You probably know your credit score is important, and you may even have an idea what your “number” is. But many people don’t focus on their credit score until they need it. By not focusing on your credit score earlier, you’re overlooking a chance to create a solid asset that you can leverage for the major (and sometimes minor) life decisions.
A Good Score Is A Good Investment
Your credit score is not just used for the big things like a house or a car – it’s something any type of creditor will check, from a landlord to a cellphone carrier. While you may not be completely denied because of a lower score, you will be charged higher interest rates. Personal finance company Credit Karma has analyzed interest rates and determined that the cost differential over a lifetime between someone with Good credit and someone with Excellent credit is more than $60,000. The cost of Poor credit? More than $200,000*.
High credit scores indicate to lenders that the loans will be less risky. Because of this, lenders are willing to compete for these lower-risk loans by offering lower interest rates.
Credit Score vs Credit Report
Your credit score is different from your credit report. To create your credit report, each of the major credit reporting agencies (Transunion, Experian and Equifax) collect data on you from various sources, including companies, lenders and court records. The reporting agencies then package it and resell it to businesses that request your consumer credit report. These reporting agencies are required to provide you with a free copy of your credit report every year, but they aren’t required to provide you with your credit score.
Your credit score is produced by the Fair Isaac Corporation “FICO” or by VantageScore. These data analytics companies have developed proprietary techniques for analyzing individual credit reports and determining consumer credit risk. They report a standardized score between 300 and 850 that is a benchmark of creditworthiness. Credit scores can be purchased from any of the credit reporting agencies, or directly from FICO. They are relatively inexpensive, about $15.
The chart below details the range of credit scores, sorted by credit worthiness.
Making Your Credit History into An Asset
If your score isn’t in the “Good” or “Very Good” range, there are several things you can do to improve it.
- Consistently pay your bills on time. Even one late payment more than 30 days after your due date can damage your credit score.
- If you don’t have enough of a credit history, you can improve it without taking on additional debt by taking out a credit-builder loan. This type of loan places the money you borrow into a certificate of deposit or savings account that you can claim after you make 12 monthly payments.
- A secured credit card is a similar idea it gives you a line of credit equal to an amount you have on deposit with the issuing bank.
- Keep your debt below 30% of your credit limit on your revolving accounts, like your credit cards.
The good news is that following these measures can improve your score very quickly – even just a few months or a year can raise you into the next category. Your credit score can turn into an asset that can help you make more money over time by paying less in interest. And if you have older things that aren’t so positive? Don’t worry, as long as you keep payments current, they will age off your report in about three years. Pretty soon you will be turning the vicious cycle of paying additional interest into the virtuous cycle of saving and investing.
*As of 2015
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.