Boost Your Credit Score: Save Money In The Long-Run

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If you’re familiar with Dave Ramsey you know that he doesn’t care for debt.

As a matter of fact, he doesn’t care about his credit score.

Here’s the thing.

This logic is not particularly beneficial for YOU.

Because your life, well – it’s different.

I don’t see a credit score as an “I love debt score”.

I see it as a “Save money on what you may want to finance in life”.

While we’re at it, “A just in case I need to use it type of thing”.

In short – a solid credit score will make your life WAY easier and save you money in the long run.

Do you want simple solutions from someone who has boosted their credit score significantly throughout the years?

Get ready to learn tips + tricks along with some credit score fundamentals.

Let’s go!

boost credit score save money

Boost Your Credit Score: Save Money In The Long-Run


Why A Credit Score Is Important.

Credit scores show whether or not you have a history of making good on your debts.

There’s no way to know, otherwise.

It’s not smart for the lender to get by with your word as an indicator of your trustworthiness.

Would you trust a random person to hold your purse or wallet while you use the restroom?

What if they told you they were honest and trustworthy? Hmmmm no, right?

It’s the same concept when a lender finances thousands of dollars.

They need assurances from a trusted 3rd party that you have a track record of paying your debts.

Get used to a credit score being one of those numbers you are going to need to know in your life – along with your SSN, phone number, PIN’s.

Wait, you do know your phone number, right?


Why A Solid Credit Score Will Save You Money.

If you’re wondering WHY you need a solid credit score.

For starters: Do you want to buy a house someday? A car? Get a business loan?

You may still be able to do all these things with a lower credit score, but there will be a premium cost to you.

In short, this means that having a lower credit score will cost you MORE MONEY!

Let’s consider a mortgage. Take a look at the below chart.

These rates are from mid-Feb 2018 for a 30/year, $300,000 mortgage.

boost credit score
This chart shows the FICO score minimum starting at 620, which is generally the requirement when acquiring a mortgage.

 

Notice the correlation that’s displayed in the chart?

The lower the credit score, the higher the APR/Interest rate. This means a higher monthly payment!

The higher the credit score, the lower the APR/interest rate. This means a lower monthly payment!


For dramatic effect, let’s just compare the balances for the highest credit scores (760-850) and the lowest (620-639).

boost credit scoreThe monthly payment difference is $240.

Would you want an extra $240/month sitting in your bank account?

How about $2,880 a year?

Is this a trick question? Of course, right?

Why pay an entirely unnecessary $240/month or $2,880/year when you can be living in the exact same house for less?

In this example, throughout the life of the loan, the Total cost of mortgage (TCOM) will be a whopping $86,400 higher on a $300,000 mortgage. This will vary depending on the mortgage amount and interest – but it gives you an idea!

Here’s the deal.

If you pay attention and take the steps to properly maintain your credit score then you won’t have an issue paying a premium to buy a home, a car, get a loan – anything that requires credit.

Keep your credit score high to save money on what you plan on doing in your life.

Let’s go through the steps of what makes up a credit score so you can get a better understanding!

The Make-Up of a FICO Credit Score

A FICO credit score consists of a few elements.

There are 5 factors that go into the calculation.

Keep in mind, they don’t all have equal weighting.

Before I break it down, here are the credit score ranges:

  • 800+ = EXCEPTIONAL
  • 740-799 = VERY GOOD
  • 670-739 = GOOD
  • 580-669 = FAIR
  • <580 = POOR

 

#1 – Payment History (35%)

Taking the biggest piece of the pie is payment history.

This one is simple.

Are you paying your debt as it comes due? 

“According to FICO data, a 30-day delinquency could cause as much as a 90- to 110-point drop on a FICO Score of 780 for a consumer who has never missed a payment on any credit account.”

It’s a good rule of thumb to keep accounts paid on time.

#2 – Credit and Debt Utilization / Total Amounts Owed (30%)

This area takes a look at how much credit and debt you have compared to your credit line and original debt balances.

For credit balances:

There’s some math involved here to calculate the credit utilization ratio.

Simply take the amount of credit used divided by available credit.

Let’s say you have $5,000 in credit card balances with a $50,000 credit line across 3 credit cards.

Let’s work it out.

$5,000 / $50,000 = 10% utilization ratio = Good

Aim for a lower utilization ratio.

Some places say to keep it at 30% and under but there’s not a definitive rule.

For debt balances:

Installment loans (scheduled payments) such as car loans, mortgage, other types of loans.

A rule of thumb is to decrease the outstanding balance owed.

#3 – Length of Credit History (15 %)

This considers your newest and oldest credit lines.

You’ll find that when you view your credit report, they have an average of the newest and oldest credit lines.

Here’s an example.

