Debt Free

In the brave new world (sorry, Aldous) that is the 21^st century, it’s a fact of life that your credit score will determine how easily you can go about your daily life. If you can increase your credit score, you’ll have an easier time, and have to fork over less of your hard earned money than if your FICO score remains mired in the basement. How then to increase your credit score? Well, you can start by ordering a copy of your credit report from the three major credit bureaus and poring over it until you make yourself sick. Not much to look at? Well that’s another mistake. You have to have credit in order to get good credit.

If you actually do have a credit history, here are three mistakes you can make with your credit that will hurt your credit score:

Increase Your Credit Score – Avoid Mistake #3
Trying to get too much credit, too fast – Every time you apply for new credit, it generates what’s referred to in the credit industry as a “hard pull” on your credit report. A hard pull is an indication that a prospective creditor pulled your credit report. A hard pull does adversely affect your credit. You can also get a “soft pull”, such as when an existing creditor is checking up on you, or if you check you own credit. These inquires have no adverse impact on your credit score. In fact, they aren’t even visible on your credit report.

Hard pulls, a different story. Too many hard pulls in too short of a time will send your score plunging lower. Each hard pull will lower your credit score by approximately 5 points. You can see how a trip to the mall could cost you 25 points in a single day if you’re tempted by those “Just fill out this application and you’ll save 5%” offers. It could cost you way more than that when if your FICO score drops. The good news is that in about 6 months the credit ding will be gone. Try to limit your new credit applications to those you really need, such as for a mortgage or an auto loan.

Increase Your Credit Score – Avoid Mistake #2
Improper credit utilization – That doesn’t mean don’t use your credit card to purchase round trip tickets to London and a new Tag Heuer for the missus. “Utilization” is a credit industry term that indicates the percentage of your revolving credit you are currently taking advantage of. If, for example, you have credit cards with limits totaling $20,000, and currently have balances on the cards totaling $15,000, you have a revolving utilization score of 75%. Not too good! That’s why you should keep credit accounts open when you pay off the balances. Closing the accounts will adversely affect your credit utilization scores. In addition, after 7 years that card will no longer appear on your credit report. A card that has no balance and reads “pays as agreed” on your report helps your credit score.

Increase Your Credit Score – Avoid Mistake #1
No surprise here. The one thing you absolutely, positively must avoid to increase your credit score, or more accurately prevent its deterioration, is have no late payments. Payments over 30 days late are devastating to your hard earned credit score. The frequency, recency and severity all come into play when your credit score is calculated. Each has different statistical weighting according to a complex formula derived by the credit reporting agencies. They’ve found that each of these affects you credit worthiness differently.  Recent late payments, those in the last 24 months, count against you much more that a late payment you made 5 years ago. The same goes to the frequency of your late payments. If you were late once last year, it will hurt, not the same as if you are a habitual offender. If you are one who always pays over 30 days late, even if you always eventually pay, you are costing yourself a ton of money. Stop it! The severity indicates how late your payments were. Anything over 30 days late is bad, but stretch a late payment to over 90 days, and you’re in deep trouble credit score wise.

Avoiding these 3 credit score killing mistakes is a necessity. Keeping your credit score high will save you money on every credit purchase. That goes for that portable DVD player you got on Sale at Best Buy for $99, to your mortgage. As an example, current mortgage interest rates for creditors with FICO scores over 760 average 5.78%. Slip just a bit, to a still good credit score of 759, and you’ll be paying an interest rate of 6.002%. That seemingly insignificant increase could end up costing you plenty. With a 6% mortgage, you’ll pay about $1,500 a month and $289,000 in interest over the life of a 30 year mortgage. Drop your interest payment to the 5.78% figure and your payment drops to $1,463 a month. Moreover, you’ll only (!!) pay $277,000 in interest over the term of the loan. That one credit score point could cost you $12,000 in interest payments over 30 years. Drop under 700 and your interest rate will climb to 6.286%, with a commensurate monthly payment on the same $250,000 mortgage of $1,545.

Remember, avoid the mistakes and keep you credit score high and your payments low!