Financial Fitness Series - Benefits of Good Credit
Top Four Benefits of Good CreditYesterday I shared an infographic that illustrated the basics of a credit score. Today, I wanted to highlight the financial benefits of having excellent credit. I know that most people know that good credit helps you secure credit cards or other loans, but I don't think that people realize the actual cost benefits of good credit. The major benefits that I see include:
- Lower costs to borrow - Below are two screen shots thanks to MyFico.com that illustrate the cost difference between a poor or fair credit score and a good or excellent score. In the case of a car, it could cost you up to $1,920 a year in additional interest costs and a total of $9,600 over a 5 year loan. As far as mortgages, it could cost you up to $3,480 in additional interest per year to have a lower credit score and over a 30 year mortgage, it would represent $104,400 in additional interest costs just by your credit score alone.
- Access to more credit - If you have a credit spending problem, then access to more is not necessarily a good thing, but if you use your credit responsibly, having access to more credit allows you to become more strategic with your financial life. I have clients who utilize 0% or low financing options to free up their cash to invest or earn more money over a period of time.
- Financial flexibility - If you have poor credit, you will likely have to pay for cash more often than not, which ties up your options depending on your cash on hand at any given time. I have a client who needed a new car, but had such poor credit that she could not get approved for any type of financing and had to pay cash for the car. Because she did not have a substantial amount of cash, she had to get a car that was in poor condition which ultimately led to more cash outlays for service.
- Points and Rewards - Many credit cards offer points and rewards depending on the amount of money you spend. There are a number of cards that give you significant points when you sign up and charge a minimum amount of money. There are a few personal finance bloggers that I have seen that maximize this strategy and reap rewards from free vacations to significant money back. If you are spending money anyway, it makes sense to get rewarded while you are doing it.
How do you get started?If you are just beginning to build your credit or thinking about building your credit, here are four steps to take to get on the right path.
- Check your credit score - There are plenty of sites that will give you this information. You are actually allowed by federal law to get a free copy of your credit report every 12 months from the three reporting companies. I personally like the website Credit Karma. They not only provide you a free report, but they give you a report card with tips and tools for how to improve your score.
- Plan for improvements - Once you know your score and determine what you need to do to make it better, commit to making this a priority this year. It takes time to build your credit score and the sooner you start, the better you will be down the road.
- Set calendar reminders to review - There are a number of reporting sites that will charge you to monitor your credit score. I think an easier (and cheaper) approach is to schedule a monthly calendar reminder to login and review your score. Make sure there are no negative changes to your score and that everything looks "normal" to you.
- Look before you leap - Before you make a financial choice that may impact your credit (i.e. applying for an auto loan, a new credit card, moving, changing jobs, etc), determine what type of impact it may have. Credit Karma has a tool that allows you to model "what-if" scenarios to determine the impact it will have on your credit score.
Good luck on your road to credit excellence!