One of the most overlooked areas to becoming wealthy is a good credit score range.
Why does a good credit score range impact your financial plan?
In a nutshell, the better your credit score, then the less you’ll pay for the big purchases in your life; like your cars and house.
In this post we’ll go over the following:
- A Good Credit Score Range
- How Your Credit Score is Calculated
- Why is Your Credit Score so Damn Important?
- How to Improve Your Credit Score
A Good Credit Score Range
A good credit score range and credit report is imperative to becoming wealthy and often an afterthought from many experts.
Unfortunately, few people understand what’s a good credit score range or how it’s calculated.
Your credit score, often referred to as your FICO score because it was created by the Fair Isaac Corporation, is a range between 300-850. This number represents your risk to potential lenders.
I know…this may be boring, but stay with me because it’s essential.
Anything under 700 is a risk to lenders, which means the interest rates you pay on loans, credit cards, and most credit accounts are much higher. The lower the score, the higher the interest rate.
A good credit score range goal is 760-800.
Getting your credit score is almost as easy as getting a library card. And like a library card, it’s usually FREE!
Personally, I use Kredit Karma to check my score.
Another thing you probably want to take a look at while you are getting a handle on your credit is your credit report. Your credit report gives you a summary of all of your debts, open credit cards, closed accounts, and your payments.
This report helps give lenders (bank) an idea of how much debt you have, whether or not you pay your bills on time, and any credit inquiries. They also use this to calculate your debt-to-income ratio.
Your debt to income ratio is all of your monthly debt payments (i.e., car, credit card payments student loans, etc.) divided by your income.
Let’s look at this example:
Car Loan #1 – $350
Car Loan #2 – $400
Student Loan – $350
Credit Card Pmts – $500
Total Monthly Payments = $1,600
Total Monthly Income = $12,500
Debt to Income Ratio = 12.8%
Typically when you are trying to get a mortgage, your lender will look at your credit score, credit report, and debt to income ratio. To get the best interest rate, then your lender will want the following:
- Credit Score of 760 or higher
- Credit Report showing good payment history
- Debt to Income Ratio of less than 35% (including the mortgage payment)
In the example above, this couple could theoretically qualify for a mortgage of $2,775 per month.
How is Your Credit Score Calculated?
Unless you enjoy geeking out on personal finance, chances are you haven’t explored how your credit score is calculated. We roughly understand how the score is calculated, but the exact science is as tightly sealed as our nuclear codes.
Here is what we know:
It is a combiniation of basically your payment history, how much you owe vs how much credit you have available, credit history, types of credit (i.e. auto loans, credit cards, etc) and new credit.
Maybe you don’t think any of this matters because you don’t need to borrow money now. Well, perhaps that’s true, but who knows what will happen in six months or a year.
As with anything in life, if you wait until you need it, then it will probably be too late.
Don’t wait! Understand your credit score and work on getting it to as near perfect as possible.
Your score won’t improve overnight, and it takes time and consistency.
Why is This Damn Score So Important?
Again, those with a good credit score get the best interest rates.
Let’s say you want to get a mortgage right now, today! You’re looking to finance $300,000.
Here is a list of current mortgage rates with a corresponding credit score and monthly mortgage payment from myfico.com as of 3/37/19 (excluding taxes, insurance, and any PMI):
Obviously, these numbers should be an eye-opener, if you thought credit didn’t’ matter.
Someone with a good credit score range (760-850) would pay $1,376 per month for their mortgage, but someone with a decent credit score (680-699) would pay $1,445 per month.
Although this is only a difference of $69 per month, it’s a difference of $24,840 over 30 years. If you invested that difference every month, then it would be worth over $100,000 in 30 years!
If you had a horrible credit score in the 640 range, then you’re paying $183 a month more. That money invested in a Roth IRA over 30 years could be worth nearly $275,000 tax-free!!!!
Learn how to invest that extra money: Best Way to Invest Your Money.
This same principle goes toward buying cars too. I understand it would be great if we all bought cars with cash, but it’s not always possible.
The next best thing is to have a good credit score, so you get better rates.
How to Improve Your Credit Score
If you want to improve your credit score here are 5 Quick Tips:
- Pay Your Bills on Time – You don’t necessarily need to pay your bills off, just pay them when they’re due
- Keep Your Utilization Rates Less than 30% –
- This means if you have a credit card with a $10,000 line, try to have less than a $3,000 balance.
- If you have two cards that each have a $10,000 of available credit, but one card has $6,000, and the other has $0, then transfer $3,000 to one card. Now each card has a 30% utilization rate!
- Keep your cards open because closing cards deletes credit history and lowers your utilization rate
- Could reduce your credit score
- Don’t apply for every store credit card available (i.e., Gap, Kohl’s, etc.)
- Feverishly trying to pay off your lines of credit and credit cards
Some “financial” gurus boast credit scores don’t matter. Well, that’s complete BS!!! You saw how having a good credit score range can increase your retirement savings by nearly $275,000 over 30 years!
A good credit score range is imperative to getting wealthy. Do the smart thing…get into the 760 Credit Score Club and you’ll thank me!