Credit Score, Credit Report, and Credit Cards

Credit is one of the most vital factors in your life from 18-60, but because it’s hard to wrap our minds around it, we often overlook it entirely. Think about it: Our largest purchases are almost always made on credit, and people with good credit save tens of thousands of dollars on these purchases. 

There are two main components to credit (also known as your credit history): the credit score and the credit report. 

Your credit report gives potential lenders—the people who are considering lending you money for a car or home—basic info about you, your accounts, and your payment history. In general, it tracks all credit-related activities, although recent activities are given higher weight.

Your credit score is a single, easy-to-read number between 300 and 850 that represents your credit risk to lenders. It’s like a Cliff’s Notes for the credit industry. (Best range is 760-850)

It’s easy to check your credit score and credit report—and you should do it right now. Once a year, by law, you’re allowed to obtain your credit report for free at www.annualcreditreport.com. To get your credit score, on the other hand, you’ll have to pay. You’ll get the option to pick any of the three major reporting agencies. Just pick any one—it doesn’t really matter.

A good credit score can save you hundreds of thousands of dollars in interest charges. You might say naively, “I don’t care about this. I don’t need to borrow money.” Maybe you don’t today. But in three or four years, you might need to start thinking about a wedding or a house. What about cars? Vacations? Etc.

If you doubt that a loan’s interest rate really makes that much of a difference, check out the following table. Assuming you borrowed $200,000 for a 30- year mortgage, look at the differences in what you’d pay based on your credit score.

As you can see, a high credit score can save you hundreds of thousands of dollars over your lifetime—and that’s just on a mortgage. Its fine to be frugal, but you should focus on spending time on the things that matter, the big wins. So, let’s look at some tactics for improving your credit, which is worth much more than any advice about frugality.

Building Credit with Credit Cards

One of the biggest problems with credit cards is the hidden cost of using them. It may be incredibly convenient to swipe your card at every retailer, but if you don’t pay your bill the same month, you’ll end up owing way more than you realize. Take, for instance, an iPod.

It looks like it costs $250, but if you buy it using a credit card with the average 14% APR and a 4% minimum payment, and then only pay the minimum each month, you’ll be out almost 20 percent more in total.

If you paid only the minimum monthly balance on your $10,000 purchase, it would take you more than 13 years and cost you more than $4,000 in interest alone. Instead of paying off a $10,000 furniture set for 13 years, if you’d invested the same amount and earned 8%, it would’ve turned into about $27,000! Try calculating how much your own purchases really cost at www.bankrate.com/brm/calc/minpayment.asp 

This isn’t meant to scare you away from using credit cards. In fact, I encourage you to use credit cards RESPONSIBLY. If you don’t have good credit, it may be difficult to get an affordable home loan—even if you have a high income.

Getting a New Card

Whether you’ve never had a credit card before or you’re thinking about getting an additional card, there are a few things to think about.

1)  Avoid those credit card offers you receive in the mail. If you hate those credit card offers in the mail as much as I do, visit www.optoutprescreen.com to get off their lists. Out of every thousand students who are mailed offers, 150 accept them, a CRAZY high number. Students—and young people in general— are especially susceptible to these offers because they don’t know any better. For something as important as your credit, make the effort and pick a good card.

 2) Avoid cash-back cards, which don’t actually pay you much cash. Get 1 percent back on all your spending!” Wow, if I spend $2,000 per month on my credit card, I’ll get back $20. Smdh 

3) Compare cards online. The best way to find a card that is right for you is by researching different offers online (try www.bankrate.com).

4)  Rewards are important.

5)  Don’t go card crazy.

The less information in your credit report, the higher the prominence of each new report. For example, if you’re in college and you only have one credit card in your name, when you open another account, the weight of that action is more than it would be ten years down the line. If you limit yourself to opening one card a year, you’ll be doing yourself a favor.”

The Six Commandments of Credit Cards:

1)      Pay off your credit card regularly.

a.       Consequences of missing one payment

                                                              i.      Credit Score can drop more than 100 points

                                                            ii.      APR or interest rate on other purchases can go up around 30%

                                                          iii.      Late Fee

                                                          iv.      APR or interest rate on other cards you weren’t even late on.

2)            Get all fees waived on your card

a.       Give the company a call if you are late the first time and explain to them why you were late and how it will not happen again. Do not take no for an answer.

3)            Negotiate a lower APR

a.       The average is 14%

4)            Keep your cards for a long time and keep them active

a.       Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score. Don’t get suckered by introductory offers and low APRs

b.      Play it safe: If you have a credit card, keep it active using an automatic payment

5)            Get more credit (only if you have no debt!!!)

6)            Use your rewards

Mistakes to Avoid:

       1)                  Avoid closing your accounts (usually).

a.       For example, having $2,000 in debt and $8,000 in available credit is better than having the same debt with only $4,000 in credit.

b.      People with zero debt get a free pass. If you have no debt, close as many accounts as you want. It won’t affect your credit utilization score.

    

       2)                  Manage debt to avoid damaging your credit score.

 For example, if you carry $1,000 debt on two credit cards with $2,500 credit limits each, your credit utilization rate is 20 percent ($1,000 debt ÷ $5,000 total credit available). If you close one of the cards, suddenly your credit utilization rate jumps to 40 percent ($1,000 ÷ $2,500). But if you paid off $500 in debt, your utilization rate would be 20 percent ($500 ÷ $2,500) and your score would not change.

       3)                  Think ahead before closing accounts. If you’re applying for a major loan—for a car, home, or education—don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.

       4)                  Avoid getting sucked in by “Apply Now and Save 10 Percent in Just Five Minutes!” offers. Stay away from the cards issued by every single retail store. These cards might as well have “You Are A Dumbass”. Written across. 

Tiger Tracks Week 2:


1)  Get your credit report and credit score. Check them to make sure there are no errors and to get familiar with your credit. You can access your report and score at www.my fico.com. If you don’t want to pay the $15 fee at www.myfico.com, at least get your free credit report from www.annualcreditreport.com.

2)  Set up your credit card. If you already have one, call and make sure it’s a no-fee card. If you want to get a new credit card, check out www.bankrate.com.

3)  Make sure you’re handling your credit cards effectively. Set up an automatic payment so your credit card bill is paid off in full every month. (Even if you’re in debt, set up an automatic payment for the largest amount you can afford.) Apply for more credit if you’re debt-free. Make sure you’re getting the most out of your cards.

4)  If you have debt, start paying it off.