This is Millionaire Mommy Next Door's
Why is it important to improve your credit score?
You can save hundreds of thousands of dollars over the course of your lifetime with a good credit score.
Let's say you want to buy a new home, with a loan principle amount of $250,000, and your credit score is 619 (out of a possible 850). Since your score indicates that you've had trouble taking care of your obligations in the past, your lender is able to offer you a 30 year fixed mortgage at 11.88% APR with monthly principle and interest payments of $2,548.
Would you like to know how much I'd pay each month for the same home? Just $1,554. Wow. I'd pay almost $1,000 less each month, simply because my credit score is above the 720 point benchmark.
Over the full 30 year mortgage term, I'd pay a whopping $357,873 less than you would. For the same home!
To compare other credit score and loan scenarios, check out the calculator at: A Higher FICO Score Saves You Money
Instructions: 14 Ways To Improve Your Credit Score
- The best way to raise your credit score is to pay your obligations on time. Your payment history represents 35% of your total credit score.
- Order your credit report and correct blatant mistakes. Changing a mistake on your report, such as a payment that is wrongly labeled as late, can take 30 days or longer.
- The length of your credit history represents 15% of your credit score. If you don't have a credit history, open a checking and savings account and obtain a secured credit card. Build your credit by managing them responsibly. Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments.
- Don't apply for lots of credit cards. Each credit inquiry can ding 5 points from your credit score.
- Pay off debt rather than moving it around. Don't consolidate your accounts or bounce your balances from card to card. Transferring balances from a high-limit card to a lower-limit one, or concentrating all of your credit-card balances onto a single card can hurt your score. In general, it's better to have smaller balances on a few cards than a big balance on one.
- Don't charge more than you can pay off when the bill comes due. It's not necessary to pay interest on a credit card to earn a good credit score. Pay off your balances in full each month. I never pay interest or fees on our credit cards; instead, I get paid almost $2,000 a year in cash-reward money!
- Even if you pay off your credit balance each month, limit the percentage of available credit you use to no more than 30%. The credit-scoring formula favors a large gap between the amount of credit you're using and your available credit limits.
- Don't close unused credit card accounts near loan time-- you'll only raise your balance-to-limit ratio.
- Pay down the cards that are maxed out first. You'll get points deducted from your score when you charge more than 50 percent of the limit.
- Pay your library fines, parking tickets and traffic penalties promptly.
- Don't bounce checks.
- Don't allow a dispute to go unresolved.
- If you must, make it difficult to use your credit cards. Put them in a water-filled container and freeze until your score is back on track.
- If you're having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but once you begin managing your credit and paying on time, your score will gradually improve.
Relevant and Recommended Reading:
You Need To Know What People Are Saying About You: How to Order Your Free Credit Report (my previous post) A good credit score can save you thousands of dollars over the course of your lifetime. A poor one can make it difficult to land a job. Learn how to see what your record says about you, free.