Hey Man, What’s Your Credit Score?
The key to financial happiness is not just accumulating lots of money, although that wouldn’t hurt. Having a high credit score in the Great Recession is like having the American Express Centurion Card (available by invitation only). Doors open up and everybody treats you like a king.
You get mail almost daily from nice credit card companies that want to give you money, car insurance rates are lower, auto loan rates are lower, and generally when you go to spend money people just seem nicer toward you. And if you’re a single guy, after the women have done their back ground checks, you may have a more vibrant social life. After all, there are some things money can’t buy.
Conversely, if you have a low to poor credit score, you might as well not exist. Everything costs more–car insurance, mortgages, auto loans. Those lovely credit card welcome letters dry up and disappear. And your life slows down.
I’m going to discuss some tips that you can do at home, that can result in raising your credit score. It’s a bit like studying for the SATs. Sometimes a few points are the difference between Yale and Community College. Mortgage rates can vary up to two full percentage points or more depending on your credit score.
So what does it take to increase your credit score? First, a simple Fico score truth. The less you borrow of what you’re permitted, the higher your Fico score. For example, one person might have a credit card limit of $1,000 and “max out the card,” running up $1,000 in purchases. Another person with the same card might only spend $50. All things being equal, the guy with the $50 balance will have a higher score than the person who is maxed out. The term for how much you can borrow against your limit is called level of credit utilization.
The Fico credit score gives a weighting of 30 percent to credit utilization. So let’s say your situation is closer to the maxed out guy. Contact your credit card(s) in as nice a manner as you can and kindly request to increase your credit card limit. If successful in your request, the result can be a higher credit card score.
Oddly, paying off and shutting down a credit card hurts your credit score. Paying off is good, but closing the account removes total credit available to you, which means you become more like the person who is maxing out his credit card.
Too many credit cards in your possession will hurt your score. Determining how many cards are too many is like pornography, you can just tell.
Another quirk in the credit score game is to mix your sources of debt. For instance, have credit cards with balances both above and below a $25k cap. That $25k cap threshold is like the Mason Dixon line when determining if you have revolving credit accounts. Above the $25k credit card cap, Fico assumes it is not a credit card even though it is. Don’t ask me why. One way to mix your debt is to take out a car installment loan on your next purchase.
What is the impact of all of these machinations? Going from maxed out (100%) on credit cards to 50% balances can result in your Fico scores increasing by as much as 60 to 80 points. Mixing sources of debt can result in increased scores of 20 to 60 points.
It pays to discover and use these techniques.