay, what is one thing that you are struggling with this week? And I’m very direct in asking those types of questions, because as a private investor, I’m here to ensure success of my investment. I’m here to add support to that entrepreneur and that entrepreneur needs to know that I am on their side, helping them along to be successful and to get this venture off the ground. So, that communication is important. And I really think if there’s one thing I wish I would have done with Theo Chocolate early on, was communicate a lot more than I did aside from just reading the quarterly reports that they would send us. I probably would’ve had a lot more questions to ask and maybe could have changed the course of things that it wouldn’t have been 12 years that I waited for my capital to be returned to me.

Jean Chatzky: (19:44)
Is Keiretsu a good first call for our listeners if they’re looking to get involved? Are they still accepting members? And what is the cost? And just know we’ve got listeners across the world.

Brianna McDonald: (19:59)
Yeah, no, absolutely. I think Keiretsu, and granted, I’m biased. I’ve been involved with the organization a really long time. But I love the structure that we bring and the support of the community. So, we focus on many different things. You can get involved at all stages. We have committees to do the prescreening of companies, which are sector experts looking at these opportunities to see if they’re viable. We have 50 to 80 companies reach out to us every month and we look at six to eight at deal screening. So, if you just think about the dwindling down of how many companies we actually look at. Of those six to eight, we bring three to four to our forums. And from there we go to due diligence. We have a full time staff supporting not only our entrepreneurs and our every step of the way. A lot of angel groups out there tend to be nonprofits with maybe just one part time or one full time executive director. So, you’re a little bit more on your own than when you’re with us. And we do focus a lot on education. So, education is extremely important. I am still learning 15 years into this. There’s still more to know. And so our next education series will be looking at cap tables and how to calculate a waterfall. And that is really looking at the different investment vehicles that companies have used to bring on capital, and how many shares are still left in the company.

Jean Chatzky: (21:26)
Clearly, it is a whole new language, which is why I love that you all are putting education first. Because I think that, combined with your advice to just learn for a while before you put money on the line, is wonderful. You’re not going to miss this. It’s not going away anytime soon. You mentioned at the top of the show, sitting down with a group of white haired men. Is this a man’s game to this day? Is it changing? Do you have all the female investors you need pouring in?

Brianna McDonald: (21:58)
So, it is changing. But it’s not changing fast enough. We need more women investors at the table. So, once again, looking at different backgrounds, expertise, looking at these opportunities, men and women bring different things to the table. And women tend to look at things in a more pragmatic fashion that is so important. And I need more women investors. About 25% of the investors out there right now, looking at these early stage opportunities are women. And we deserve a seat at that table. So, if you can find a seat, go get one.

Jean Chatzky: (22:35)
Brianna, where can we learn more about you?

Brianna McDonald: (22:38)
So, you can learn more about me at K4. So, the letter K, the number 4 northwest.com for the Pacific Northwest and the Rockies region. Or you could go to KeiretsuForum.com to learn more about the global region. I do want to put in a quick plug. We have our Investor Capital Expo coming up, starting on October 14th. And so, it’ll be a three series program happening October 14th, October 28th and November 11th, featuring the best of our best portfolio companies. There’ll be 36 companies in total. It’s a small fee of $95. That gets you into all three of those investment forums. And you can take a look and see firsthand at some of our best performing portfolio companies that are doing their next level of investing.

Jean Chatzky: (23:31)
Sounds like a great way to learn. And I just want to take a minute and spell Keiretsu for everybody because I think that will help them find it. It’s K E I R E T S U. Brianna, thank you so much for being with us today.

Brianna McDonald: (23:45)
Thank you, Jean.

Jean Chatzky: (23:46)
And we’ll be right back with Kathryn and your mailbag.

Jean Chatzky: (23:54)
And HerMoney’s Kathryn Tuggle joins me now. Hey Kathryn.

Kathryn Tuggle: (23:58)
Hey Jean. That was a great episode.

