Benefits of Protecting Your Credit Score

Benefits of Protecting Your Credit Score

An often overlooked factor in building wealth is protecting your credit rating. Your credit score might seem like a small part of your financial profile, but that number becomes your passkey to credit. If debt is a material part of your financial life, your credit score can translate to a substantial amount of money. While a good credit score might not save you much money, a great one might.

Having an exceptionally high credit score, between 800 and the maximum score of 850, can result in savings of thousands if not tens of thousands of dollars over the long haul. Borrowers with higher credit scores pay lower interest rates and are eligible for larger loans. If you are among the very few with a perfect score, you will often have your pick of lenders and can use the competition to leverage exceptionally low rates and fees.

Let’s break this down by the numbers:

A FICO (Fair Issac Corporation) score starts at 300 and goes up to 850. Generally, anyone with a score of 700 or higher is considered a good risk, and a prime borrower. Roughly half of the people in the country with FICO scores fall in this range, so being a ‘good’ risk is not very exceptional.

Statistics show about 32.8 million people have scores between 700 and 749, and slightly more, 36.4 million, land between 750 and 799. Even more, 38.6 million, have scores of 800 or higher. Only 2 million, or about one percent of borrowers, have a perfect score of 850.

Reports indicate a noticeable increase over the last 10 years in the number of borrowers with ultra-high scores, while the number of those in the 700 range has remained mostly static.

So how can you maximize your credit score? The biggest factor in calculating a score is payment history, followed closely by the size of your debt. Those two factors make up about two-thirds the weight of your score. The rest is determined to a lesser degree by the how long your credit history is, the diversity of your credit, and the number of recent applications for credit (more is not necessarily good).

For that reason, here is a simple checklist of rules to follow, in descending order of importance:

     – Make payments to your credit accounts on time, and pay them off if you can.

     – Limit the size of your debt relative to income and assets, and stay well under your limit.

     – Don’t maintain balances on too many accounts.

     – Do not liberally apply for new credit.

It’s important to try to keep your debt to credit-limit ratio to 10 percent or less, even if you routinely pay off balances. If you keep high balances on your card, that could hurt you even if you pay off the balance by the statement due date. If you need to make large purchases, consider paying them off soon after the charge appears instead of waiting for the due date. If you do have to charge large amounts, consider using charge cards instead of credit cards. Those balances generally are not counted against your debt limit.

Be aware that checking your credit score can also lower it. Limit the number of inquiries made on your account. This can happen when you apply for limit increases or when you apply for new credit.

Try to use all the credit cards you have at least once a year. If you don’t, the issuer might close the account, which can lower your score.

Remember that positive adjustments you make to your charging habits can take many months or years to improve your score. Likewise, the damage you do with a missed payment can take years to undo. Some adjustments, like paying off or paying down your balances, can take effect quickly.

Once your credit score does rise, take advantage of it. Look for lenders that make a distinction between good and great borrowers. Not everyone does. The larger the amount you’re borrowing, the more of a difference your sterling score will make.

John Christianson
john@highlandprivate.com
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