Credit score Impact
Homeowner’s Insurance – Homeowner’s insurance rates could be 2-3 times higher with poor credit. Homeowners with poor credit pay 91 percent more for homeowners’ insurance than people with excellent credit, according to a study by an online insurance shopping service. People with poor credit pay at least twice as much as people with excellent credit in 37 states.
Example: State of Texas – Auto Insurance Costs by Credit Score
Rates shown are the average new-customer premium for adult single drivers with a clean driving record and poor, good, or excellent credit. We compare these to the average premium for a driver with excellent credit
|Excellent Credit||Good Credit||Poor Credit|
|Difference||$293 more||$2,088 more x 5 years = $10,440|
Auto Lending – $25,000 Auto Loan for 60 Months
|720 or better credit score||1.9%||$437/month|
|620-659 credit score||9.34%||$523/month|
|Below 580 credit score||17.99%||$635/month|
Difference over 60 months = $5,160 with scores 620-659, or $11,880 with poor credit
Total 5 Year “Penalty” for poor credit – $7,685 + 5,160 = $12,845 (or $22,320 with poor credit)
PLUS whatever the difference is for Homeowner’s Insurance!
NOTE: Insurance rates are NOT affected by credit score in CA, HI and MA.
How to Get – and Keep – a Great Credit Score
Now that we know what credit scores are and how they come about, let’s take a look at the key steps to get and maintain the highest possible scores.
Pay Your Bills on Time – All the Time
This is the most important factor in the scoring calculation. DO NOT rely on a grace period. Pay by the due date. If you have installment loans – such as mortgage and auto loans – consider setting the payments up on auto-pay at your bank. That way you know they will be paid on time. Just don’t forget to put the payment in your checkbook to avoid potential overdrafts!
Revolving (credit card accounts) are different because the balances typically are different each month. You CAN put them on auto pay as well, but you have to make sure you have the money to pay each month, particularly if you are setting it up to pay in full.
So what if you ARE late?
If it’s a credit card account and you have had a good on-time payment history, call the credit card company immediately. Tell them a good story and ask for forgiveness. Telling them how much you appreciate using their card doesn’t hurt either. They don’t want to lose your business and in many cases they will give you a break and remove that late payment from your credit report.
Auto and mortgage payment late payments are different. It would be unusual for that creditor to remove the late, so make every effort to pay them on time – always. Just one late payment could lower your score as much as 60 points!
This may sound silly, but some people have no, or very limited credit. That could be for a lot of reasons – prefer to pay cash, can’t get approved credit card, etc. As a MINIMUM, you should have at least one installment loan – like an auto loan – and two revolving accounts – like credit cards. The credit cards should be one of the four major credit card types – Visa, Discover, Mastercard or American Express. They will help your score more than department store or gas cards. If you don’t have open credit cards you will NEVER maximize your credit score.
If for whatever reason you can’t get approved for unsecured cards, then get secured credit cards. With secured cards you put up money as collateral – let’s say $500 – and you get a card with a $500 limit. Secured cards work just as well as unsecured cards in terms of building your credit history, and you can get one for as little as $250. If you need help getting one, call us – we can help.
Manage Your Balances
Having revolving credit card accounts, means managing the balances. How you manage your revolving accounts is actually more important than how you manage your installment accounts. With installment accounts it’s pretty much set – you make the same payment each month – often by setting it up on auto pay with your bank – and your balance (compared to the initial amount) goes down over time. Having really high balances is a factor, but one the balance goes down under 80% of the original balance, the impact on the score goes down.
With credit cards and other revolving accounts it’s a different story. Here’s how it works:
When they calculate your credit score they compare the COMBINED limits on ALL your revolving accounts and then compare that to the COMBINED balances on those accounts. That percentage determines how many points, if any, you LOSE from you scores. So as an example, let’s say you have three credit cards with the following limits and balances:
In this example you have a 45% balance to limit ratio – $4,500 divided by $10,000. How many points you lose depends on that ratio and everything else on your credit report.
So here is a very simple tip: If you keep your OVERALL balance to limit ratio under 10%, you will not lose any points off your scores.
If you can’t get the balance below 10%, get it down as low as possible. Every time you pass a 10% threshold – i.e. 20%, 30%, 40% etc. you lose more points. 30% and 50% are important because the number of points you lose goes up even more when you pass those numbers.
So the question is, at what point do they look at your balances? Answer: Almost all credit card companies report the credit reporting agencies on your statement date. And when is your balance typically the highest? On your statement date! So, what to do? If you want to make sure you have a low balance, go on line and pay your account 2-3 days before the statement date. If you don’t think you will use the card between then and the statement date, pay all of it except $5.00. That way you make sure they don’t report a zero balance month after month, which could actually negatively affect your score.
REMEMBER: It’s the overall ratio that counts, NOT the balance or ratio on an individual card.
A few other tips:
- – Do NOT close credit card accounts – that wipes out those limits and hurts your overall limit
- – Use each credit card at least once every six month so it doesn’t get closed for inactivity
- – Ideally, look at your credit card like a debit card where they take the money out of your account once a month as opposed to every time you use the card. That way you never charge more than you can afford to pay. That helps keep you from paying a lot of interest as well.
- – IMPORTANT: When it comes to getting approved for a home loan, a key factor is how much of your monthly credit card balance you pay each month. Want more details on how that works? Call us.
Length of Credit History or Credit Age
This is something only time can take care of. The longer you have (positive) accounts, the more they help your credit score. As noted above, don’t close accounts as that not only hurts your overall limits, but it negatively impacts the average age of your accounts.
While it’s good to have several accounts that will show your positive credit history, applying for too many accounts in a short period of time can temporarily hurt your scores. Whenever you apply for credit it there is something called a hard inquiry, which can negatively impact your scores, especially in the first 90-180 days. So, don’t go applying for multiple credit cards in a short period of time, as that can send up a red flag and hurt your scores.
As is the case with anything involving credit or finance, individual situations vary. If you have ANY questions about credit, finance or how it works, call us. One of our professional specialists will be happy to help you any way that we can.
How Do I Know if my Credit Report – and my Score – is Accurate?
The federal law that governs credit reporting is the Fair Credit Reporting Act (FCRA). This law spells out, among other things
- – What can be reported and what can’t
- – How long certain information can be reported
- – How accurate and complete the information reported must be
In summary, the FCRA says that anything reported to a credit reporting agency must be 100% accurate, complete and verifiable.
The reporting process is very complicated, and identifying inaccurate or incomplete information that could be making your credit scores look worse than they should be, can be very difficult if you don’t know what to look for.
It’s like going to the doctor, you want to make sure that the doctor diagnoses the problem correctly, and then puts together the right treatment plan. Often times, the doctor will refer the patient to a specialist to make sure everything is done correctly.
When it comes to identifying and correcting inaccurate, incomplete or unverifiable information, we are that specialist. It’s what we do for a living, and we are very good at it.
Our specially trained credit analysts will give anyone a free review and analysis of their credit report. After we have diagnosed any problems, we will give you a free consultation, which will include…
- – Understanding what’s important to you and your goals
- – What we found to be inaccurate or incomplete
- – Specifics as to what is hurting your credit scores and why
- – What you can do to improve your score
- – How our services can help you
- – How long it will take to get
- – An exact cost if you want to retain our services to help you
- – Answering all of your questions
After your free consultation you will know what your options are and have all the information you need to make a well informed decision as to what you want to do next.