Jean Chatzky: (24:00)
It was interesting. I’m glad that our listeners are thinking about this. We get a lot of mailbag questions about, okay, I’ve done retirement and I’ve done college and my mortgage is really inexpensive. What else can I do? And for people who are interested in this sort of thing, I mean, I have to say I found it really fun and exciting and gratifying. And you know me. I’m not a huge risk taker, but like I said, I mean, I’ve made some money. I’ve lost some money. I’ve broken even a couple of times. But I like the contact with the entrepreneurs. And I feel like it has taught me something about running HerMoney. You know, I’ve learned along the way.

Kathryn Tuggle: (24:49)
Yeah, absolutely. Well, I think that for many of our listeners, when they say that they want to do good with their money and they want to do things that are going to have an impact, in many cases, for them, that means supporting a fellow female entrepreneur. And angel investing is a pathway to do that – to be able to work one on one sometimes, with a woman that you get to know whose mission that you believe in, which is pretty amazing.

Jean Chatzky: (25:17)
Yeah. I put some money into companies and some of the deals that I’ve enjoyed best are the ones that have female entrepreneurs, specifically in the financial space. I mean, HerMoney came about in part because I invested in a company called DailyWorth. And when DailyWorth was changing course and going out of business, we were able to acquire many of the assets of DailyWorth because I was already on the inside and knew what they had and what the value was. And that enabled us to get a good launch pad.

Kathryn Tuggle: (25:53)
Yeah. I remember that very well. The day that you cut the check to buy DailyWorth. You had the check. We had the check in our little tiny office and you were like, here we go. And I was like, here we go.

Jean Chatzky: (26:05)
I know, I know. Not so long ago.

Kathryn Tuggle: (26:08)
Not long ago at all.

Jean Chatzky: (26:10)
All right. Let’s dig into our mailbag.

Kathryn Tuggle: (26:13)
Amazing. Our first question comes to us from Jennifer. She writes, hi Jean and Kathryn. I’d like to set aside a little money every month to save up for a down payment for my son’s house. Retirement, education, et cetera, are all covered. What kind of account would you put it in? Thank you.

Jean Chatzky: (26:28)
So, this is not angel investing money very, very clearly because you have a specific use for it. The question is, when does your son want to buy this house? And the shorter the timeframe, the less risk you can take with this money. If you think it’s 10 years before he is going to be looking for a house, then you can invest that money. You can put it in a diversified portfolio in the markets, knowing that longterm, the markets have traditionally produced a pretty decent return, and certainly much better than you’re going to get in a savings account. If however, we’re talking three to five years, I wouldn’t invest that money. I would put it in a savings account, a high-yield savings account, particularly knowing that high-yield savings accounts seem to be getting lower and lower returns every day. I just got one of those distressing emails this week that my high-yield savings account was lowering it’s returned by another 20 basis points. And you just grit your teeth and go, errr. But this is my money for my home renovation. And I am spending it as I pull it out of the account. Some of it I’m not spending for a year or two, but others I’m spending now. And so, I can’t afford to take any risk with that money because, should the markets take a turn, I can’t lose it. We’ve done a number of articles recently on HerMoney.com about high-yield savings. Also about high-yield checking accounts, which are a slightly different beast. So, I would encourage you to go to HerMoney.com. Give a read to those. But that’s probably where I would end up putting it.

Kathryn Tuggle: (28:12)
Great advice, Jean. Thank you.

Jean Chatzky: (28:14)
Sure.

Kathryn Tuggle: (28:16)
Our next question comes to us from an anonymous listener. She writes, my situation is purely my fault and I would love some advice on what I can do to fix the situation. I’m too embarrassed to post in the Facebook group. I was a frequent listener to the podcast before the pandemic, and I love how it kept me in check. With the juggle of working from home and watching the kids, life has been chaotic to say the least as with everyone else, which brings me to my situation. At the end of 2019, my husband and I paid off two high-balance credit cards. This was our biggest hurdle to eventually buy a home. One account was set to auto-pay, which even resulted in a $300 credit. This credit carried over for a few months and anything charged to the card was essentially taken care of. Unfortunately, come March, just as life seemed to go into chaos, that credit ran out and I didn’t notice. Three months went by with no payments from us and my husband’s credit went from an excellent score of 815 to a good score of 725. I didn’t get any late notifications from this credit card until we got a note saying his credit limit had been dropped from $25,000 to $500. Of course, this prompted me to check all the statements to discover the debt owed of just $45. As if this weren’t bad enough, I did something similar with another card. This one in my name to which I charged just $9 a month for Amazon to keep it active. And I had auto-pay set up to cover only that charge. But without realizing it, I began making other charges to this car and my auto-pay of $9 was not enough to cover it. I didn’t realize this until my credit score had dropped from 825 to 723. I feel horrible and extremely frustrated as just months ago everything was an excellent standing. I take full blame. What steps can I do to fix this? Thank you for any advice you have to offer.

