Whether you know it or not, your credit score can have a huge impact on your life. You are probably aware that your credit report and / or creditworthiness can affect your ability to get a credit card or home loan and the interest rate you pay on those lines of credit or loans. But there is more than that.
For example, prospective landlords and employers can request a copy of your credit history (with your consent), which can prove to be a crucial factor in deciding whether to get the rental and / or job of your dreams.
Similarly, insurance companies have found that people with a lower credit score are more costly. As a result, insurers tend to bill more people with less than great credit reports.
Even utility companies can punish people with poor credit ratings. Although utilities cannot directly deny services to someone with a bad credit report, if that person fails to make payments on time, they can require that person to make a large down payment prior to commencing services.
On the other hand, excellent credit can mean banks are fighting for your business, and this should result in you getting the best possible interest rates on a mortgage or credit card. It can also mean having low insurance rates and not having to deposit any deposits when opening utility accounts. In other words, it means the ball is in your field of play. This is why maintaining a good credit score is so important.
How do you achieve a good or very good credit rating? First, it helps to understand which variables are important.
This is how your credit score is calculated
Although some credit score scales are used, the FICO score is off Fair Isaac Corp. is the most common.
FICO scores range from a low of 300 to a high of 850 and take into account five variables (although the exact formula is a well-kept secret). The number in parentheses next to each variable describes its relative weight in calculating your FICO score.
- Payment history (35%): Nothing is more important than making your payments to creditors on time.
- Credit utilization (30%): This describes the total loan amount you are currently using across all of your loan accounts as a percentage of your total available balance. In general, creditors want your usage rate to stay below 30% as this signals responsible spending behavior.
- Loan History Duration (15%): Your credit history acts like a roadmap for creditors. The more data points you provide, the better they can get an idea of how trustworthy you are. Keep credit accounts open for a longer period of time definitely helps.
- New credit accounts (10%): Your FICO score will also check how many new accounts you have opened recently and whether any tough credit requests have been made. The general rule here is to only open new accounts if it makes economic sense. That means opening a new account to save $ 2 on a shirt at a department store is probably not a smart move.
- Credit mix (10%): Finally, FICO will check your credit mix. In particular, your score will benefit when you have a nice mix of monthly installments and revolving loans. Installment loans are set every month, e.g. A mortgage or a car loan, while revolving loans vary depending on your debts; B. a department store loan.
In general, a score above 700 is considered “good” while anything above 760 is considered “excellent”. When you get your score above 800, lenders can begin to bend over backwards to preserve your business.
An invaluable lesson in terms of maintaining excellent credit
While this describes the formulaic approach to good credit, it doesn’t tell you about the nuances that will help you maintain your score. As someone with a perfect credit score of 850, I can speak firsthand about a mistake I made recently, as well as the solution that allowed me to maintain my pristine credit. If you’re in the mood for a quick story, I have an invaluable lesson to share.
Without going into too much detail, like most Americans, I have a credit card that I prefer. This particular card offers rewards that can be redeemed for cash, flights, or goods and services. The point is, I use this card for practically everything.
The downside of being taken off a card like this is that I lost sight of the other plastic in my wallet. These additional cards, which got me through my studies and early years of employment, have a long history of on-time payments, even if I don’t use them that often anymore. Some people would probably suggest that I close these accounts, but if they stay open, my credit utilization will decrease and the amount of time my average account will be open will increase. Even when they collect dust, they serve a purpose.
However, late last month I received a letter from one of my creditors stating that one of these cards, which has been open since 2004, is being closed due to inactivity. Apparently I had expired since August 2016 and completely forgot to shop with this card. The loss of this card would have reduced my available credit and thus increased my level of use a little. But more importantly, it would have removed a 14 year old card from my credit history. It was not acceptable to me.
After reading on various credit card based blogging sites – because we know everything on the internet is true (eye rolling) – that once a creditor has decided to close an account, it’s final, my prospects, my perfect credit to keep it looked gloomy. On the other hand, I’m really stubborn so I called my believer. Lo and behold, it took no more than 15 seconds for the agent to agree to keep my account open with a promise on my part that I would use my older credit card more often.
Never underestimate your bargaining power
The most important point here is that as a borrower you have bargaining power over creditors and, in general, the better your credit, the more bargaining power you have. Believers will not just give in and give in to your needs unless you ask! If I hadn’t requested to keep the account open, it would have been closed simply because of inactivity.
But the idea here goes way beyond simply keeping an underused account open. If you’ve made timely payments in the past, call your creditor and ask them to lower your interest rate. If you are in arrears with a payment, but were otherwise on time all other months, Ask your lender to forgive you for making a mistake. If you are extremely late with your payments or are having trouble making your payments, call your lender, explain the situation, and come up with a plan for how to fix it. Ultimately, it is cheaper for creditors to keep their existing customers than to acquire new customers. Hence, it is in their best interest to work with you regardless of your creditworthiness.
If you take anything out of my personal story, let it be like this: when in doubt, ask your believer. The worst they can say is no, and there are far worse things in this world.