The higher your FICO® Score, the more money you can save in interest over the life of the loan. For example, say you're planning to borrow $350,000 for your home. With a score of 700 in the current interest rate environment (as of March 24, 2019), you could qualify for a 30-year fixed mortgage at 4.30%. Over the lifetime of the loan, you'd pay $273,834 in interest.
However, if you boosted your FICO Score by just 60 points to 760, that would take you into the next credit scoring band. Then, you'd qualify for a 4.08% interest rate, which means you'd pay $257,515 in interest over the life of the loan. That's a savings of $16,319. Imagine what you could do with those savings if you invested that money instead of paying it to the bank.
Poor credit scores make it difficult for consumers to land loans at reasonable interest rates and can perpetuate the vicious cycle of debt.
1. Not Reviewing Credit Reports Regularly
Errors happen on credit reports more often than they should and not catching them can have serious consequences, like drastically lowering a credit score. Experts in the industry recommend that credit card holders check their credit report at least once a year to see if any creditors have been misreporting information and that balances are accurate.
If there are discrepancies, credit repair specialists can send dispute letters to the credit bureaus to have those errors changed. A current and accurate credit report is the first step toward rebuilding a credit score and improving a consumer’s financial health.
2. Keeping a Balance on Credit Cards
Keeping a revolving balance on a credit card has many side effects:
· Interest rates can cost a cardholder a significant amount over time
· If the balance is due to a missed payment, it can result in late fees and hits to a credit score
· A high balance may impact a card users utilization rate, which has negative implications on a credit score.
A best practice with credit is to pay the balance off, in full, each month. After taking a credit repair certification class, you will know how to advise clients on the small day-to-day changes that can have a major positive impact on their credit score. If you must keep a balance, be sure it is less than 25% of available credit.
3. Opening Too Many Accounts at Once
Hard credit inquiries, which occur every time you apply for a new line of credit, it will result in at least a slight drop to a credit score. Hard inquiries cover many types of lending, like credit cards, auto loans, or mortgages. The more frequently someone applies for a new line of credit, the more dings their credit score will take. Spreading out inquiries is essential to keeping a credit score healthy.
4. Not Knowing Which Debt to Pay First
Paying down debt is an art. Some folks have debt in the forms of:
· Car loans
· Credit cards
· Student loans
And, not all loan rates and terms are created equally. To cost-effectively pay off debt, consumers should lay down the terms of each of their loans to see:
· Which has the highest interest rate
· What fees are associated with paying loans off early
By paying off high-interest loans quickly, consumers will amass fewer interest charges, freeing themselves from debt faster. As long as there aren’t fees associated with paying a loan off early, it’s generally wise to tackle those debts first.
5. Making the Minimum Payment Only
Just because someone is paying their credit card bill every month doesn’t mean they are helping their financial situation.
For example, if someone has a $2,000 balance on their credit card and a 15% interest rate, it would take more than 11 years to pay off the balance assuming the minimum monthly payment is $30. In this example, the debtor will also pay about $4,200 more in interest than the original amount borrowed.
To be more direct, paying only the minimum doesn’t do much to lower debt and credit card balances. Finding ways to loosen up funds and pay more than the minimum payment will help consumer’s dig out of their debt faster.
6. Ignoring Credit Utilization
Credit utilization is the calculation of how much available credit is being used. It’s an important metric. According to MyFico, 30% of an individual’s credit score is based on their utilization rate.
So, if someone has a credit limit of $10,000 across three credit cards and a combined outstanding balance of $5,000, their credit utilization ratio is 50%. This percentage would be a red flag to lenders. As a rule of thumb, the lower the ratio, the better. Experian recommends keeping the utilization rate below 30%.
A high utilization rate shows lenders that cardholders may be living beyond their means. Additionally, for cardholders who keep high balances, a single unexpected expense could push them over the limit making it challenging to pay back the amounts owed.
7. Close Old Accounts
Most of us rejoice once we know our credit cards have been paid off. But, what one does next can actually impact their overall credit rating.
Did you know that closing the account can actually lower your credit score?
As we covered in #6 on this list, credit utilization matters. If someone closes a line of credit, there will be a smaller amount of available credit, which will lower the utilization rate. Additionally, closing a credit card will decrease the history of credit. Both the lifetime of an account and available credit factor in an overall credit score.
More often than not, it’s better to keep the card open.
8. Apply for Department Store Cards
There are a few issues with department store credit cards, the first being that these cards come with very high interest rates — far higher than national brand cards such as Visa or MasterCard. According to CreditCards.com, the average retail card APR is 24.99%, compared to the average general-purpose credit card APR of 16.15%. If cardholders racks up charges and can’t pay the balance each month, they can expect to pay for it in interest. The second issue is the temptation that may come with a department store card. It may feel like the rewards can outweigh the negative aspects of the credit card but having access can be an unwanted invitation to spend exorbitant amounts of money on items you otherwise wouldn’t buy.