10-year open account and a 1-year open account would have an average credit history of 5 ½ years ((10 + 1) / 2).

The longer the credit history you have, the better.

#4 – New Credit (10%)

The important part to consider here is the number of hard inquiries that are made and how often.

Each time you apply or request credit, the company or lender looks at your credit to make determinations.

This “dings” your credit for a short time, but as time goes on, it will be less impactful in the big picture.

#5 – Credit Mix (10%)

Are there varied debt and credit lines within your account?

Do you have a car or student loan, home mortgage, credit cards?

This gives the lender some solace in knowing that you have experience paying on all types of credit lines.

Don’t worry though, this section is considered the least important.


Ways To Boost Your Credit Score

credit fix, fico score

Next, I’ll give you a list of things I’ve done in the past to boost my credit score.

Payment History

I pay all balances before they’re due. My preference is to pay all balances in full.

BOOST TIPS:

As long as you pay your debts each month, you’re good to go. This includes minimum or in full payments.

Work on bringing all accounts current and set up a schedule so you never miss a payment.

Use your credit card for purchases you make anyway and make on-time payments. Continue this cycle.


Credit and Debt Utilization

It’s best to keep this ratio low. My ratio varies between 1%-2%.

3 simple ways I achieve this low ratio:

Leave credit cards open, even if I don’t use them. This increases my denominator.

Pay all monthly balances on credit cards. This decreases my numerator.

Gladly accept any credit line increase that comes my way. This increases my denominator.

Let’s take another look at the example I gave earlier for calculating the credit utilization ratio:

$5,000 / $50,000 = 10% utilization ratio = good

$5,000 is the numerator. Work to decrease this balance.

$50,000 is the denominator. Work to increase this balance, if you can’t lower your numerator.

Another Example: Let’s say you have a $50k credit line, but you are using $500/month – that’s 1% ($500/$50k).

You decided to close all but one of your credit card accounts.

Assume that in doing this, you reduced your $50k credit line to $1k – that increases your ratio to 50% ($500/$1k).

BOOST TIPS:

If you don’t use a lot of credit, then you don’t have much you can change in this area, other than increasing your credit line.

Haven’t received a credit line increase in awhile? You can always request one.

From my experience, the company always offers an increase before I even get to request it.

Keep in mind that the company may have to pull your report to verify your creditworthiness.

Opening up new lines of credit to get your ratio down could end up hurting your credit score if you open too many accounts at one time. Start slow and work up from there.

Credit cards: Keep balances low in comparison to your credit lines.

Installment loans: Consider paying down outstanding debt. A good way to do this is starting with one loan balance, paying it down, and moving onto the next balance.

Related article: 3 Reasons To Save More Money + FREE Savings Tracker


Length of Credit History

I keep older credit cards open to preserve account longevity – even if I don’t use most of them.

I have a couple of credit cards that are over 10 years old.

They only get cancelled if there is an impending fee or the account has been opened a short amount of time.

BOOST TIPS:

If you have credit cards you don’t use, consider your utilization ratio (previous topic) and your length of credit history before canceling them.

Sign up to be an authorized user on someone else’s card and this will show up on your credit report as well.

If you don’t want to use credit, get the card, use it once or twice a year to keep it active and then store it away. This will have a similar effect.


Credit Mix

The following installment loans show varied credit mix even though I paid them off in full.

Student loan: I paid my student loans off by saving up for the balance while I was going through school.

When the grace period ended, I redirected the funds to pay off the loan in one lump sum.

Also, any reimbursements my employer made were earmarked for the loan.

Car loan: When I bought a car, I signed up for financing. Afterward, I changed my mind and paid off the car loan within the 3-day time period.

BOOST TIPS:

• It helps to know your end goal when you take out any type of loan. Do you plan on making the same payments each month, increase payments to pay it off faster, pay it off in large chunks, etc?

• Installment loans can be paid in full at any point in time (unless the loan terms disallow it for some reason). Just make sure whenever you take out a loan that it does NOT have a prepayment penalty.


New Credit

I never go crazy applying for credit cards. These days it can be tempting to get 20% off, $15 credit, heck, free Amazon Prime for a month.

BOOST TIPS:

• Minimize the number of inquiries you initiate by applying for a credit card or line of credit. These can add up and affect your credit for a short period of time.


Credit Score “Good To Knows”

credit fix, fico score

#1 – FICO vs. VantageScore 3.0 (4.0 is most recent, released Fall 2017).

Both FICO and VantageScore have a scoring range of 300-850.

Look at the FICO score as the more-established, original number and the VantageScore as a newer version (since 2006) that the 3 credit reporting agencies all have a stake in.

VantageScore is NOT an average of all three credit reporting scores. Parts of the data are taken from the credit records, but it utilizes a different scoring formula.

