In a striking comparison of two 30 year-old individuals with identical major purchases: same house cost, same cost of cars and same credit card balance, the individual with excellent credit ends up with nearly a million dollars more when retiring at 65 than the individual with below average credit. How is this possible? It all comes down to the different costs each individual faces when borrowing for major purchases, and the savings each year that the individual with the better credit has to invest for retirement.1
The bottom line is undeniable, if you have good credit, it’s worth taking the steps to make it excellent. If you have poor credit, it’s imperative to start the repair process as soon as possible.
If you don’t know your credit score, or the details behind your credit score, you can quickly assess your situation using LendingTree’s completely free credit score portal. As the old GI Joe saying goes, “knowing is half the battle,” and this is doubly true in the credit improvement process. The Lendingtree tool shows you your score of course, but it also tells you if negative marks have been reported to your account (there could be errors in your file you could correct!). It even has educational materials on how credit scores work, and highlights which elements of your borrowing and payment history have the most impact.
If you’re like most people, you’ll want to make sure you have excellent credit, and that you have that extra million in your account when you retire. Here are some pointers to help make that happen.
1. Take Control of your Score
A survey for a 2013 study by the Federal Trade Commission found a quarter of consumers had errors on their credit reports that could affect their scores. With those odds, you can’t simply keep your fingers crossed and hope your report is accurate. It’s easier to stay on top of your credit file than ever before. Companies offer completely free services that not only provide your credit score, but also display components of your file with explanations of what may be impacting it.
Even if you pay your bills on time, knowledge is power and it’s wise to monitor your score on a monthly basis. You’ll be able to quickly catch any mistakes, and even ask creditors who aren’t reporting your activity to do so. No lender is required to report, but most will do so as a favor to a valued customer if asked. The point is, if you aren’t monitoring, you’ll never even know which lender is reporting, and which isn’t. This sort of thing can be quite impactful to your score.
2. Pay Down The Plastic
Your credit score may remain high, even if you owe a lot. But it’s going to take a hit if you get close to maxing out your credit cards. Lenders want to see that your finances are unstressed, and using up too high a proportion of your credit lines (your “credit utilization ratio,” in industry jargon) makes it look as if you’re struggling. FICO® won’t say what proportion of your card credit limits you can use without it hurting your score, and experts are divided. But 30 percent is a commonly cited figure, and some say as little as 25 percent. This is key: as much as 30 percent of your credit score is determined by how much you owe.
If you’re anxious to drive up your score, you could call your card companies and ask them the date each month on which they report to the credit bureaus. That’s because the balance on your cards on that day is going to be reported — even if you zero that balance a week later.
One clever move can save you money as well as increase your credit score – Consolidation. Generally, installment loans such as unsecured personal loans are not included in the utilization ratio. Consolidating credit card debt into a personal loan can be a big credit score booster.
3. Pay Your Bills on Time
FICO®, the company whose systems are behind more than 90 percent of lending decisions, says 35 percent of your credit score depends on promptly paying your bills. That makes it the single biggest factor, which, in turn, makes it your biggest priority.
Many people slip up occasionally over bill payments, and so they have one or two black marks on their reports. Providing those marks are accurate, there’s no obligation for anyone to remove them. However, it’s worth trying a charm offensive on the creditor that originally reported them. If you’re a longstanding customer with a good payment record, try asking — very, very nicely — for a “goodwill adjustment,” which would see those nasty late payments expunged from your record.
If things have gotten worse than that, and you’re negotiating with a collection agency, see if you can make a deal. Ask your creditor to agree to delete the record from your credit report as soon as you’ve fully paid what’s due. Just one thing: Collectors are notorious for agreeing orally to anything they think will get you to part with your cash, only to renege later. You need an agreement in writing to seal the deal.
4. Take Care Opening New Accounts
If you suddenly make a whole lot of credit applications, it signals that you’re having financial problems, and reduces your credit score. That doesn’t mean you can’t shop around for credit, because FICO® says its systems, “distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.” You can also access your own credit report as often as you like without affecting your score.
What is important is that you think strategically when making new applications. Certainly, don’t apply unnecessarily if you’re planning to get a new mortgage or car loan anytime soon. Writing in Forbes recently, Caroline Mayer recalled how she’d once succumbed to a clerk’s pressure to get a store card shortly before she refinanced her home. That card application hit her credit score by about 30 points, and cost her big time.
5. Watch Your Credit Mix
Generally speaking, lenders prefer you to have a mix of “revolving” and “non-revolving” credit. The first are open-ended accounts that provide you with a limit, and are most commonly credit cards. The second are installment loans featuring fixed repayment schedules, such as mortgages, personal, student and auto loans.
This “credit mix” criterion accounts for only 10 percent of your score, and applying for new accounts just to comply with it could actually damage your creditworthiness, at least in the short term. So achieving the right mix is a long-term ambition.
6. Start Slow
About 15 percent of your score is determined by the length of your credit history. Honestly, there’s not much you can do about that.
However, FICO® advises those with brief histories to avoid opening too many new accounts too quickly. That’s because your “average account age” is built into the calculation of your score, and that average age is going to look bad if all your accounts are recent. Does all the above sound too much like hard work? Well, can anyone suggest an easier way to make a cool million bucks?
1Individual with excellent credit received the following interest rates (APR): mortgage 4.03%, Auto 1.99%, Credit Card 12.99%. Individual with below average credit received the following interest rates (APR): mortgage 5.48%, Auto 8.99%, Credit Card 21.99%. Direct savings over lifetime equal $230,808, terminal value of reinvested savings at age 65 (8% investment return) of $1,371,000.