Good Credit Saves Money

One number can save you a lot of money: Your credit score. But how do you go about building or improving credit? We’ll tell you today on MoneyWise. Your credit score is how lenders judge you. The higher your credit score, the lower the interest rate you’ll be offered when you apply for loans, credit cards, and mortgages. That much you probably knew. What many people don’t realize, however, is that these days, your credit score may also determine what you have to pay for home and auto insurance. And increasingly, employers are using candidates’ credit scores in their hiring decisions. A candidate with a high credit score might be offered a job over someone else, all other qualifications being equal. That also translates to more money in your pocket. To build or raise your credit score, the first thing you should do is get a basic understanding of how the credit system works. And for our purposes, let’s concentrate on your FICO credit score since it’s the one most lenders use. It’s based on the information held in your credit reports at the three credit bureaus, Experian, TransUnion, and Equifax, and ranges from 300 to 850. Anything lower than 580 is poor. A score between 580 and 670 is fair. A score from 670 to 740 is good. A very good score is anything between 740 and 800. And if you have a number higher than 800, you have an excellent score. Your score indicates the likelihood that you’ll repay money that’s loaned to you. That number is based on five factors: 1. Your payment history and whether you’ve made any late payments 2. the length of time you’ve had each account 3. Your balances versus your available credit 4. The types of accounts you have 5. And the number of new accounts. But what if you don’t have any of those items in your credit report? It’s a chicken and egg kind of thing You can build credit by opening a secured credit card. It has a credit limit equal to the amount of money you deposit in a designated savings account, and the bank uses that as collateral. It will then allow you to make charges on the card up to that limit. But you don’t want to do that. Instead, just make one routine (budgeted) charge a month and then pay it off in full when the bill comes in. Now, you want to make sure the card is one where the bank reports your activity to the credit bureaus. That’s usually the case with secured cards, but check to be sure. Once you start using the card the way we described, you begin to build a solid credit history. You can also get something called a credit builder loan. If you go to the website Self.inc they’ll help you set it up. By the way, you can also get this type of loan from some banks and credit unions. Here’s how it works: You apply for and get the loan, usually the amount is from $300 to $1000. When approved, you don’t actually get the money. It’s put into a CD and you make monthly payments that are reported to the credit bureaus as loan payments, building your credit history in the process. When the loan’s paid off, you get the money you’ve paid into the CD plus a little interest minus a fee the bank charges. So it works like a secured credit card, but for an installment loan. Having both would build a favorable credit history and score even faster. You can also become an authorized user of someone else’s credit card to build a credit history. Usually, that’s a parent or some other family member. Just make sure that person has a solid credit score. And you don’t have to actually use the card. As long as the primary owner uses it and makes regular, on-time payments, you’ll get the benefit of good reporting on your credit. If you have a low credit score, the steps to increase it are simple. Make all of your payments on time. Pay extra so you reduce the amount owed versus your available credit. For credit cards, you always want that below 30%. Do that and your score will begin to rise. Of course, it takes time to build or establish a good credit rating so you have to be patient. On today’s program, Rob also answers listener questions: ● Does it make sense to put a portion of your savings into an I-bond? ● Is it okay to accept a financial gift from your adult children? ● How should you handle or invest a large sum of money from the sale of a house? ● How can you ensure that you’re getting the best possible auto insurance rate? RESOURCES MENTIONED: ● Treasurydirect.gov ● Thezebra.com ● PolicyGenius.com Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. To support this ministry financially, visit: https://www.oneplace.com/donate/1085/29