Did you know that your credit rating can have a major impact on how you save money? It gives lenders an overall picture of how likely you are to uphold your agreement. If you have a lower score, lenders worry about late payments or having to send you to collections. Overall, the better your credit rating, the more money you can save!
You’ve all heard car companies advertise 0% APR (interest rate), but did you know that these offers are credit-dependent? A customer with a credit score around 750 could pay 0% interest on a new car, but a customer with 620 may be paying 10% or more! This difference could cost $50 or more per month, depending on the length of the loan and the price of the car.
Credit cards are another way that consumers with excellent credit are rewarded. I recently opened a new credit card with a $12,500 limit, 0% APR for up to 18 months, no annual fee, and 2% rewards on all purchases. Compare this to my friend with a credit score of 599: He had to have a cosigner, has a credit limit of $500, a $50 annual fee, and an interest rate of 25%!
When we bought our house, our mortgage rate was 7.1%, higher than the average rate of 5%. We resolved to improve our credit rating then and there. Two years later, we had both improved our ratings to "excellent.” We contacted our mortgage company to ask about refinancing. They charged $400 but dropped our interest rate to 5.4%! This drop in interest saved us $200/month! We decided to keep our monthly payment the same, applying that extra $200/month to the principle and will pay off our mortgage 7 years early. That will save us over $100,000! Check out this mortgage calculator, plug in interest rates and early payoff options to see how much you could save.
If you are a renter looking for an apartment, landlords may run a credit check. They may charge a higher rent, require a larger security deposit, require several months rent in advance, or may refuse to accept you as a tenant, based on your rating.
Now that you know why it's beneficial to have a higher credit rating, how do you go about improving it?
The Federal Trade Commission allows access to a free credit report every 12 months. You will need your social security number and will be asked several credit-related questions. The free report does not include the actual credit score, but you can buy it for a few dollars. You can figure out if your score is high or low based on the number of negative factors versus accounts in good standing. With your negative factors identified, take some basic steps to improve them. Some of the most common are:
- Short credit history. This is inevitable if you are young or have not had the opportunity to use credit. My credit history is 12 years and still considered short. If you've never had a credit card, open one judiciously, and use it wisely. This means paying off the card every month, and never using more than half of the available credit limit. You may want to start with a store card where you shop regularly that allows you to pay off the card right there in the store.
- Late or missed payments. Never make a late payment. New credit laws allow card companies to increase your interest rate up to 29.9% or higher after just one late payment! Set up automatic payments so you never have to worry about forgetting a due date. Make sure your bank account balance is sufficient to cover the payments, or you will get fined for both a late payment and an overdraft on your bank account. If you happen to miss a due date (let's face it, this can happen to the most well-intended person), call the company as soon as you realize it. Politely plead your case. If this is your first late payment, the customer service personnel are usually understanding and will waive the late fee to prevent a negative report to the credit agencies.
- Accounts in collections. If your credit report shows accounts sent to collections, contact the companies to resolve the issues. You may have had a roommate in college who never made the last payment to the cable company, but your name was on the account. Unfortunately, you're still responsible. Set up payment plans to eliminate this factor on your report. This process may take months or years, but be persistent.
- High debt to credit ratio. Let's say you have two credit cards with a limit of $5000 each and a total balance of $2500, plus a car loan that was $20,000 with $5000 of it paid off. Your debt to credit ratio is $17,500/$30,000. The lower the debt and the higher the available credit, the better your score. So, put those credit cards in the freezer, use your coupon savings to pay down your debts, and watch your credit score rise.
Credit ratings won't increase overnight, and it will take hard work and dedication to make significant improvements. Stick with it, and watch the new opportunities unfold! Just be careful to use your new credit wisely.
This has been a guest post by Melissa from Whitney Point, NY
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