For years you have either heard or read about the importance of maintaining excellent credit in order to receive better rates from lenders.
If we ask 100 people “What factors create a good credit score?” the chance of receiving at least 90 different answers is high. You may say “Keep a low balance” while your best friend might respond with “Don’t open any credit cards and pay everything with cash”. Since this subject needs further clarity, Better Credit offers you this article, which highlights the 4 Key Steps to maintaining excellent credit as well as provide an answer to the question above.
What is an Excellent Credit Score?
First let’s review what credit scores are. Credit scores are a generated by financial institutions in order to set lending guidelines to borrowers. Therefore those who lend you money use these numbers to determine how much you can borrow and for how long. So, if you need to borrow $300K, the lender may give you $300K with interest. This interest could mean that instead of paying $300K, the amount borrowed, you pay $350K.
The higher your credit score is to 850, the lower amount of interest you’ll have to pay. Your score impacts what lenders such as car dealerships and mortgage brokers will require from you. There are two ways to view credit scores: from the stance of a lender or from the perspective of a customer.
The lender will verify multiple data points and use the information to create a story or probability that you will be able to repay the funds they provide. Whereas consumers think of credit scores as a specific number. Throughout this article we will address both sides. Any time credit card companies solicit their programs to you, consider that several factors make up your credit score.
Lenders checking into your credit history may find that you’ve made timely payments yet have several credit cards, which may reduce your score. It’s important for you to maintain a sense of what an excellent score is and work towards increasing it to the 780 range. Your credit score indicates if you’ll get the best loan amount and interest rates from lenders.
Do you know your credit score? It might surprise you that most people do not know what their credit score is and how it might be affecting their daily lives. Whenever you make a purchase where you need to obtain financing, your credit score is the key indicator of how much you’ll be awarded and the overall price you’ll need to pay. At Better Credit, our goal is to educate you and ensure you have a goal of increasing your score to at least 780.
We use a score of 780 because this places you in the best situation, in the minds of lenders, to obtain lower interest rates and better terms than a borrower with a credit score of 680 or even 700. Every point matters to financial institutions so the sooner you can begin to increase your scores, the more money you will save. You are after the best possible deals. This means that you focus is on elevating your score so that you can obtain preferred lending and approach financial institutions with confidence.
A good credit score ranges from around 680-740, according to Credit.org, so that means in order to maintain an excellent score, you’ll need to follow the 4 Key Steps below.
How to Get and Maintain a Great Credit Score in 4 Key Steps
Credit rating systems structure their points based on whether lenders receive timely payments and if the borrower maintains an overall low balance. The following 4 major points will guide you towards a clearer understanding of how credit bureaus monitor and construct your credit scores.
- Keep Low Credit Utilization
Typically, there are two primary factors that keep your credit score low: late payments and high utilization or debt to credit ratio. The combination of delinquencies with multiple lines of open credit ruin credit scores the longer they are left unpaid. If you have 5 credit cards with a $10K spending limit and on each card you owe around $9K, lenders call this high utilization.
In addition, the Fair Isaac Corporation (FICO) reports that this factor is their main method to determine what you’ll pay in interest rates. Better Credit recommends you keep all of your credit balances well under 30% of your total credit limit. So, if you have five cards with a total credit limit of $30,000, maintain an overall balance of $9,000 or less.
Use the same rule for your overall credit limit and credit utilization. If you have a total of $30,000 in credit limits and your utilization across all cards hits 30 percent ($9,000k) then your scores drop. Since credit bureaus look at the utilization for each card as well as your overall utilization, be mindful of both. A good method for doing this is to use free software like Credit Karma. Their platform allows you to quickly access your total utilization ratio and provides you with free access to both the TransUnion and Equifax reports for each credit card you owe.
- Avoid Late Payments
Another major factor in increasing your credit scores is paying it on time every month. We suggest the fastest way to manage this is to set automated payments with your bank or the lender. Program the transactions to pay off your entire balance before the due date. This ensures you pay on time and keeps your balance to $0.
On the other hand, missing the payment date by a couple of days will not negatively affect your credit score. The score drops once 30 days pass beyond the due day. Therefore the longer you avoid paying, the larger it will impact your credit score. All delinquencies stack upon the other which send your score in a downward spiral.
- Apply for Credit Cards Only When You Need It
Your credit history is verified with each new card you open. The lending community calls these checks “hard inquiries”, which lowers your credit scores anywhere from one or two points. Of course these points are removed within 2-3 years, however if you do not need a new credit card for an emergency purchase, you’re better off paying cash or leaving without making the purchase.
Our research finds that larger purchases are made during the holidays and stores are trained to ask shoppers if they’d like to apply for an in-store credit card. Now that you know with each new card you open your score is reduced, consider if that new card is worth the “hard inquiry”.
When a company offers you a new credit card or line of credit for your new business, often times they are not providing you with a real “deal”. It’s a potential burden in disguise. To add, if you’re credit history is inaccurate, any purchases you make with this card will accrue higher interest rates.
- Find and Eliminate Errors
The Federal Trade Commission (FTC) reports on average nearing 5 percent of consumers find errors on their credit report. This is why we stress the significances of verifying all of your credit information regularly. If approximately 25% of people have errors on their report, lenders may be charging higher interest rates than necessary.
