Changes in lending rules have made your credit score even more important to your long-term economic health. Mortgage, credit card, auto and other lenders are now charging a higher rate for lower credit scores. Someone may now pay more for insurance or rent based upon their score.
What does this mean? In general, America’s credit scores have improved, but tens of millions of Americans are still forced to borrow at higher rates. For those who are in tough financial circumstances, these penalties are causing further strain on their resources.
What does a low credit score cost the average American? Credit scores can range from a low of 300 to a high of 850. In general, a credit score above 740 is considered good. From 640 to 740 is considered marginal and now may be subject to higher rates. Below 640 is considered poor. If your score is significantly below 640, borrowing can be close to impossible depending upon other financial consideration such as cash reserves. This means that you may not be able to obtain the home of your dreams or may not be able to refinance your present home.
Let’s say that you would have a rate of 5.0% if your credit was great. Let’s also say that you would pay 6.0% because your credit is not good. What does that cost you? Not even considering other debts such as your credit cards, your higher mortgage payment will cost you plenty more. On a $300,000 mortgage, the higher cost over the term would be approximately $90,000. Add your other debts and even higher insurance costs and many will pay hundreds of thousands of extra dollars for a lower credit score. And those who have lower credit scores generally can ill afford higher payments as compared to the general population.
We are here to say that you can break this cycle. How? Credit score improvement is something that you can do in the short-run to save money instantaneously as well as the long-run so that you can save thousands over your lifetime. The key is getting on a long-term plan as well as making short-term adjustments.
If you look at the inset box on this page, you can see the make-up of a credit score. What can you do in the short-run and the long-run to help increase your credit score?
|Credit Score Make-Up
…35% payment history
…30% amounts owed
…15% length of credit history
…10% new credit
…10% credit mix
More immediately, we can correct inaccuracies. Did you know that more than 30% of the average credit reports contain one or more items that are false? Without action these inaccuracies can cost thousands and the average consumer does not even know that these inaccuracies are on his/her credit report. Therefore, step one is to run a credit report and look for any inaccuracies. From there, a professional can help you remove any found in the report.
In addition to inaccuracies are those items which are true but not added to the report in a compliant manner. The Fair Credit Reporting Act includes such requirements for creditors. For example, the creditor must be able to prove that they rating is correct. This means that they must respond to challenges with proof.
There are also long-term actions that can be taken. These may include paying off debts which reduces the amounts owed. You can also change the mix of credit from revolving to installment and even make sure that your balances are not too high of a percentage of the total credit limit. For example, a credit card with a $5,000 balance can reduce the score if the total credit limit is $5,000 versus $20,000.
Therefore, a good credit score improvement program usually must include a debt reduction program. Did you know that a debt reduction program can pay your debts off more quickly? The creditors would like you to continue paying forever on these debts as that is how they make their money. The new credit rules in America dictate that you have a short-term plan to increase your credit score as well as a long-term plan to keep it high. The savings? Thousands of dollars that will benefit you instead of the bank.