Is anyone else tired of self-proclaimed financial experts claiming credit cards are evil and your credit score doesn’t matter?
Personally, I use credit cards every day and am compulsive about my credit score.
Side Note: I once had my wife call me Mr. 810 after I discovered my credit score increased. A little too much? Probably!
It amazes me some of the most well-respected bloggers/experts want you to ignore your credit score. They say, “don’t worry about it.”
That’s crazier than a Trump-Clinton election.
I understand these gurus want you to be debt free (including your mortgage), but for 95% of people in the real world, that’s impossible. If you fall into the 5% of people that pay cash for EVERYTHING…congratulations. If you are in the other 95%, then your credit score matters!
Your credit score is important because it is a contributing factor to the interest rates you’ll pay on homes, cars, and credit cards. The worse your credit score, the higher the interest rates you’ll pay on your mortgage, car loans, and credit cards (although I agree you should eliminate all credit card debt quickly).
These higher rates may appear minuscule at first glance, but they can cost you tens of thousands of dollars over your lifetime.
Your Credit Score (or FICO Score)
Your credit score is used by lenders to help determine whether you are worthy of a loan and how much they will charge you to borrow that money.
Credit scores range from 300-850 and the higher the better.
It is determined by the following factors:
35% – Your Payment History
30% – Debt Usage
15% – Credit History (how long you have had it)
10% – Types of Credit You Have
10% – Credit Applications
To learn more about your credit score, I created this short video about Credit Scores.
If you are dying to know your credit score, then you are in luck because you can get it free from many places. Here are just a few:
Quizzle.com (my favorite)
Call Your Credit Card Company
How Does Your Credit Score Affect Your Life?
This chart shows the difference you’ll pay over the life of a mortgage based on different credit scores.
Look closely because you’ll notice someone who has a near perfect credit score will pay about $80,000 less than a person with a horrible credit score for the same $250,000 house.
If you have a bad credit score think about how much more you are paying for your house and your car. If you have credit card debt, then you are paying more interest on that too!
The difference between an excellent credit score and a below average credit score can be over $100,000 during a lifetime.
Still, think your credit score doesn’t matter?
How to Improve that Score
Luckily with some diligence and hard work you can improve your credit score. Sometimes it can be done very quickly.
The first thing you can do to improve your score is to focus on credit usage. This is the fastest way to improve your score and it accounts for 30% of your score.
Your credit usage is how much debt you have outstanding vs how much is available.
For simplicity, let’s assume you have $1,000 of credit and you currently have $800 on that card from items you purchased. This means your usage rate is 80%.
Ideally, you don’t want your usage rate to exceed 30%. If you can reduce the usage ratio on your credit cards, then you will increase your score.
You can do this a couple of ways:
1) Pay down the debt (the best way)
2) Ask your credit card company to increase your limit
3) Open up a new card (least recommended)
Another way to increase your credit score is to make sure you pay your bills on time. Your payment history makes up 35% of your credit score, so take it seriously.
This doesn’t mean you need to pay the entire balance (though you should). You just need to make the minimum payment by the due date.
This includes all of your credit cards, student loans, mortgages, car payments, and anywhere else you owe money.
If you are irresponsible, then you should do two things:
1) Set up automatic payments for all of your bills
2) Set reoccurring reminders on your phone to pay bills
You won’t see an immediate impact from doing this, but your score will start to increase.
Finally, if you have had a late payment and your credit card company reported it; then ask them to remove it. If you don’t know how then I recommend checking out this article by Ryan Greeley.
Obviously, a bad credit score doesn’t make you a bad person (just a lazy one:), but it does have a major impact on your financial life. If you want to save tens of thousands of dollars, then take the time and effort to ensure your credit score is above 750.
It really does matter;)