Welcome to Day 5 of the Money Management course!
Today we’ll cover something that we all dread hearing about… our credit score.
Bear with me here, I know having poor credit is a difficult reality to face. Unfortunately, it’s a necessary evil.
Why is your credit important?
The most obvious reason to work on your credit is facilitating access to loans.
Good credit = higher approval amount + lower interest rate
That’s not all though.
Here are a few other ways your credit impacts you:
Housing | Are you apartment hunting? Did you find a sweet rental? | Good credit = more likely to get hired |
Car | Looking to buy or lease a car? | Higher credit = lower payments |
Work | Applying for your dream job? On the market for a new job? | Employers check credit scores. Better credit = more likely to get hired |
Insurance | Need insurance (rental, housing, car, etc.)? | Quotes are reflective of your credit |
Phone | Changing your plan? Or getting a new phone? | Good credit = more likely to get approved |
Security deposits | Starting a new utility, internet or phone account? | High score = small or NO security deposit |
The key takeaway here is that you can SAVE A TON OF MONEY!
Unfortunately, it’s an uphill battle for those of us who struggle to pay our bills. If you can’t get enough cash to pay your credit card, it will stay on your record. When you request a new credit card, car loan or mortgage the bank will jack up your interest rate.
For those of us who have good credit, banks will go as far as asking to increase your credit limit. It also puts you in a position to bargain your interest rates.
Here’s exactly how to get that magic number up
Your credit score boils down to just 5 things.
Here’s a breakdown of what they are how much each weighs into your score.
1 – pay your bills on time
If you make a payment more than 30-days after the due date, it gets recorded as delinquent. The longer you wait, the worse the impact on your credit score. This usually works in 30-day increments. In other words, there generally will not be a difference if you are 30 days or 59 days late but there is if you are 30 days or 60 days late.
Don’t forget to pay your cell phone and utility bills on time!
Late payments in your history come from more than just your credit card. Generally, your cell phone and utility bills also factor in.
As far as your credit card goes, if you can’t make the full payment (and avoid interest charges), you should, at the very least, make the minimum payment by the due date to avoid a delinquent flag on your history.
If you’ve missed payments in the past, these will generally stay on your credit history for 7 years.
In other words, always make payments for all your bills on time!
If you have a tendency to forget, you can set up pre-authorized payments for all your bills.
2 – keep your credit utilization below 75%
What is credit utilization?
Utilization shows how much of your credit you are currently using.
Let’s say your credit card has a $1,000 credit limit. Of that limit, you currently have a balance of $500. This means your utilization is at 50% ($500/$1,000).
If you have multiple cards or other loans, then you have to add up the balance due on all your loans and divide it by the total limit amounts.
For example, let’s say you have two credit cards, a student loan and a car loan:
There are a number of recommendations as far as utilization rates.
Equifax (the leading credit reporting agency in North America) recommends a 75% utilization cap. Other sources suggest a 20-30% utilization. In the above scenario, you have to add up all of your available credit and all of the amounts you have outstanding to calculate your utilization across all accounts.
Given the differences, it’s best not to go above 75% but studies have also shown a correlation between high credit scores and low utilization so if you can maintain it at 20-30% all the better.
Bonus tip: when your bank offers you a credit limit increase, take it. Unless you think a higher limit will result in you spending and owing more, the increase will give you a bigger buffer putting you closer to the 20-30%.
3 – build credit history
The longer you’ve had the same credit card or loan, the better. If you are looking to close down a card, consider how many years you’ve held it for. You’re better off closing the card you’ve had for 2 years than the one you’ve actively used for 10 years.
It takes time to build up your credit history so think twice before closing an account.
You’ll often see credit card promotions with killer sign up bonuses, but people generally don’t realize the hidden cost of jumping from card to card. In the end, it will tank your score and indirectly cost you (through higher interest rates, more expensive phone plans, utility deposits, etc.).
4 – don’t credit card “hop”
This concept goes hand in hand with the last point. If you think signing up for a credit card with a great bonus offer is a good idea, think again.
Each time you apply for a new credit card or other loan account, it’s recorded in your credit report.
A couple inquiries a year won’t cause any red flags in your history but if you’ve been applying for a number of credit cards in a short amount of time, lenders will see this as a sign of instability.
5 – balance out the types of credit you hold
The types of loans in your name will weigh differently on your score.
A mortgage or car loan is a fixed amount meant to be paid down each month. Given that you don’t have the freedom to take out amounts already paid off, this is seen as a less risky loan.
On the flip side, a credit card can fluctuate in any which direction. You might have the full amount paid off one month and utilize your entire credit limit the next. In the eyes of lenders, this is a riskier investment.
A better credit score will have a mix of loan types and favor more stable accounts.
This is generally a more difficult factor to control but still worth mentioning given that it impacts 10% of your score.
Getting on top of your credit doesn’t have to be daunting. If you follow the tips I’ve laid out above, you’ll get there in no time.
Are you curious to find out what your score is?
Borrowell will get you your free report and give you personalized tips to build your credit.
Tomorrow we’ll cover how you can easily start making extra dough on your spare time.
