Fri 27 Jul 2007
I’ve referred several times to the fact that credit is something that is extremely powerful. Whether or not you choose to use credit to your advantage or to your disadvantage is your choice. In order to understand some of the power you can achieve if you use credit, here are some examples:
Credit Card Interest - People with good credit ratings can pay as low as 7% on a credit card compared to those with bad credit who often receive offers for cards that charge 29% interest. This difference alone is a reason to desire a good credit rating.
Credit Card Offers - Good credit tags you as a source for credit card offers. Most of these offers are bogus but it sure helps to have a few 0% balance transfer offers sitting around that allow you to keep your card payment in a savings account (or somewhere else) while you’re paying NO interest.
Leverage - Good credit allows an individual to be approved for high credit offers. This credit can be applied towards large purchases which individuals with less than stellar credit cannot make. This applies mainly in the purchase of large assets such as homes.
Again, credit is a powerful tool that you can learn to use in your favor. To understand this beast, we can look a little more at what your credit score is composed of. Most of the information I will be providing can be found in the Bankrate article “Credit Scores Made Simple.”
Your credit score is composed of the following elements which are weighted towards calculating your score. I will also provide a few tips for using the way your score is calculated to your advantage.
Payment History on Accounts: 35% of score - If you pay late, it looks bad; if you pay only the minimum, it looks bad; if you are in excess of meeting your financial obligations, it looks great! Solution: never pay late and always pay more than the minimum required. Even if you only pay $1.00 more than the minimum, your score is impacted in a positive fashion.
Amounts Owed: 30% of score - Not much of a way to impact this. The amounts you owe can be represented in your Debt To Income Ratio (DTI) which shows what percentage of your income is going towards debt payments. You should aim to keep this level around 20%. In order to use this aspect to your advantage, you need to either pay down your debts or make more money.
Length of Credit History: 15% - Fifteen percent of your score is based on how long you’ve held your various accounts. The easiest way to maximize on this is to keep your accounts open forever once you open them. Enough said.
New Credit: 10% - Don’t take out bad credit (payday loans etc) lines if possible, your score will go down when you open a new account but if it is a high risk account, your score will be even more negatively impacted. If you aren’t opening new accounts, this aspect will continue to improve your score
Types of Credit Used: 10% - Do you have good credit (mortgage) or bad credit (payday loans)? Keep good credit and your are golden. Maintain bad credit and your score won’t improve.
Do a little more research; check out a few articles out there floating around. Improving your credit score isn’t that difficult and once you’ve got that item down, you’ll be ready to starting using your good credit to establish great things!
Good luck to everyone!