Jean Chatzky: (30:01)
My first piece of advice is please stop beating yourself up. Please stop beating yourself up. I get how frustrated you feel because you had everything in such great working order, but we’ll fix this and you’ll put yourself back into a scenario where it doesn’t happen again, because I’m going to tell you how to do this. But our jobs right now, with work, with kids, with getting dinner on the table, have become so overwhelming that I’m surprised I haven’t gotten 20 letters like this. And in fact, I may have gotten 20 letters like this. Kathryn, you’ll have to tell us. You can fix this. It is not terrible. Your credit scores are still good and you just need to give yourself a pass. All right. So, that’s number one. Just give yourself a pass. And if your husband is giving you a hard time about this, which I suspect maybe he is, because you say this is purely my fault, then just let him listen to this answer because we’ve all got way, way, way too much to do right now and we need to give ourselves a break. So, here’s what I want you to do. First of all, recognize that your credit score is a muscle. And like a muscle, and you know this because you’ve done it before. Like a muscle, with work, it rebounds. And it will rebound. I want you to go to all of your credit cards and I want you to set up electronic alerts on those credit cards, so that you know when the bill is coming due and you also see what the bill is. These will come right to your email. You can have them text it to you. And that way, even if you go the auto-pay route, you’re not going to take your eyes off the ball again. And then just pay the cards on time, every time, making sure that you’re not racking up additional debt. It’ll take probably six months for them to come back. And a very, very big part of that reduction in score is the reduction in the credit limit, because my guess is it was a huge part of your utilization. So, get back on track and then call the credit card company and ask them if they can increase that limit again. Tell them what happened. Tell them you’re back on the wagon, that your behavior has been good. And even if they’ll only nudge it a smidge higher at a time, I would keep asking, because that’s going to do some good work to boost your score and the same is true on your other card as well. But you’ve got this. You completely have this. And I expect that you’ll be back up in the excellent zone, which by the way, you’re not too far away from. We all get so stuck on these 800 numbers. 760 and above is excellent. And you are almost there. So, just keep going and you’ll get it.

Kathryn Tuggle: (33:07)
When you say that in six months she’ll be back on track, is that assuming that the credit card companies are willing to increase her credit line?

Jean Chatzky: (33:15)
I think that she could probably do it. And Kathryn, as I answer this, I’m sort of reading. There are five factors that go into credit scoring. On-time payments is the most important. Utilization, which is the percentage of the credit that you have available to you that you’re actually using, is the second most important. And each of those account for about a third of your score. So, the on time situation is one that she can completely handle. Doesn’t need a hand from the credit card company to get that done. The utilization, you will need a little bit of a nudge. And if they say no, you may want to look at opening another card just to get yourself some additional utilization, or calling one of your other cards and asking for a bump up in credit limit that you’re not even going to use, just to put you back over that 760 level.

Kathryn Tuggle: (34:12)
Love that advice. And I did want to say that her letter was really long and I cut it down. And she did say that her husband had been amazing through this. She said that he’s not upset, that he is one to think positively and move on. So, I wanted to give him credit where credit was due.

Jean Chatzky: (34:28)
Well, shout out to your great husband. I love that.

Kathryn Tuggle: (34:31)
Absolutely. And in terms of your other question about everybody feeling the mental strain right now due to COVID, we have been hearing a lot, a lot, a lot from our listeners. And this listener actually said, P.S. any future shows on the mental load of mothers and household financial organization would be greatly appreciated. I don’t know a time in my life when I’ve seen women under this great of stress.

