Credit Matters: Raise your FICO Score and Lower Your Payments!

Creditworthiness (definition): The ability to borrow money bestowed on those who need it the least.

Why (and Just How Much) Your Credit Matters

Now more than ever, if you want to spend less and save more, your credit score matters. It matters if you want low-interest-rates on mortgages, car loans, and reduced insurance bills. It matters if you want more cash flow each month. And if you want to improve your chances of landing a job, your credit matters.

To see how much it matters in dollar figures, let’s look at the cost of having “fair” credit versus “excellent” credit. As the MyFico.com website suggests, you might be offered a mortgage rate of 5% as opposed to a rate of 3.5% for those with stellar credit. That will cost you an extra $175.55 per month in principle and interest on a $200k mortgage, a difference of $2,107 annually. And according to Bankrate’s InsuranceQuotes.com, the person with fair credit will also pay 32% more for home insurance, or an extra $154 per year.

Or you might have to take a car loan at 9.9% instead of one at 2.9%. That amounts to an extra $62.87/month on a $20,000 loan, or $754 per year. Add to that higher car insurance costs… the person with fair credit will easily pay an extra 50% or more on their car insurance, or approximately $660 annually, says Wallethub. That can add up… and we’re not even looking at a second car or credit cards!

And let’s not forget to measure the opportunity cost. If you saved $3675 per year and could grow that money by a modest 5% annually, you’d have $48,535 more in your pocket, money that could continue to grow and earn for you.

So while your FICO score may be “just a number,” the nearly 50 thousand dollars a low number may be costing you could be real money in your portfolio.

Even beyond saving you money, healthy credit makes a difference in lifestyle—in the freedom you have and the choices you can make. Credit can determine whether you buy a home or keep renting, whether you can obtain a car loan or not, and whether you qualify for a business loan or stay at your job.

Simply put, having healthy credit is an important step towards financial success! And here are simple strategies and solutions that can improve your credit:

 7 Ways to Raise Your Credit Score

1. Limit and diversify your credit lines.

You want at least two sources of credit, three or four is better. If you have a car loan, a mortgage, and two credit cards (or a credit card and a store card), you are in great shape!  More than half a dozen credit lines won’t benefit your score further, and too much available credit can even hurt it.

2. Keep your debt-to-credit ratios low.

Ideally, you’ll want to keep your balances at or below 30% of your available credit for each credit line. So if you have a card with a maximum credit line of $2,000, utilize no more than $600 to maximize your score.

Be aware that transferring your balances to one card with the lowest interest rate might lower your payments, but if you max out a card to do it, it could actually be a bad credit move. (Plus you’ll pay balance transfer fees that might cancel the savings.)

3. Use your credit.

Although low balances are good for your credit, no balance at all is counter-productive if your goal is to raise your score. Inactive credit cards don’t do much to build credit, so use your credit every few months, and carry small balances into the following month to ensure that the company isn’t reporting a zero balance.

4. Make payments on time.

Nothing will lower your credit score faster than late payments. Defaults are reported to the credit bureaus in 30-day increments, so if you are a few days late, your credit score won’t likely suffer. But 30 days will, and if you hit the 60 or 90-day mark, your score will be impacted more severely.

If you have lates on your report already, just maintain low balances and make payments religiously. Your new good credit behavior will eventually outweigh older mistakes. Consider setting reminders or using autopay.

5. Keep old accounts open.

The longer your credit history, the better! Since your score improves as your credit ages, never close your oldest accounts. You can pay off your balance, just keep the accounts open and use them every once in awhile.

6. Apply for new accounts sparingly.

Too many inquiries or new accounts can lower your score because it can be a sign of financial stress. So don’t collect a bunch of credit cards “just in case” or to try to suddenly raise your credit limits with new accounts—it can backfire. Avoid applying for credit cards for sale perks or airline miles and don’t apply for cards with low introductory rates unless it’s a card you really want and will use.

7. Monitor your credit.

There are many services that offer this. Check out CreditKarma for a monitoring solution that is completely free and surprisingly helpful. The site also offers articles and tips to raise your score, a handy “credit simulator” that helps you predict how certain actions might affect your credit, and easy links to help you dispute inaccurate information.

Three Common Credit Problems—Solved!

Building or rebuilding your credit from scratch?

If you’ve never established credit, or if your credit has suffered from collections, defaults, or even a bankruptcy, you need to establish new credit to show the credit bureaus that you can make regular payments.