If you’re uncertain how to check your credit history for errors, use Credit Karma. This site reveals each of your loans and your payment history. The main reason we recommend Credit Karma to our clients is because they offer links on their site so that you can easily file a dispute with the credit bureaus if you find incorrect information.
The reason why Better Credit works so well is that we work for you. We are able to perform what’s called a “Direct Dispute,” with your previous lenders, which is a great way to improve your scores. It is not uncommon for scores to rise between 20-100 points in a relatively short amount of time.
This leads us to the discussion of how to view credit in a way that will benefit your life and improve future choices. At Better Credit, we look at the acquisition of credit differently than most. Due to this, a shift in one’s mindset is needed.
The Mindsets That Can Keep You From Having a Good Credit Score
There’s a balancing act one must play in the world of financing purchases. On one hand if you have a limited credit history, you have one credit card that hasn’t been used, lenders may not feel confident in your ability to repay the loan. The same is true for those with low credit scores. Banks and other financial officers are reluctant to provide funds to those with a shaky credit history. A great credit score indicates how you manage your loans.
The notion that no credit is better than having credit is not accurate. Those who avoid opening a credit card or utilizing financing may find that when they need to finance a large purchase, lenders will be wary. Your lack of credit history could negatively impact how lenders respond to your loan application.
But, Dean said, that’s not how good credit works. If your goal is to build an excellent credit score, you’ll put a huge emphasis on paying on time and avoiding debt. Because, as we talked about earlier, the less credit card debt you have, the higher your score will be.
What Are the Benefits of Having a Good Credit Score?
Your credit score is in your hands. You have complete control and can benefit greatly from managing and monitoring your score.
With an excellent credit score, lenders want to do business with you and give you superior deals, and you have more options. This places you in the best position financially to save more and potentially pay off the debt sooner.
Poor credit limits your options destroys your chances of obtaining excellent interest rates. In fact, you’ll pay more for the same item than you would have with a higher credit score.
If you have higher rates, you’ll likely get trapped within a system of dealing with unknown leaders with terrible lending terms. That’s if the bank decides to award you with a loan.
So, if great credit yields lower rates, how much can you save? What impact will that make for your financial situation?
A good credit score a powerful indicator of how you’ll be able to amass wealth throughout the coming decades. What you end up paying financial institutions, in interest, determines how much capital you’ll have to invest in other opportunities.
How a Good Score Affects Your Mortgage
So, let’s say you go to your local credit union and apply for a $160,000 home loan. At the time your credit report displays a range in the low 600s. Due to this your loan officer approves you for a 8.6% interest rate.
Now, instead of a low-600 score, your score is 790. The loan officer gives you a rate of 3.9%. This difference of 4.7% compounded over a 30-year loan will save you thousands annually.
According to Credit.org, a low score of 600 will make you pay about $229,000 in interest over the life of the loan. Therefore a 790 score results in around $89,000. That’s a difference of $140,000 or $388 each month.
The benefits of a great credit score are huge.
How a Great Score Affects Your Credit Card Payments
The same applies to credit card rates. The JP Morgan Chase Rewards Card has an APR range between 0% to 22.99%. We know that the average balance for someone who has credit card debt is about $7,700. Each month a 10% averages about $64. So you’re paying close to $70 less per month simply because of a great credit score.
How a Great Score Affects Your Car Loan
Okay, so you’ve got your home loan and credit card and you’re happy because your great credit score has saved you about $450 in monthly payments. Let’s take it one (and final) step further.
Kelley Blue Book’s average price for a new car was $32,130. A credit score of over 790 typically allows you to get it with 0% financing, so there’s zero interest on the loan.
When we compare the above to the average APR on a new-car loan, 3.37% with a 60-month loan the difference is around $55 each month or $660 per year.
Based on our calculation, the combination of car and mortgage payments, a good credit score could save you about $500 a month. We suggest that you do everything in your power to increase your credit score. As you see, it may make a the difference between thriving or simply surviving.
How to Get and Keep a Good Credit Score: The Main Point
Raising your credit score is a matter of creating good habits that show lenders you are a responsible borrower who will pay back your loans or balances in a timely, consistent way. To do that, you should:
- Apply for credit only when you need it. Don’t sign up for one-time deals with store credit cards. There’s a chance the resulting score decrease could cost you percentage points on long-term loans for a home or a car.
- Keep your balances low. Aim to keep your overall utilization around 25%, but under 10% is the ideal situation.
- Always pay your bills on time. Set up automatic payments through your bank, credit card company or loan lender to make sure you avoid 30-, 60- or 90-day late payments.
Your mindset is also really important in managing your credit. Don’t get trapped thinking that on time payments are the only way to increase your score; several additional factors are involved. Good credit habits attract lenders and banks to you with their lowest rates.
To get your credit score into the high 700s and higher, it will take a bit of effort and patiences.
The time it takes to improve your score is vital and provides monetary benefits beyond lower credit card rates. Those preparing to finance a new home or vehicle will find that their improved credit score yields better payoff times and lower rates in general. This keeps more money in their pockets.
If your score isn’t in the mid to high 700s, and you’re ready to improve your credit scores, contact us today.