If someone offered you free coupons for all the biggest purchases you’ll make in your life, saving you loads of cash, would you take it? Of course you would. Why then, do so many Americans neglect their credit score?
Having a good credit score is like having the world’s best coupon book for all of life’s major financial transactions. Not only will it open doors for you to qualify for things like home loans, auto loans, private student loans and credit cards, but the better your credit score is, the better the “deal” you’ll get – and that all translates to money in your pocket.
[Free Resource: Check your free credit report and score]
For example, let’s say you buy a $250,000 home. With 20 percent down, you’ll need a home loan for $200,000. Check out the difference in interest rate and payment with a mere 44 point difference in credit scores:
Credit score: 722
Mortgage interest rate: 4.990%
Monthly mortgage payment: $1,072
Credit score: 678
Mortgage interest rate: 5.375%
Monthly mortgage payment: $1,119
In 360 months – the length of a typical home loan – the better credit score in the above scenario saved the first borrower $16,920!
Clearly, it pays to have a good credit score. Here’s how to improve your credit score so you can access the best deals on life’s largest purchases:
1. Pay all of your bills on time every month.
If your credit score is under 700, chances are you’ve missed a payment in the past. Missing monthly payments is one of the worst things you can do to your credit score. That’s because payment history, or how reliably you’ve paid your bills on time in the past, makes up roughly a third of your credit score – more than any other factor. If you work on only one thing to improve your credit, this would be it.
2. Use a small percentage of your available credit.
The second largest piece of your credit score is “credit utilization,” or the percentage of credit you use (balances) compared to the amount of credit that’s available to you (limits). If your credit utilization rises above 50 percent, your credit score will suffer, according to Ed Deshields, President of CE Analytics – the company that created the CE Credit Score. So keep balances low and avoid accumulating charges on credit cards with low credit limits.
Nearly 80 percent of credit reports contain an error, according to a survey by the U.S. Public Interest Research Groups – and errors can take a toll on your credit score. That’s why it’s important to check your credit report regularly and dispute any inaccurate information that you may find. You can get a free copy of your credit report and score, plus the ability to dispute errors online, at Quizzle.com.
4. Avoid applying for numerous new credit lines in a short period of time.
Another part of your credit score is new credit, which includes the amount of new credit inquiries on your credit report, which occur any time you apply for credit. While there are built-in protections to limit the number of inquiries to your credit report when shopping for a home loan or auto loan, that’s not true of credit cards. Each time you apply for a new credit card, your credit score will take a hit – about three to five points. Avoid chipping away at your credit score by limiting how many credit cards you apply for in a short period of time.
5. Don’t close credit card accounts you don’t use.
When you close a credit card account, you’re decreasing the amount of credit that’s available to you (credit limits), which impacts your credit utilization. Remember – credit utilization is how much credit you use compared to how much credit is available to you. If you continue to use roughly the same amount of credit, but have lessened the amount of credit available to you, your credit utilization will go up and your credit score will go down. Instead of closing credit cards, put them to good use and charge small purchases on them to keep them active.
Note: If your credit card carries a fee, you may want to weigh the hit to your credit score by closing the account against the cost of keeping it open. The short-term impact on your credit score may not be worth the price tag that the card carries.
When it comes to improving your credit score, there are no fast fixes. Real credit improvement takes time, patience and consistent smart use of credit. So stick with it, pay your bills on time and be responsible. With time, your credit score will rise and you’ll begin to enjoy the benefits of good credit.
Related articles from the Quizzle Wire:
- 5 Ways to Protect Yourself from Identity Theft
- How to Build Credit in 6 Easy Steps
- 10 Credit Score Facts and Fictions
- The 7 Worst Home Improvements to Make
- 11 Budget Planning Mistakes to Avoid