We all want nice things. New cars, a big house, a 52 inch flat screen TV (oh yeah!), new skis, that Harley your have had your eye on. These are all things that are wonderful to have, and which we seldom want to wait for. However, we usually don’t have the cash available to just run out and buy these things, so where do we turn? That’s right, we get credit.
For some purchases, credit makes a lot of sense. I personally don’t ever expect to be able to buy a car with cash, much less a house. For those things, credit will act as an extension of my earning ability. In other words, it stretches my cash position out over many years, so I can afford things that I would not otherwise be able to buy. But the difference in what you will have to pay over time is really amazing.
If you have a poor credit score, you will have higher interest rates. This may not seem like a big deal, but let’s take a look at what that means for just one purchase. Let’s say you want to buy a house. Your credit scores aren’t that great. You can qualify for the house, but you will get an 8% interest rate. Your will finance $200,000.00 on your house. You payment ends up being $1,467.53 per month for 30 years.
Now, let’s say your neighbor across the street has good credit and gets the same model house. They get a 6% interest rate on their house. Not much of a difference, right? Just a measly 2% interest. So what is the big deal?
Well, the big deal is that your neighbor will pay much less than you will. Their payment for the same $200,000.00 house would be $1,199.10. That’s right; they will pay $268.43 a month less than you will. Ouch!
Ok, you say, no big deal. That is a lot of money, but in the long run does it really matter? Well, the long run is where it gets you. You see, if you make those payments for a year at the higher rate, you will pay an extra $3,221.14 compared to your neighbor. That’s a lot. Over 7 years, which is about how long the average person stays in a home, you will pay an extra $22,547.96. That’s right, you pay more than $22,000.00 for having a 2% higher rate!
The question, then, is what can you do about it? The first thing you should know is it is never too late to start. You need to monitor and manage your credit to make sure that your scores go up, or at least that they don’t go down. To accomplish that, just follow a few easy rules:
Rule Number 1: Make Your Payments ON TIME!
OK, this sounds easy, but this is the one that gets most people. A single late payment, noted as a 30 day late on your credit report, can drop your scores as much as 60 points. That is enough to seriously impact your interest rates, or even your ability to get credit. If you can make your payments on time, and keep doing so for a number of months, you will begin to see your scores move up.
Rule Number 2: Don’t Go Over Your Limit!
This is a bad thing. If you go over your limit, your creditor will note that on your credit report. Going over your limit shows that you are not responsible with your credit. Creditors want to see you use credit responsibly, and going over your limit shows them that you don’t know how much you are spending. While this won’t hurt your scores as much as a late or missed payment, it still hurts.
Rule Number 3: Only Get Credit When You Need It!
There are three reasons for this, but one of the most important reasons not to go out and get a bunch of credit is that every time someone checks your credit you, they will do a hard pull. Each hard pull will get about a 5 point deduction. After about 6 months, you will get those points back, but if you have, say, 5 new checks against your credit report, you will take a 30 point hit for a while, which can affect your rate. There are other things to consider here, but too many pulls is generally considered a bad thing to a potential creditor.
Rule Number 4: Keep Your Account Balances Low!
Your scores can go WAY down with high balances on your cards. For instance, I had a 44 point reduction in scores by going to a 90% overall utilization across all my cards (it was, um, a test! Right, a test! To see what would happen. Really…). The rule of thumb is to keep your balances below 30 percent of your limit. So, if you have a $1000.00 limit, you need to keep your balances below $300.00 ($1,000.00 X 30% = $300.00). Again, it is all about ‘responsible use’. Creditors want to see that you don’t have to have credit, and instead use it for convenience or for those big purchases.
Rule Number 5: Check Your Credit Report!
Your really need to know when something changes on your credit reports. If you haven’t checked recently, you should probably go do it. You can get it for free right here: https://www.annualcreditreport.com. If someone has stolen your identity, or a collections firm has decided to come after you for something that isn’t yours, the only way you may find out about it is to pull your credit report. You can get on free yearly, or pay for one more frequently than that. You can get your reports and scores from http://www.myfico.com/.
The most import thing you can do to build and keep good scores is to make a plan and following it NOW! Good credit scores are vital in today’s economy, and it is up to you to make them the best they can be.
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