Did you know you are entitled to one free credit report per year from each of the three credit reporting bureaus? Something as simple as 20 extra points on your credit score can save you well over $100,000 over the life of a mortgage loan. It is important to know what is on your credit report and verify there are no errors or fraudulent activities.
You are probably well aware that a poor credit score costs you money, but you probably are not aware how much that can add up to over time -- sometimes well over $1 million.
Here is how poor credit costs you in more ways than you imagined:
Mortgage: One obvious place that poor credit hurts you is the interest rate you must pay when you purchase a house. According to MyFico, someone with a credit score of between 500 and 579 would have a 9.125% APR. Based upon the median home price in Orange County, this would mean $800 a month more for the same house. Adding up to $288,000 over 30 years.
Auto loan: According to Edmunds.com the average car loan is $24,864. According to MyFico, an auto loan for a person with good credit would carry a 7.221% APR, while someone with poor credit would pay a 14.909%. That works out to a difference of $88 a month, equaling $3,168 over three years.
Credit cards: Let's assume, that both the people with good and bad credit both carry the median credit card debt of $2,200 over 30 years. If the person with good credit had an interest rate of 9% and the person with bad credit had an interest rate of 20%, the person with poor credit will pay an extra $7,260 over a 30-year period.
Lost interest: If the person with good credit took the difference and invested that money in an account that earned 8% compounded annually for 30 years, he or she would have well over $1 million saved. In fact, investing the $800 difference in the cost of the mortgage alone would be worth $1.2 million.
Insurance: All types of insurance (auto, health, homeowners) usually cost more for a person with poor credit. Insurance companies know that people with poor credit make more claims than those with good credit -- and therefore are more of a risk to insure.
Job: More and more employers pull your credit report when you apply for a job, because many see a risk in employing a person with poor credit.
Housing: Many apartment managers run a credit check on prospective tenants. If your credit is poor, you may be denied a unit due to the risk that you may not be able to pay.
Take the time to make the effort to keep your credit in good standing. It will pay off with more money in your pocket and less stress in your life.
Credit Savvy Tip #1: Become An Authorized User
If you have a friend or family member with great credit, become an authorized user on their credit cards. The credit scoring formula looks at your credit as a snapshot in time, it has no memory. The credit scoring software does not know you did not have the card yesterday. If you become an authorized user on your parents American Express they have had since 1958, with no late payments and a low balance, your score will calculate like you have had that same credit line for fifty years, with no late payments and the low balance. With this technique you can achieve a credit history, and the score that goes with it, which is older than you are.
Credit Savvy Tip #2: Pay Your Balances Down
30% of your credit score is made up of your debt ratio: the amount of debt you have as a percentage of what your credit limits are. If you are in the market for a large purchase, you should try to pay your balances down to as close to zero as possible. I understand that it is not always possible. With this in mind your most noticeable benefit on your credit score takes place when your credit debt ratio is 70% or lower, naturally the closer to 0% the better.
When you do pay down your balances, make sure they are spread evenly. For example, if you have one credit card with a credit line of $10,000 and one with a credit line of $1,000 and you are carrying $5,500 worth of debt you should have $5,000 on the $10,000 card and $500 on the $1,000 card.
Credit Savvy Tip #3
Have you ever looked at your credit report and seen balances that are inaccurate? This is because your credit cards may not be reporting your balance at a time of month that is most advantageous to you. For instance, let us say your MasterCard reports to the credit reporting agencies on the 15th of every month. Your bill is not due until the 24th. Even if you pay your bill on time, the credit agencies will think that you are carrying a balance higher than you really are! Call your credit card companies and find out when they are reporting your balance and pay your bill before that date. Doing so can boost your credit score and save you thousands of dollars in interest on a new loan.
Credit Savvy Tip #4: Don't pay Off Old Collections
Why would you ever not want to pay outstanding collections? Because, due to an error in the credit scoring software, when you do and your credit score is recalculated and your paid collection now becomes the most recent item on your report. If your collection is more than four years old, having a recent paid collection will hurt your score more than just leaving it unpaid.
Credit Savvy Tip #5: Keep Your Old Cards Active
15% of your credit score is based on the length of your credit history. If you have older cards, keep them! Even if they have a higher interest rate than your newer cards, it is best to put them in a drawer and use them every six months to buy gas and keep them active.
Credit Savvy Tip #6: Credit Card Tips
To lower your credit card "APR" annual interest rate and remove your annual fee. Make sure you have been in good standing with your credit card company, meaning no late payments, not being over the limit, and paying at least the minimum due for a minimum of three months in a row. Being in good standing you can ask to lower your "APR" annual percentage rate. Also if your credit card charges an annual fee, you can ask to have the annual charge removed. If the customer service representative is unwilling to help, ask for a supervisor, remain calm and friendly but be persistant. Remember you are the customer, once you have your good standing with the creditor they will be more willing to help you with your requests.
Your Credit History
As part of the loan application process, virtually all lenders will want to see a copy of your credit report. The report will list all your long-term debts (credit cards, mortgage payments, automobile and student loans, etc), as well as your payment history. If you don't have a copy of your credit report, most lenders will generally require you to pay for a copy when they process your loan application.
However, most real estate experts agree that it is a good idea to obtain a copy of your credit report several months before you apply for a loan. This is so you have a chance to resolve any problems with your credit before your bank sees it. U.S. Federal law ensures that you have access to your credit report, which may be obtained from your local credit bureau or any of several national firms that specialize in credit reports.
Late payments
For most people, problems with their credit report are likely related to late payments on a debt. If you were late one month in paying off your credit card, but otherwise have a good payment history, chances are most lenders won't be too concerned. But if you have a history of late payments you'll need to document the reasons why. A slow payment history won't necessarily get you turned down for a loan, but you may have to pay a higher rate of interest or otherwise prove to the lender that you can repay your loan in a timely fashion.
Errors on your credit report
Many people are surprised to learn that credit reports can often contains errors or inaccurate information. If this is the case with your credit report, you'll need to contact the reporting agency or creditor to have the problem resolved. This can sometimes be a slow process, so make sure to give yourself time to clear up the mistake.
Bankruptcies and foreclosures
There's no getting around it, a bankruptcy on your credit report is not a good thing. But that doesn't mean you still can't obtain a loan. Even though a bankruptcy may stay on your credit report for seven to ten years, lenders will often consider the circumstances surrounding a bankruptcy (family illness, injury, etc.). Moreover, if you have reestablished good credit since the bankruptcy, a lender will be more inclined to approve your application.
My Experience And Knowledge Will Save You Thousands of Dollars Every Year!
The links below have been provided for your convenience so you may contact these agencies for your free reports today.
