Educating Yourself and Understanding Why FICO Score Matters
In 2018 my credit score went up as high as 815 and then I decided, I was no longer going to be “part of the system”. Not being part of that system meant that I no longer care about keeping a good tab on my credits and expenses. I also thought why would I need good credit when I’ll probably get rich on my cryptos , well let’s just say that, that didn’t work out and two years later when I needed money to do home renovation and my cryptos holdings flatlined, the “system” that I had no use for at that time now had no use for me! No banks were willing to give me a loan for under 20% interest because of my poor credit score by this time!
I highlighted the last sentence above because if you don’t take anything out by end of this article, at least know that ignoring your FICO score will have serious financial ramifications! So what is this FICO or Credit Score and how can you increase or protect yours?
Your FICO or Credit Score is a number that rates your financial trustworthiness – that is a judgment on how likely, or capable you are as a consumer to be able to pay back your debt! The credit bureaus break down their scorings based on 5 different factors – Payment History, Amount Owe (Outstanding Balance), Length of Credit History, New Credit Open, and Type of Credit as shown in the chart below and your score will put you under 1 of 5 categories as the borrower – Exceptional, Very Good, Good, Fair, and Risky. Anything below 670, the “Good” threshold will automatically close many doors to you. Credit scores can affect you in the following ways:
- Home Buying: You cannot get a conventional mortgage loan with a credit score below 620; Even though you can qualify for FHA ( Federal Housing Administration) mortgage with a 500 score, you’ll have to put down 10% of the loan upfront and be forced to accept mortgage insurance that increases the total cost of the loan.
- Applying for Jobs: Some employees include a credit check as part of a background check. If your position requires handling or management of money, you will not be an employee that they can trust.
- Buying Car & Getting Car Insurance: High credit score will allow you to get better rates on your car insurance. When buying a new car, like buying a new home, you will need to get a loan with a good rate. A $15,000 car may actually cost you $25,000 by end of your loan if you have a high-interest rate because of your bad credit score!
- Apartments & Security Deposits: Having bad credit requires you to have co-signer and security deposits because landlords do not trust your ability to pay.
- Signing up for Utility: Like apartments, utility companies may also require a security deposit upfront when you do not have a good credit score.
- Refinancing Existing Home: You can lower your mortgage payment and interest by refinancing, a great option when you have a good credit score!
Most banks now offer free Fico Score so you do not need to sign up for paid services like Experian, Transunion, or Equifax. I have Experian because it allows me to create alerts and monitors to see how my credit changes and react quickly to it. Intuit is a free app that allows you to monitor your spending, create a budget and provide a lot of educational materials on building up your credit.
How Do I Build Credit If I cannot get a Loan?
Start small, if you don’t have a credit card open with your bank. If you do not qualify for a normal credit card, you can apply for a secured credit card, which is a card for consumers with a low or bad credit history that they have to fund upfront to finance day-to-day purchases while they build their credit.
Two of my favorite arsenals I used in my journey to rebuild my credit score are Varo Believe and SeedFi .
Controlling Your Spending and Building Saving to Pay Off Debts
Look, if you are putting your purchases on a credit card and carrying the payments from month to month, you have no business in buying that fancy phone, expensive TV, or whatever “I must have!” period! These are called revolving debts, I was guilty of that. I was guilty of “splurging” in the moments and putting that experience on “charge” to the credit card.
Reign in on your spending habit and cut down on your luxury items, eat-outs, and subscription services you don’t even have time to use! That gym membership that you’re not even going to? Cut it!
Start using coupons, deals, and savings apps. For office supplies, as I make frequent trips to Office Depo, I use DOSH which allows me to stack my cashback on top of what my card already offers. I am able to get cashback on donut shops, restaurants, and hotels on travel with DOSH. You can see a few brands that DOSH works with below.
On average, I used to spend $179/month on car gas until I started using Upside. It’s such an incredible saving, most people just brush it off when I tell them about it while others just get it and forget it among the long list of unused apps on their phone.
The power of Upside is compounding savings on referral use – the more people you help save, the more you save! That is because each time they use the app to get gas, the gas station pays Upside which upside in return pays them, and then you as the referral. It does not limit how many people you can refer and better yet, they also offer really great deals on restaurants going anywhere from 7% to 47% discounts. Some of these restaurants are also on the DOSH network, so I get to double dip on the rewards!
Approaches to Paying Off Debts & Credit Cards
As you recall from the FICO Score infographic pie chart, 30% of your credit score is factored in based on the amount you owed. This counts all types of debts including personal, credit, mortgage, car loans, etc.
We already talked about putting a break on your bad spending habit and even saving more, now what else can you do if you already rack up tons of debt from various cards.
Option number 1: Take advantage of the 0% APR balance transfer and consolidate your loan into a lower interest card. Two cards that came to my rescue were the Citi Double Cash and U.S Bank Visa Platinum. They each offer a 0% APR balance transfer for at least 18 months.
Big loans – option number 2: Consolidate into personal loans with lower interest rates. If you have a much bigger total debt, say above $5,000 and paying above 20%, there are personal loan services like Upstart. This is one of the services I found in my hours of desperation when I couldn’t find any other lender to give me a decent rate on my debt consolidation loan because my credit score was low.
Take out the big loan enough to pay all your credit cards and pay them off right away! Don’t be tempted to use that money for anything else!
Best Loan Consolidation Option – HELOC: If you own a home and have equity on it, you can tap into that for cash value to borrow. This is called the home equity loan. If you want to go with this approach, don’t waste your time with Bank of America, or other common big names. They are not going to entertain you, especially during this economic downtime. I used Figure.com, and the process was easy, fast and it was all done online.
Three Golden Rules To Improving Your Credit Score
Having consolidated your debt, reigning in on your spending, and saving more, make sure you follow these three golden rules going forward if you want to improve your credit score:
- Pay all bills on time.
- Keep credit card balances under 30% of their limits, and ideally much lower.
- Keep older credit cards open to protect the average age of your accounts, and consider having a mix of credit cards and installment loans. Space out credit applications instead of applying for a lot in a short time.
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