If you check both your FICO credit score and VantageScore, there will be some differences due to scoring methods.

FICO credit scores cost a small fee to view. VantageScore’s can be accessed for free at a myriad of different locations.

This leads me to my next point.

#2 – Your credit score WILL vary depending on where you view it.

Across the 3 reporting agencies (TransUnion, Experian, Equifax), your score will vary by a few points.

Comparing FICO to VantageScore 3.0, it will have more of a variance.

This is understandable since the two scoring models are different. From my experience, the difference has been minor.

#3 – Places to get your credit score.

Get a free credit report each 12-month period by going to annualcreditreport.com.

You will be able to get a free report from each of the three credit reporting agencies at this one central location.

Please note that this only applies to a “credit report”, not a “credit score”.

It costs a small fee in order to get your actual FICO credit score.

After getting your FICO score, consider using a FREE service to continue monitoring your credit.

Credit Sesame and Credit Karma are good options to use.

With these services, you will be able to get a FREE credit score based on the VantageScore parameters.

As I mentioned earlier, this varies slightly from the FICO score.

From my experience, it is by 10-15 points. Your experience might be different.

I use both services so they come highly recommended.

Check your credit score for FREE:

CREDIT SESAME

CREDIT KARMA

Consider using these services to keep tabs on your credit score. When a score comes up that you are not expecting, it can mean you need to get into action mode to determine what happened. The only way you will know is if you are familiar with the 3-digit number that normally appears.

Which leads me to my next point…


Related articles:


#4 – Check your credit score for potential issues.

You can never be too careful with identity theft running rampant these days.

If you catch suspicious activity early enough, you can get the damage removed before it permanently affects your credit score.

Even if you refuse to ever have debt and don’t care about building credit, you should still check your score to make sure that somebody else isn’t using your credit for you.

#5 – Be patient. 

If your goal is to increase your credit score, it takes time. It’s not an overnight process.

Pay bills on time, keep accounts open, be responsible with credit, keep the utilization low – all this adds up and will slowly and surely increase your score.

For some folks, this process may take even longer if there is a bankruptcy, delinquent accounts, etc – these negative marks will stay on your report for seven years.

The Bottom Line

Keep this article in mind as your credit score guide. In time, responsibly taking care of credit will reflect in the 3-digit number that will be one of the many numbers that will have a place in your memory!

Full-Time Dollars

Read more about my mission HERE.


Ways to stretch your money further + manage finances:

Ebates – receive $10 when you spend $25 (online/in-store shopping)

Ibotta – receive $10 as a welcome gift (grocery in-store shopping)

Personal Capital – free service that allows you to track all your balances with an A+ interface

Credit Sesame – check your credit score for free

Visit my resources page for more information on each service and to view other offers!

Check out my resource page for more offers!

*As with all financial and investment decisions, consult a professional. Read disclaimer here.

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Readers, how has your luck been when building, preserving, increasing your credit score? Any tips + tricks to share?


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Last edit 12/1/2018

4 Comments

  • Tom from Dividends Diversify

    Informative article HP. Fortunately, we haven’t had debt for years, so I don’t focus on my score. It’s important though. Debt can be used wisely and having a good score is important to getting a loan when you need it and at the best rate. Tom

    • Full-Time Dollars

      100% – Paying more than you have to in order to get the same goods is no bueno. Keep more of your hard-earned money! Thanks for stopping by, Tom!

  • Mrs. Defined Sight

    Hi HP,

    Indeed! A very informational article! You’ve laid out the importance of 3 digit number so well! It was fun going back through memory lane…starting out in life, reviewing our credit and applying for first time home owners loan. The numbers overwhelmed us.

    Now over 12 years later our situations are a lot different; we moved, sold our previous home and bought a new one – we thought, “huh these numbers aren’t as intimidating as they used to be. Actually are amazing!” So yes, if one starts early, they can really change what path they go down!

    I’d like to also commend you on a great affiliate post! I haven’t been over here in a lil while (Mr. DS keeps talking about bacon btw) 😉 and I neglected to notice your Resources tab, unless it is new? Awesome job there!

    And thank you again for also for sharing your tips on optimizing the speed of our website. We are up to a C! I never settled for those grades but Mr. DS seems to be happy about it. Sigh and smile.

    • Full-Time Dollars

      Thanks Mrs. DS! I definitely learned some things compiling this article. I tried not to make it too bland considering the subject matter. It’s hard to say no to free products that are actually useful – so why not share.

      I have had a resources page as a category for a while, but it is outlined now on the desktop. I like how it looks now, but I may change the theme again soon – but hopefully not too soon.

      I will say that your site is mighty faster than it was before, so there is 100% improvement from what I am seeing!

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