Although improving your credit score may appear to have nothing to do with saving money, it can help in many ways, such as lowering your insurances rates and even your utilities.
So, if you’re serious about saving money on recurring expenses in your life, then you should understand how credit scores work. This will make it much easier to save money in ways you may not have considered before.
What Is a Credit Score?
Your credit score is also referred to as your FICO score– because the Fair Isaac Corporation (FICO) figures it out for you. This score is used by lenders to decide on how likely are you to default on a loan. Even if they do decide on approving your loan, they use a percentage system to figure out the risk of the loan. The higher the estimated risk, the higher your interest rate will be.
After your loan application, the lender will pay Transunion, Experian, or Equifax a fee to get your credit report.
As an example of how the interest rate works and how much you can save if you have good credit, let’s look at your costs if you were to get a home loan.
How Much Can You Save?
If you decide to buy a home on a 30-year fixed mortgage for $200,000, your credit score will determine your interest rate.
· If your score falls within a range of 620 to 639, your interest rate will be 5.5%.
· If your score falls within a range of 640 to 659, your interest rate will be 4.9%.
· If your score falls within a range of 660 to 679, your interest rate will be 4.5%.
· If your score falls within a range of 680 to 699, your interest rate will be 4.3%.
· If your score falls within a range of 700 to 759, your interest rate will be 4.1%.
· If your score falls within a range of 760 to 850, your interest rate will be 3.9%.
At first blush, this may not seem that impressive. After all, if your score was 800, you would be paying only 1.6% less than if your score was way down at 630. However, although the difference between 5.5% and 3.9% is small in terms of percentages, it’s big immense when you’re talking about the total cost of the home.
Over 30 years, a score of 800 would cost you $139, 684 in interest for your house. However, a score of 630 would cost you $208,356 in interest. You would be paying $68, 672 more. For that amount, you could have invested the money in a franchise, mutual funds, or a college degree. Your return on your investment would earn you more than enough money to buy a second home!
How FICO Calculates Your Credit Score
Now that you understand what a credit score is and how it can save you big money, you’ll appreciate why it’s a good idea to search out reliable credit repair companies online and leverage their services to improve your existing score.
FICO reviews five aspects of your spending habits when calculating your credit score, and it weighs each one slightly differently.
· 35% of your score is based on your payment history.
· 30% of your score is based on how much you owe.
· 15% of your score is based on the length of your history.
· 10% of your score is based on how often you apply for credit.
· 10% of your score is based on the types of credit you’ve applied for.
Together, these five variables make up 100% of your score.
How to Improve Your Credit Score
So what can you do to get a better score?
Here are 10 techniques:
1. Pay off everything on time: this includes not just your credit cards, mortgages, and utility bills, but even things that can get marked on your credit card like parking tickets and library dues. People have hurt their credit scores by not paying for their overdue library books! Although this may seem petty, FICO uses whatever it can to measure your financial responsibility.
2. Avoid impulse purchases on credit. If you make too many purchases in a month, it will add up and you won’t be able to pay your credit card bill.
3. If you do fall behind and a collections agency calls, then pay it off quickly, but be sure to negotiate to have the negative item removed from your credit report if you pay in full.
4. If you don’t have enough money to pay all your bills, then prioritize your payments. Focus on those that you can pay in full, and then those that have the longest overdue date.
5. If a store offers you a credit card, accept it, but also find out how to close the account. Now, you have to do two things: first, close the account later that day; and second, pay the bill when it arrives. This will register as an “on time” account on your FICO report.
6. Avoid incurring expenses, taking out loans, or in racking up your credit cards any other way. This way, you won’t fall behind.
7. Avoid carrying a balance from one month to the next on any item on your credit card. While this revolving account will not upset your credit card company, who only care if you don’t pay the minimum balance, it will hurt your credit report.
8. After you have used your credit account for some time, call your credit card company to ask to increase your credit. However, don’t use this increase. A larger volume of available credit will decrease the proportion that you’re currently using. A half full glass of water will only look quarter full if you pour the water into a bigger glass.
9. You can also increase the number of credit cards, but hardly use them, and pay back what you do borrow. Again, your proportion of available credit will appear large compared to the credit in use. A caveat: do not open up too many cards in a short period of time. This is often interpreted as a sign of financial desperation.
10. With good credit, you will acquire quite a bit of credit from different sources. However, use all your credit cards sparingly. While, you have to show some form of active use, you also want to establish a reputation for constraint, thriftiness, and financial responsibility.