(ThyBlackMan.com) For a $500,000 home, the difference between a 760 and a 620 credit score could cost you more than $150,000 in additional interest payments, over 30 years, due to higher rates! This is an example of one cost savings and there are several more below.
Credit vendors, banks, landlords, etc. use our credit scores to evaluate our credit worthiness. Your creditworthiness is the likelihood you will pay your debt or NOT.
Our credit score is rated numerically from a low of 300 (Bad credit) to a high of 850 (Tap-Dancing Credit), based on YOUR CREDIT records.
Three credit bureaus collect and analyze our credit history and sell both the report and credit score to merchants. The three credit bureaus, (Equifax, Transunion, Experian) calculate your score, using FICO analysis. FICO, is a data analytics company focused on credit scoring services. FICO reviews/analyzes five different factors:
- Your Payment History- Do you pay on time?
- Your total debt owed to all merchants.
- How long you have had EACH credit line.
- How much recent credit you have acquired.
- The types of credit you have.
TYPES OF CREDIT
- Installment loans, including auto loans, student loans Furniture purchases, etc.
- Mortgage loans
- Bank credit cards (VISA, MasterCard, American Express)
- Retail (Sears, Home Depot, etc.)
- Gas cards
- Unpaid loans taken on by collection agencies or debt Buyers
- Home Rental data
Unpaid accounts that have gone into collections will also appear on a report and negatively impact your score.
Although the three credit reports typically include similar types of information, the data collected by each credit bureau can vary.
FACTORS THAT NEGATIVELY IMPACT YOUR FICO/CREDIT SCORE
- Late payments
- Max out your credit cards. Large amount of debt or high credit utilization rate. {Example: Your JC Penny’s card has a line of credit for $7500 and you owe $7500. You have zero credit availability on this card.}
- Large number of credit cards.
- Having only one type of credit. See above types of credit. {ALL THINGS BEING EQUAL, CONSUMERS WITH A ‘MIX’ OF CREDIT TYPES ON THEIR CREDIT REPORTS TEND TO BE LESS RISKY THAN THOSE WHO HAVE EXPERIENCE WITH ONLY ONE TYPE OF CREDIT}
- Bad debt-where you have stopped making payments (Mortgage loans, College loans, etc.)
GOOD CREDIT SCORE YIELDS THOUSANDS OF DOLLARS IN SAVINGS!
- Low interest rates on credit cards and loans. If you have a good credit score, you almost always qualify for the best interest rates and you pay lower finance charges on credit card balances and loans.
- Better chance for credit card and loan approval.
- More negotiating power. …A good credit score gives you leverage to negotiate a lower interest rate on your credit card or new loan.
- Banks are more willing to let you borrow more money because you pay back what you borrow ON TIME.
- Easier to rent an apartment or home. As a landlord, my management firm always examines a tenants’ credit score. I decline to rent to those with low scores as experience has taught me I will often be forced to evict.
- Better car insurance rates. Insurance companies claim that people with bad credit tend to file more claims and these people are penalized with a higher insurance premium. With a good credit score, you pay less for insurance than similar applicants with lower credit scores.
- Get a cell phone on contract with no security Another drawback of having a bad credit score is that cell phone service providers may not give you a contract. Instead, you’ll have to choose one of those pay-as-you-go plans that have more expensive phones. People with good credit avoid paying a security deposit and can get hundred-dollar discounts on the latest phones by signing a contract.
RAISING YOUR SCORES
Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company.
Ensure that the information on all of your credit reports is correct and up to date. Agencies make mistakes. Review each line item and report any errors to the credit agency that made the error. (Equifax, Transunion, Experian)
STEPS TO IMPROVE YOUR SCORE
- Get a credit card or more cards. People with high scores have on average seven (7) cards! This includes open and closed cards, and accounts carrying and not carrying balances. Look for credit cards with no annual fees (example- JC Penney’s, Home Depot, Exxon Gasoline, etc)
- You want a low credit utilization rate. To calculate your credit utilization ratio, divide your total balances by your total credit limit. {Example – You have several credit cards with a maximum credit limit of $100,000 and owe $1,000. Your credit utilization rate is $1,000/$100,000 = 1 percent. Or you have $100,000 of credit and owe $100,000. You have a 100% credit utilization rate and will struggle to get more credit.} The higher your credit utilization rate, the lower your FICO score and subsequently you pay a higher interest rate for credit.
- Ask for a credit increase on your card(s). Most credit cards, as
long as you are a good customer who pays ON TIME, will increase your credit limit. When I was traveling 75% of the time on business, I quickly realized my preferred travel credit card, Costco Visa, did not offer me enough of a credit line. I made one phone call and the representative increased my credit line by $10,000. Because I was a good customer and paid my bills on time. - Get Multiple Types of Credit Cards (Gas, Merchant Store, American Express, etc.) Again look for ZERO annual fees}
- Keep your monthly balance on your cards below 5% of your credit limit.
CONCLUSION
Unless you are a millionaire, having credit is a necessity. Having a good credit score will help you save money and make your life much easier. Good or Bad credit affects most financial decisions: Buying a car, buying or renting a home, getting loans and opening new lines of credit require credit score reviews by the people or companies who can grant you credits.
We all see the car advertisements for zero percent interest. But to get zero percent you must have a good credit score. How much will you save on a $30,000 loan for three years at zero percent, versus eight percent? Two thousand eight Hundred and fifty six dollars ($2,856) is the answer. There are high interest credit cards for people with low scores, so you may pay 25% versus the normal 18%. Why? To offset the risk of bad credit. When you loan money to people with low credit scores, you know a higher percentage of those customers will default.
Here is the good news if your credit score is low, you can repair it overtime. Do NOT hire a credit score fixer company, as they will do the exact steps you can do on your own!
Staff Writer; Styron Powers
One may visit this brother over at; Powers Investments Management and also connect via LinkedIn; S. Powers.