How To Lower The Cost Of Your Entire Financial Life

Your credit score is the standardized way that the financial world measures your financial responsibility. The more responsible they determine you are, the less risky you seem and as a result, the less interest you will typically have to pay. In short, your credit score helps determine how expensive your financial life is going to be.

What are the benefits of a strong credit score?

1)   It can lower interest rates on personal loans, mortgages, credit cards, and auto loans. 

2)   It can lower insurance policy rates.

3)   It can eliminate the need for large security deposits or down payments.

4)   It can help you get hired for your dream job.

How can you transform your credit score?

The two areas that will give you the most bang for your proverbial buck are your payment history and amounts owed. Together, they generally make up 65 percent of your score. Here are three simple steps you can take to give your credit score a powerful boost and keep money in your pocket.

Your credit improvement checklist:

1. Review your credit report and fix any errors and inconsistencies.
2. Get current and pay your bills on time by setting them on automatic.
3. Use less than 30% of your credit limit

1. Review your credit report and fix any errors and inconsistencies. This step has the potential to positively impact your FICO score across all areas!

Your Action Steps:

• Obtain and review your credit report annually for free by going to annualcreditreport.com. You can get access to your credit report from the three credit reporting agencies: Equifax EFX , Experian, and Transunion TRU .
• Once you access each report, save it, review it carefully, and note every error, omission, or inconsistency.
• Next, dispute these errors online, via phone, or by mail. (The online process is considerably the fastest!) Note that each agency typically has up to 30 days to investigate and respond to your dispute, or else it must be removed from your credit report. 
• Sign up for a free credit monitoring service. There are quite a few services out there but I believe Credit Karma and Credit Sesame are great options to track and monitor your Vantage Score and even help you detect fraud. To obtain your free FICO Score (which is still used 90% of the time for lending decisions), you can leverage the free FICO score reporting service from Experian or the credit score service from your bank, lenders, and credit card providers.

2. Pay your bills on time.  (~35% FICO score weighting): Payment history helps determine your track record of reliability. As you can see, this is usually weighted the heaviest in determining your credit score. Your payment history stays on your credit report for up to seven years, so it is critical that you take the steps necessary to get all your accounts current and pay every bill on time.

How to Execute:

• Get caught up on all payments that are due. Take the extra step to give the creditor a call and confirm the amount due. While you have them on the phone, share that your goal is to improve your credit score and request that any previous late payments be rescinded from your report. A little heart to heart can go a long way, and it’s a win-win for you and the creditor (who just wants to get paid).
• Set up automatic bill pay on all your monthly obligations. Even if you feel that you can only make the minimum payment, making the minimum payment is ALWAYS better than a late payment. Putting these things on automatic will ensure that your payments will be made on time.
• If you are worried about over-drafting your account, take the extra step of creating a separate checking account for your monthly bills and automatically deposit what you need to meet those obligations every month. 

3. Use less than 30% of your credit limit (~ 30% weighting). This is another credit score heavyweight. Creditors want to see that you are using your credit without overextending yourself. A good rule of thumb is to keep your credit usage to less than 30 percent of your credit line. Ideally, you want this number as close to zero as possible.

Your Action Steps:

• Focus on paying off your credit balances by highest credit usage. This will allow you to make the biggest impact on reducing that important utilization number. When I did this, I bumped my score by 50 points over a 6-month period.
• Request a credit line increase. If your account is in good standing, you can often get approved for credit line increases, which generally improves your credit usage numbers. As you improve your credit and keep your accounts in good standing, it can make sense to request a credit line increase every 6-12 months. I also suggest that when you contact your creditor, confirm if the credit report they use can be a soft pull versus a hard pull. The hard pull can impact your credit score negatively if you’ve had several new inquiries on your credit report in the past 24 months.
• Consider consolidating your debt. This is one way of taking control of your debts, lowering your interest rates, and decreasing your credit usage. You can use a site like Credible to compare rates. Warning: BEFORE doing this, make sure you are in a position to not add further debt. This means feeling confident with the way you manage your spending/cashflow, having at least $1000-$2,000 or more set aside for emergencies, and having a plan to pay off your high interest rate debts (and setting them on automatic!).

Set yourself up for success and reap the benefits

If, like many of us, it can take a lot to get or keep yourself going, involve a friend, spouse, family member, or a trusted and unbiased financial professional. With a little help and making small incremental improvements like these, you’ll not only improve your credit and reduce the cost of your financial life, but you’ll be well on your way to financial independence!