If you simply need to build credit, a good place to start can be a store card (such as Target or Sears), or an installment loan for a piece of furniture or a car. To apply for a credit card, visit CreditKarma or CreditSesame for advice about which cards you might qualify for.

If you don’t have an adequate score to obtain a credit card or installment loan, start with a secured credit card. This is a card secured by your own money. (It’s a stupid financial vehicle; you’re literally paying to borrow your own money, which is tied up and not earning a penny in interest, but it does work well to establish a payment history.)

If you are a renter, you can also ask your property management company to report your rent payments. Learn more about this option at Experian.com.

Depending on your circumstances, you may be able to rebuild your credit in a couple of years or less, so don’t be discouraged.

Turned down for a car loan? 

We know someone with “fair” credit who was turned down repeatedly for car loans—until she raised her price range and bought a better car! That’s because financing companies prioritize risk reduction. The nicer and newer the vehicle, the more lenient the lender will be, since they don’t want to loan money on a dented car with 180k miles on it! New or certified pre-owned vehicles are easier to finance because they can qualify for lower rates than older cars. Plus, they are still under warranty and won’t likely saddle a borrower with expensive mechanic bills that could compete with payments.

It is also helpful to make a large down payment, especially if your income is modest. Even if your score is low, if you are making a down payment of 30%, perhaps even 50% or more, you will be seen as a lower risk than someone with no down payment. (Trade-ins can also help.) Even if you can purchase a car with cash, consider financing a small portion of it to build your credit score.

Have collections or judgments?

Judgments should be prioritized and paid, as creditors can invade your bank account or even garnish your wages to collect! If you can’t pay the judgment, work out a payment agreement and stick to it. Tax liens should be treated similarly.

Pay or negotiate all recent collections. (Sometimes you can negotiate to have it removed from the credit bureaus upon satisfaction, which you should get in writing.) Make sure old parking or traffic tickets are paid, as these debts are typically small and not worth the headache they can cause.

With old collection accounts (more than 5 years) that are not being actively pursued, you can actually lower your score by paying them, as it brings accounts with derogatory information current. These accounts may also be beyond your state’s statute of limitations, which you can check here at CreditCards.com. If the time limit has expired since your last payment, you can no longer be sued for these debts (although collectors may still try to collect, you can still choose to pay, and unless the lender agrees otherwise, they will stay on your credit report for 7 years.)

If the creditor is not continuing to report the item each month, it can possibly be removed through a simple dispute process. You can do it yourself online (through whichever bureau is reporting the negative information—Experian, Equifax and/or TransUnion), or use a company such as National Credit Care, which will do the work for you. If the derogatory item is not disputed by the creditor, it will be removed.

If you are applying for a mortgage, be aware that you may be required to pay any collections, but it can often be done at closing, which won’t put you in jeopardy of inadvertently lowering your own score. Consult with your mortgage professional for the best strategy, and never apply for new credit while home shopping!

Credit Score Myths and Realities

MYTH: Checking your own credit will hurt your score.

On the contrary, checking and monitoring your credit only helps you be aware of any problems so that you can keep your credit healthy. Checking your own credit is considered a “soft inquiry.” A “hard inquiry” is when you apply for new credit, and yes, that can lower your score.

MYTH: Your credit score is positively affected by higher income or more savings.

Actually, these factors are not known, monitored, or taken into account by credit bureaus.

MYTH: You must pay to check your credit or your credit scores.

This was mostly true until recently, but there are now some free services that you might find helpful:

• Discover.com now offers a free Credit Scorecard which will give you a new TransUnion FICO score every 30 days, as well as a simple evaluation that might help you improve it. You do not need to be a customer.
• Citibank and Capital One customers will find free credit scores on their monthly statements.
• Credit Karma provides limited credit monitoring, including TransUnion and Equifax Vantage scores (an alternative to FICO with similar scoring) for free.
• You can get a full, detailed credit report from the three credit bureaus for free every year (FICO score is extra) at AnnualCreditReport.com.

We hope we’ve given you some tools and information you can use to improve your credit! If we can answer questions about your finances, or if you would like to increase your cash flow, grow assets outside of the stock market, or protect your loved ones with life insurance (permanent or convertible term) contact Partners for Prosperity today. You can also learn about our “Prosperity Economics” philosophy here.