On Wednesday, I mentioned the crucial role your credit plays in purchasing a home. Having an excellent credit score versus a poor one can save you tens of thousands of dollars over the life of a loan. As such, improving your credit score should be a top priority when getting your finances in order.
Most lenders use your FICO scores when determining your credit worthiness. FICO stands for Fair Isaac Corporation, and they determine your score from reports given by three separate credit bureaus: Experian, Equifax, and Transunion. The scores range from 300 – 850. The higher your score the better. If you have a score over 760, you will likely get the best rates and terms available. You can still get good rates with a score between 720 and 760. But when you get between 620 and 720, you will find a mix of prime and subprime financing. Anything below 620, you will get the worst rates out there or may not get financing at all. FICO calculates your score based on five factors: your payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Don’t fear if your score isn’t quite where you need it to be. Taking two simple steps can dramatically improve your standing. As you can see your payment history (i.e., how often you pay on time) factors into your score the most. And the easiest way to pay your bills on time is to set up automatic bill pay. Almost all companies, whether your phone carrier, cable provider, and even the IRS, can set up a way for your payments to come out automatically. Having your bills come out automatically means the payment won’t get forgotten or lost and will keep your payment history squeaky clean.
Of course, you have to make sure you have money in the account. So you should leave a little cash cushion to ensure your payments go through. For those of you that don’t like automatic bill pay, instead you can get auto reminders. Most businesses have the technology to send an email or a text a few days before a bill’s due date to remind you it’s coming up. Setting up a reminder each month will help guard against a forgotten payment, without you giving a lender access to your account. For those of you having credit problems, your debt is likely the reason you got in trouble in the first place. And as someone who had $160,000 in public and private student loans on top of credit card debt when I graduated from law school, I know how crippling debt can be. I’ve talked about goal setting when it comes to paying off debt, but I would also like to offer some more practical steps. Online you can find free debt reduction calculators that can assist you in developing a debt reduction plan. My favorite spreadsheet has you categorize your debt by amount, interest rate, and minimum payment. It then gives you several options to pay off your debt in the way that works best for you. If you would rather pay off the smallest balances first to gain momentum, you can prioritize your debt repayment that way. Or you can pay off those debts with the highest interest rate first, my preferred payment strategy. And even still, you can customize the order however you want. Say for example, you want to pay off a loan to a parent or sibling before you focus on your other debts. You do need a realistic sense of how much you can contribute towards debt repayment. That means knowing how much you bring in and how much goes out. And, of course, that means finding an effective way to track your spending. Improving your credit score can be one of the most beneficial things you can do for your financial life. Developing these two key habits will give you the best opportunity of improving your credit the fastest. Who is this FICO anyway?
Set Up Automatic Bill Pay
Payoff your debt
Either way, the debt calculator gives you a strategy for using extra money to pay off your debt and shows just how long it will take you using your desired method.
