In the last column we looked at a number of personal finance issues in the news. Recently, I heard a National Public Radio piece on credit scores that I found to be very interesting, and something that I was not aware of. The piece discussed belonging to the “800 Club” — people with excellent credit scores of 800 or above. I was aware of that; however, the discussion was also about claiming bragging rights, creating clubs or groups to compete within the group for the best scores, and even shaming others on social media.
Everyone should work to increase their credit score, and if a group on the internet or at work or school can help you to do that in a positive and reinforcing way, that’s great. However, some of the reporting I heard had mean-spirited and even bullying aspects to it. That is not good, but it is perhaps just another example of the negatives of our addiction to social media.
Nevertheless, this is a good time to revisit credit scores and their importance in our financial lives.
According to creditcards.com, nerdwallet.com and other sources, here are some important things that everyone needs to know about credit scores.
First, your credit score, which generally ranges from 300 to 850, with the higher scores being better, indicates your creditworthiness, or, put another way, the likelihood that you will repay any money that you borrow. One of these scores is a FICO score, and, as of April 2017, approximately 20 percent of Americans had a FICO score above 800, putting them in the prestigious “800 Club.” The fact is that a score of over 720 is considered to be excellent.
Second, there are added benefits of being a member of the “800 Club.” You are likely to be quickly approved for a loan. In addition, you will qualify for lower interest rates, which can save you a lot of money in interest costs over the life of a loan, especially on longer term loans like a mortgage. Also, it may qualify you for a 0 percent promotional credit card rate for purchase and even for balance transfers, which once again, if used wisely, can save you on interest costs for important purchases. Just make sure that you don’t have a balance when the promotional rate ends. Last, it may quality you for higher credit limits, and for rewards credit cards. However, remember that the studies show that you may spend more with those cards than you otherwise would.
Third, here are some tips to build your credit score, and even get into the “800 Club,”
• Pay all of your bills on time. As much as 35 percent of your credit score is payment history. It is not just your credit cards that you have to pay on time. It is everything, including your mortgage, car loan, utility bills, cellphone and land-line bills, cable and internet bills, rent, and medical bills, because they may all can be reported to the credit reporting/credit score companies.
• Improve your overall debt-to-income ratio by reducing any outstanding balances. Then you may be able to increase your credit limits, which will further improve your debt-to-income ratio. That ratio, if low, is seen as an indication of how well you are handling your finances. However, don’t raise your limits too much, because too much availability can be a negative. The concern is essentially that you could borrow up to that
availability tomorrow, but not actually be able to handle those balances. Also when paying down any credit card account balances, pay down the ones first that have the highest debt to credit limit ratio. For example, pay the account that has an $800 balance and a $1000 limit (an 80 percent usage), before an account that has a $400 balance and a $1,600 limit, (a 25 percent usage).
• Show that you have a variety of credit accounts that you are handling responsibly, like a credit card, a reasonable mortgage, a reasonable car loan, and maybe a small personal loan. However, for me, it makes no sense to increase your overall debt long-term, and to pay those interest costs, just to increase your credit score. Make it a short-term strategy.
• Keep older accounts, like credit card accounts, open. That does not mean that you have to carry balances that you can’t afford. It shows stability, as does having a long-term residence and employment, but you may not always be able to control that.
• Check each of your three credit reports annually from Experian, TransUnion and Equifax, by getting them at AnnualCreditReport.com. Your credit scores from these three agencies are algorithms based upon your credit reports, so make sure that you correct any errors in those reports.
• Think carefully before you cosign for someone else’s debt. If they fail to pay the debt, it can destroy your credit history and your great credit score that you worked so hard to achieve.
• Remember once you have a great credit score, even a small slip-up, like one late payment, can really negatively affect your score.
Now that you have a roadmap, take that journey and improve your credit scores.
John Ninfo is a retired bankruptcy judge and the founder of the National CARE Financial Literacy Program. Find his previous weekly columns at http://www.mpnnow.com/search?text=Ninfo or at http://www.monroecopost.com/search?text=Ninfo.