It’s no secret that having high credit scores has its advantages getting low rates. Having a high credit score can literally save you millions of dollars over your lifetime by getting the lowest interest rates for a mortgage, zero financing fees on auto loans and credit cards. High credit scores equal low rates.
It’s a catch 22. In order to achieve or maintain a high credit score you have to maintain credit card debt. In order to have good credit scores you must understand what the factors are that impact your credit score. There are specific key points that you must know, understand, and execute.
Know the factors that impact your credit score
- Payment history
- Debt to credit ratio
- Reporting period
- Number of accounts needed
- Opening and closing accounts
- How credit card interest is calculated
- Most important, your credit score and what’s reporting on your credit report
- Understand to get low rates
Payment history – know when your payments are due. Put a post-it on your mirror to remind you when payments are due, out of sight out of mind. Making late payments will make your life very difficult. So make your payments on time.
Debt to credit ratio- the formula for this calculation is to take the amount of debt you owe on one account and divide by the amount of credit extended. Your goal needs to be at 35%. So in a nutshell you should keep the balances of each credit card below 35% of the amount of credit extended. Don’t over extend.
Reporting period- It’s important that you understand whatever balance you have at the end of the reporting period is what will report to the credit reporting agencies. Each credit card reports their information to the credit bureaus at different times.
If you pay your account off every month and it’s paid off before the reporting period, your credit report will reflect a zero balance which suggests you don’t use the account. To sum it up you’ll need to know when each credit card company reports to the credit bureaus and carry over a balance below 35% of the amount of credit extended.
Number of accounts needed – from my experience 3-4 accounts is a good number. Any more becomes difficult to manage and can lead to a life of debt that you’ll never payoff. I have 3 different accounts that I use for general living expenses; one for gas, one for groceries, and one for entertainment. This way I’m able to track my spending on a monthly basis and better budget my money.
Inquiries- the type of inquiry has different impacts. Inquiries to financially extend credit such as credit cards, personal loans, and auto loans will have a negative impact on your credit score. These inquiries are looked at as a negative because you’re trying to increase your debt load and will have a negative impact on your credit profile. If you’re trying to build your credit score, apply for credit cards that you’re guaranteed to receive. Your credit score will increase much quicker than applying for a credit card and not having credit extended. See my tools section for credit cards.
Opening and closing accounts- building your credit is a marathon not a sprint. It can take you years to get your credit score from the 400′s to the low 700′s. Ideally you want to open accounts that you’ll use for life. If you have poor credit then you have to start off with a secured credit, get it done. The terms aren’t favorable and the costs are high, but remember, this is a stepping stone to reaching your goals to get low rates.
Get three secured accounts, follow my instructions above and check your credit one year later. You should be able to qualify for a more favorable account. Don’t apply for the accounts that are offered to perfect credit, because you’re not there yet.
Apply for an account you will get. Once you receive, payoff and close the worse of the three accounts, each year your credit will improve as you open and close an account. Remember, the goal is to open accounts you’ll keep for life that offers low rates, so depending on your credit profile it could take one year to five years to achieve.
How credit card interest is calculated-credit cards use a compound method that calculates the daily balance with the APR and the days in the billing cycle. Your payment is typically 3% of the balance. 90% of the payment will pay the interest.
You will never pay your credit card debt off by making minimum payments. The rule of thumb is to make three times the minimum payment in order to pay the accounts off. The average American has $15,000 in credit card debt. If you’re this person see my tips in the tools section to pay off your credit card debt much faster making the same payment you are now.
Know what’s on your credit report and your credit score- this is the most important part of ‘The Know.’ You should check your credit profile annually. Get a copy of your credit report at www.annualcreditreport.com it's free. In order to improve your credit score and to maintain a high credit score you need to know what’s reporting. Your credit report is a tool to determine your credit worthiness, checking it annually will allow you to ensure your credit isn’t being misrepresented. Collection agencies are the biggest corporate to impacting your credit report. They will report information to your credit report without you knowing.
A real life example is medical accounts. Let’s say you go to the doctor and your visit is covered by your insurance. Your doctor will send the bill to your insurance company to be paid and it doesn’t. Every day that goes by, the debt becomes less and less valuable to the point that it becomes worthless because it’s unlikely it will get satisfied. Enter collection agencies. They buy these debts for pennies on the dollar and set out to collect the full balance.
The best way for them to collect the full payment is to report it to the credit bureaus. If identified early enough it can be easily satisfied and cleared up with little or no damage to your credit rating. The moral of this story is to pull your credit report annually so you can avoid the pitfalls and surprises when applying for financing and will lead to low rates.
This is the easy part, right? Now you know and understand the factors that impact your credit score. It’s up to you to be disciplined to achieve your goals to get low rates. Put it into action, monitor monthly, get a journal and document your actions, and get results. Your hard work will pay off. These are the keys for you getting low rates and saving money. For Questions or comments feel free to contact me.
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