Did you know that bad credit can cost you an extra $200,000 over your lifetime? That alarming headline came straight from a MSN Money article that estimated the amount of extra interest a consumer with bad credit will have to pay over their lifetime when compared to someone with good credit. It’s a wake-up call for anyone wishing to borrow money to buy a car, a home, go to college, or make a purchase on credit card.
Bad credit will cost you big money and the reason why has to do with how banks lend money. When making a decision to lend money to a consumer, banks generally purchase your credit report from the three main credit bureau reporting agencies: Equifax, Trans Union, and Experian. With data from your credit report a credit score is calculated to determine the likelihood that you will repay the loan on time and in full.
The most commonly used and recognized credit score is the FICO credit bureau score. By using a credit score, banks will determine whether or not to lend you money and the loan amount. What many people don’t realize, however, is that your credit score will also be used to determine the interest rate for a loan or credit card. After experiencing one of the worst recessions in decades, banks are requiring even better credit scores to get the lowest available interest rate. Banks that once gave the best interest rate to customers for having a FICO score just over 700 (the score ranges from 300-850) may now require scores to be as high as 750 to get that same best interest rate. So if you are planning to borrow money, you should expect to pay more unless you follow these three tips:
1. Make your Payments on Time
The internet is filled with articles and blogs with gimmicks on getting a high credit score. In reality there is only one true way – pay your credit card bills and loans on time! A recent, single late payment can reduce your score to a point where you will no longer get the lowest rate. Fortunately there are simple ways to build the discipline to pay on time including setting up automatic payments from your checking account. One other tidbit: pay all your household bills on time and in full. Remember that cellular phone contract you decided to cancel and not pay the termination fee – that will go on your credit report and lower your score. Same thing for ignoring that auto leasing company bill for the scratch you refused to pay for after you returned the car (I have reviewed many credit bureaus in my career and have often seen consumers with otherwise perfect credit profiles get hurt by not making these payments).
2. Build a Credit History
It may sound ironic that your credit score can increase by using your credit cards or taking out an auto loan, but it is true. That’s because banks like to know that you are capable of borrowing money and paying it back. If you never borrowed money, a lender will never know whether you are disciplined enough to pay it back. What lenders don’t want to see, however, is too much borrowing. Excessive borrowing is not good for you, your finances, and your credit score. Your monthly payments must always be within your budget!
3. Build a Relationship with a Bank
This tip may sound a bit old-fashioned when most of your banking can be done on your smart phone and not through a bank branch. But this relationship can often result in a lower interest rate on your next loan. That’s because banks typically offer lower interest rates on loans when you have a checking account with them and you allow the bank to automatically deduct monthly loan payments from your checking account. And besides that lower interest rate, automatic payments will ensure your loan is paid on time which helps you maintain a good credit score. So remember to pay your bills on time, build a credit history and establish a strong relationship with a local bank such as Webster. By following these three tips, you will be able to obtain an auto loan, a mortgage loan or an education loan at the best available interest rate. Couldn’t you find better things to do with $200,000?