Friday, March 7, 2014

7: Improve Your Credit Score

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
  1. 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.
  2. 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.
  3. 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.
  4. Don't apply for lots of credit cards. Each credit inquiry can ding 5 points from your credit score.
  5. 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.
  6. 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!
  7. 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.
  8. Don't close unused credit card accounts near loan time-- you'll only raise your balance-to-limit ratio.
  9. 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.
  10. Pay your library fines, parking tickets and traffic penalties promptly.
  11. Don't bounce checks.
  12. Don't allow a dispute to go unresolved.
  13. 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.
  14. 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.

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