Did you know having a good credit score can save you thousands of dollars?
Credit scores (or Fair Isaac Credit Score) follow you from job to job and don’t just determine the interest rate you pay on your auto or mortgage loan.
Your credit score also can contribute to whether you are promoted in your job and what kind of a rate you pay on your automobile insurance.
If you have too much debt, you might not get that new dream job. Tweet this
Even utility companies check these scores and decide whether you have to pay a deposit based on the score.
The Credit Card Accountability, Responsibility and Disclosure Act (widely known as the Credit CARD Act) made understanding credit easier but it’s also had an impact on consumer credit scores.
Lenders have cut credit limits, cancelled cards and raised Annual Percentage Rates APRs in order to counteract this legislation. Due to these strategies and the aftermath of the recession, FICO scores of millions of Americans are falling.
According to recent figures provided by FICO, 25.5% of consumers (nearly 43.4 million) now have a credit score of 599 or less, marking them as bad risks for lenders.
It makes it unlikely that this group of people will get credit cards, auto loans or mortgages under the tighter lending standards that banks now use.
These credit ratings can also make the difference between whether you are accepted or rejected for a consolidation loan, as a renter and much more. That’s one of the many reasons it’s important to know your number.
Summary: Why do I need a good credit score?
A good credit score is invaluable to everyone. Here are the benefits of a good score in a nutshell:
Security Clearances – If you are having financial problems, as indicated by a FICO score, then you are a security risk and cannot be allowed to work in certain areas requiring a security clearance such as the military or civilian contractors.
Loans – A good credit score helps you qualify for loans and get faster loan approval.
Interest Rates – Your FICO score is oftentimes the determining factor when it comes time to be assigned an interest rate.
A better rating can help you get a better mortgage rate and could even make the difference between becoming a homeowner versus a continued renter.
0% APR – Have you ever been tempted by the advertisement on a new car, furniture or a new credit card that offers a special “0% APR”?
Few people realize that these kinds of special offers only go to those in the top levels of FICO scores.
If a good credit score holder acquires too many of these kinds of loans, they’ll deteriorate their score. So reserve these for long-term loans such as a new automobile.
So Close and Yet so Far – Sometimes the difference between qualifying and not qualifying for a great deal can be as close as 20 points on your FICO score.
You may say: “So what? I don’t qualify for it, but I can still qualify for a fairly low interest rate.” But it adds up and matters a great deal. The difference on a $20,000 car loan at a 0% APR versus a 7% to 8% APR is around $1,800 over the course of the loan.
Job Applications – Your score can impact whether you get a job that requires high security clearances, such as government and financial sector positions.
Renting – Some people cannot rent a home or an apartment without a good credit score.
Utilities – You can often have your security deposit waived if you have a good FICO.
Insurance Rates – It can affect your insurance premiums. Some auto insurers are using credit data to help determine insurance rates.
In fact, 92 of the 100 largest personal auto insurance companies in the country use credit data in underwriting new business, according to a study by Conning & Co.
Three easy steps to improve your credit score
Step 1: Pay credit bills a day early rather than a day late
Set up online automatic bill pay so that you’ll never be late again. It’s not so much that you are actually paying early as much as it is that you’ll never pay late.
Step 2: Pay attention to proportionality
Keep your charges at 50% or less of the available credit, even if you pay off the card at the end of each month. This means that if you have a $5,000 credit limit, you should never have a balance of more than $2,500.
Step 3: Pay at least $5 more than the minimum each month
Paying extra shows up on your report as paying down your debt which makes your credit score go up!
Not only that, but the more you can pay above the minimum payment, the less you pay in interest charges.
As I’ve mentioned in previous blogs, our family had $40,000 of consumer debt and very low FICO scores at one time. After hard work, we improved our FICO to the point where we qualified for a 0% APR on a new car loan offer.
Our young adult children are creating good scores as well. In fact, our 22-year-old son had a 700+ score when he graduated from college, enough to prequalify for a townhouse mortgage loan.
If we can do it, you can too!
When is the last time you checked your FICO score?