How Having Great Credit Can Be Powerful
Credit scores are considered a tool for financial needs, but how good the score is will determine whether it is a simple lever or a sledgehammer.
You can use your great score to score a great deal, on everything from credit cards and loans to even cell phone plans. Having a bad score can lead you to pay more on your purchases or missing out completely.
The cost of having a higher interest rate from a poor or even mediocre credit score can hit or go beyond six figures over the course of your life. For example, using the rates that Informa Research gathered:
A person with a FICO score around 620 will end up paying 65 thousand dollars more on their 200 thousand dollar mortgage than someone who has a FICO score over 760. (FICO scores are usually measured on a scale between 300 and 850)
On a 30 thousand dollar auto loan over 5 years, a buyer with lower score will pay 5 thousand dollars more.
A home equity loan of 50 thousand dollars over 15 years will cost a low scoring person over 20 thousand dollars more.
Since credit scores are used in so many aspects of a person’s financial life, it is worth the time to manage and understand your score and how your actions will impact the number. Regardless of your income or how old you are, it is possible to build and take care of great credit.
A quick fact: Most people have more than one score. These scores can change often. Your score can also change depending on which formula is used for scoring, as well as which credit bureau gave the information that was used to determine the score. If you want to keep track of how your credit score changes over time, the score you monitor should be the same type and from the same bureau. You don’t always have to pay to get your score. You can often get your FICO score or your VantageScore free from your bank or the company which issues your credit card. You can also check financial sites like NerdWallet, where you can get something like a VantageScore 3.0, a measurement similar to a FICO.
Once you learn more about your credit score you can:
1) Build up your credit without building debt.
Millions of people out there don’t have a credit score at all because they never used it or haven’t used it anytime recently enough to generate a score.
If you don’t have any credit, a good first step would be to apply to get a credit-building loan. This places the loan money into a savings account you cannot claim until you make 12 payments on time each month. Many financial institutions like credit unions offer credit-building loans, as well as online lenders like Self Lender.
Another way to build up your credit is with a secured credit card. This is a card which is issued with a credit line matching the amount you deposit into the bank.
Once you have established a score, you can use online credit score simulators to see what type of actions will hurt it or help it.
2) Improve your credit using good habits.
If you want to improve your score, you have to pay your bills on time. This is the most important factor.
Another important factor is credit use that is regular but light. Know what your credit limit is and don’t charge more than 30% of your limit.
Pay off your balances in full. You shouldn’t carry debt if your goal is to improve your score. If you do have a balance that you carry, try to get it paid down as soon as you can.
Try not to close any accounts if you want to grow your credit score. Once you have a high score, such as 760 or higher, you can close an account without doing major damage, but you should keep your credit cards with the highest limits open.
3) Maintain and take care of your credit score.
Once you have a good credit score, considered 690 or higher, you can lose a lot if it goes down.
One missed payment can take your score down 100 points or more. To prevent any inadvertent lapse, consider putting your credit payments on automatic withdrawal.
Having an account in collection or a judgment from a lawsuit against you can also lower your score. Keep your medical bills current, since they can be put into collection without much notice.
Another good reason to keep an eye on your credit report is the potential for identity theft. You can get information on your credit report, updated weekly, on a site such as NerdWallet. You can also get a free report from each of the three major credit agencies once per year. Not all of your information will be the same at each bureau, but most of it will be.
4) Use good credit to your advantage.
Once you have gotten your score up to 700, you will be considered a favorable risk. Once you reach 760, you become ideal. You can expect to see the very best terms and rates that lenders offer, as they will compete to get your business.
Reconsider which auto insurance you use as well, as improved credit can lead to better rates. If you have been with your current insurance provider a while, they may not have rechecked your credit since it has improved. You can ask for them to check your score again. This is also a good time to shop around.
With the amount of money you can save, you can also make a bigger impact on other financial goals you may have, such as retirement, emergency funds, or eliminating debt.
That is how powerful a great credit score can be. Instead of having to beg providers for a loan that you pay too much for, you will have plenty of options to help you get ahead.