Understanding Your Credit Score
Have you ever thought about owning property? Going to college and getting a loan to pay for it? Maybe a business loan to help kickstart your multi-million business? You have to approach a bank - and convince them YOU are a worthy and reliable contender. While these banks have a lot of algorithms running in the back end trying to predict how likely you are to pay them back, your Credit Score is a huge indicator.
The FICO Score / VantageScore is a predictor used by banks and credit card companies. A Very Good / Exceptional FICO score is between 740 and 850, while a Good / Excellent VantageScore is between 661 and 850. Having a good credit score is important because banks are more likely to give you a better interest rate. Let’s see this with an example:
Let’s say you want to purchase a $400,000 property. No one just has $400,000 in their bank account, so you approach a bank to get a loan. They see a 550 FICO score, and automatically they know there is a higher likelihood of you defaulting (not paying them back). They ask you for 25% down on the house (up-front cost) and a high-interest rate. This means you have to put nearly $100,000 upfront. Now let’s say you go to the bank for the same property, but in this alternate universe, your FICO score is 800. The bank can now predict you are much more likely to pay them back, so instead, they now ask you for 10% down and a slightly lower interest rate. This means, now you only have to put $40,000 up-front. Instantly this deal makes you more likely to purchase this property and start building your wealth!
Great, so having a higher credit score is awesome! But how do I get there? Well, there are several things you can do to start building an excellent credit score today:
1) The most important thing is paying your loans and credit cards back on time. Credit card debt is one of the worst forms of debt, so always make sure you are never late.
2) Credit Utilization Rate. The CUR is basically the ratio of your total debt to the total available credit. Typically, you should try and keep the credit utilization rate below 30%. So let’s say you have a credit limit of $1,000. If you only spend $200, your CUR is 200/1000 = 0.20. It is best not to max out your credit limit.
3) Total Debt — Goes without saying, keep your debt as low as possible!
4) Get a secured credit card. While allowing you all the benefits of a credit card, the secured credit cards you can’t really default as it is backed by a cash deposit — however, still make sure you are paying back on time!
5) You can check your credit score, for free, once every 12 months. There are 3 nationwide credit reporting companies and each allows you to access your credit report for free every 12 months. So planning in advance, you can basically get a credit score report every 4 months! Keep track of your score, notice if it ever dips, why it dips, and try not to do that again!
If you’re still confused, feel free to schedule a complimentary session with Professor Keith Weigelt to discuss your credit score and how you can raise it!