Jean Chatzky: (34:57)
Definitely not. And we’ll take that under advisement and tee one up.

Kathryn Tuggle: (35:01)
Absolutely. Our last question comes to us from Jeff. He writes, hello. Last year I had to take out a 12 month, no interest credit card for our daughter’s dental work and some other medical expenses. It was great while it lasted. I paid extra on it, but I’ll still have a balance left that will go into that wonderfully high interest rate in two months. Since it’s not going to be paid off by then, what would be my best option? My credit score is good, at 790. The balance will be around $10,000. Could you advise? Thanks so much.

Jean Chatzky: (35:31)
Absolutely Jeff. And your credit score is not just good. Your credit scores is excellent and that’ll definitely help you here. The balance at $10,000, my guess is when you say wonderfully high interest rate, you’re either talking about 19.9% or 24%. The interest alone there is going to cost you a couple thousand dollars over the course of the year. So, we want to get you into a scenario where you are able to pay less than that. My first suggestion would be to look for another balance transfer card. They are still out there. And you will typically have to pay a fee of about 3% on whatever balance you transfer. But that’s $300, and compared to the couple thousand, that is not so much. So, I’d look at that first and then I’d make a plan so that by the time that interest rate expires, you’re pretty close to done with this. The second thing I’d look at, if that doesn’t work for you, is a personal loan. Personal loans charge more than 0% credit cards, but they charge less than credit cards at those high, high interest rates. And we’ve got information on HerMoney.com. We’ve got tables that list personal loans. So, you can go there and you can do a little rate shopping. But you should be able to cut the interest rate by a half to two thirds. And if you can’t get another balance transfer card, that’s the direction that I would go. I’m sort of listening to myself answer this question. And the other option is a home equity line of credit. If you have a home, it is possible to pull equity out of your home and use it to pay that back. The interest rate there will be lower than the personal loan, higher than the 0% credit card. So, I might throw that in the mix. But if you can just get rid of this within a year, I might just do the personal loan, pay it off as quickly as possible and get it done.

Kathryn Tuggle: (37:37)
Fantastic advice. Thanks Jean.

Jean Chatzky: (37:39)
Thank you so much, Kathryn. And keep those letters coming. You know where to find us we’re at mailbag@hermoney.com. And in today’s Thrive, let’s talk about where to find the best deal at Costco. Costco members will often flash their little white cards, complete with the terrible photos, and tell you it’s the best money they ever spent and that they love being part of the club. There’s no doubt that the bargains in-store and online are great, but will a membership really save you money. After all, the annual membership in and of itself is an investment. Here’s the lowdown. Costco, which as we all know, I have a love, hate relationship with, can be a true money saver for you if there’s a location in relatively close proximity to your home, and if they carry items you would normally use. With that said, if you find you don’t visit the store that often, or you have to drive a long way to get there, then your savings may be negligible. Also, it’s important to take a close look at your storage space. A Costco membership can be a great pathway to taking fewer grocery store trips and stocking up on frozen foods. But if you don’t have enough room, it’s easy to overbuy and end up with waste. If you’re considering a membership, at hermoney.com, we have a rundown on all the products on which you stand to save the most money. Here’s a look at a few of them. Gas. Members report saving over a hundred dollars at the pump in just a single year. That, by the way, more than covers the cost of the membership. Kirkland Brands. Buying the Costco brand consistently will save most households somewhere in the neighborhood of $60 annually. For the record, I think I might save that on olive oil alone. Wine. If your Costco has it – my Costco doesn’t have it – but on average, you can say $5 to $12 per bottle, depending on the original retail price of the wine. And if you purchase more than a few bottles a year, again, this can easily cover the cost of membership. Keep in mind, there’s really no risk to give it a try. If you’re not satisfied with your membership, you can cancel at any point for a refund. And if you’re not satisfied with a particular item, they have a pretty good return policy, as well as a pretty good hotdog there too. Thank you so much for joining me today on HerMoney. Thanks so much to Brianna McDonald for the great education on becoming an angel investor and putting our money to work for entrepreneurs and companies that we believe in. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks so much for joining us and we’ll talk soon.


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