This is a typical story. Your family is outgrowing your vehicle and you are starting to think about purchasing a new one that is a little bigger.
As you drive around town you start admiring all the vehicles that look like they would serve your needs better.
While doing this your mind drifts to the cost of that vehicle. You have some money saved, but know you will need to finance the majority of the cost.
You also know that the way you will get the lowest interest on your loan, and therefore pay the least for the car is by having a high credit score.
You realize that you need to look up the best ways to increase your credit score before you start applying for car loans.
How Increasing Your Credit Score Reduces Your Cost
The thing you need to know about loan rates is the interest charged by the lender is in direct relation to your credit history and the score the history creates.
Here is an interest rate chart from 2018, today’s rates may be different, but this will show you how the cost increases the lower your score is.
Average Interest Rates by Credit Score
CREDIT SCORE AVERAGE APR NEW CAR AVERAGE APR USED CAR
781-850 4.19% 4.69%
661-780 5.01% 6.38%
601-660 7.91% 10.91%
501-600 12.17% 16.78%
No established credit 21% (author added based on loans she regularly sees)
Based on this chart, let’s check the cost of a new car that is priced (assume taxes and all fees are included in that amount) at $35,000 on a 60-month loan. Cars are so expensive these days!
CREDIT SCORE MONTHLY PAYMENT INTEREST PAID TOTAL PAID FOR CAR
781-850 $647.58 $3,855.02 $38,855.02
661-780 $660.55 $4,639.21 $39,639.21
601-660 $708.17 $7,490.03 $42,490.03
501-600 $781.57 $11,893.94 $46,893.94
No Established Credit $946.87 $21,812.06 $56,812.06
As you can see, the person who has poor credit (501-600) pays over $8000 more for the same car as someone with excellent credit (above 780)!! That is enough to buy another car! Granted, not as nice a one, but a decent car none the less.
Hopefully, if you don’t have established credit you wouldn’t even consider purchasing a car at such a high price, but if you do, you would pay enough for two very nice cars just for this one.
Now that I have convinced you that raising your credit score will save you lots of money (just think what the differences would look like for the cost of a home!), it is time to check out what the steps would be to bring that score up so that cost goes down.
Best Ways to Increase Your Credit Score
Set Up Auto Payments for Bills
Be sure all your bills are set up to be auto paid a couple of days before the due date, so you never miss a payment and they are never late. If your bill varies month to month, set a reminder on your phone to set up payment every month. Having a 30-day late payment will bring your score down the fastest. So, avoiding that is the easiest way to increase your credit score.
Be Sure You Have Money in Your Account for Auto-Payments
The easiest way to ensure you always have the money in your account to pay the bills is to have a separate account for bill paying. Don’t spend out of your bill pay account and you won’t spend so much that you can’t pay a bill.
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Keep Your Credit Card Balances Below 10%
Of course, the best way to use your credit cards is to use it some each month and pay the balance in full every month.
If you have a high credit card balance, focus on paying extra on it each month to bring the balance lower. As your balance on all your revolving accounts goes below 30% and lower, your score will climb.
Keep Old Cards Open and Alive
If you have bank credit cards that you have had for a long time, they often go unused, especially if there are no rewards attached to their usage.
Take the card out, dust it off and use it occasionally. Pay the balance in full each time. This will ensure your card is not closed by the lender for “inactivity”.
The number of years it has been open adds to your length of credit history and ensuring you have a long history is a way to increase your credit score. However, if you have a bunch of store credit cards, I wouldn’t maintain all of them. Close most if not all and just keep your oldest one or two bank cards open.
Pay Down Installment Loans
An installment loan is any loan that you finance a certain amount and when you pay it off, the loan is closed or finished. These are typically car, home, personal, student, and a few others.
Work to pay down the balance on these. The bigger the difference between the opening balance and what is currently owed is, the higher your score will increase.
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Avoid Applying for New Credit
Unless you need to establish credit because you have very little loans in your history, then avoid applying for new credit.
This includes those pesky store credit cards. Every time you go to a cash register, you will hear the offer to apply for the store’s card “to save an additional 10%” or something like that. Just repeat after me, “No thank you.” Believe me, I am always looking for a great deal, but this one is not worth it!
Every time you open a new line of credit or even apply, your score will be negatively impacted.
Shop for Financing During a Limited Timeframe
You should shop around for the best loan anytime you are making a large purchase. However, make sure you shop during a limited time frame of about two weeks.
If you apply for several of the same types of loans during this short time span, it will only count as one application and not reduce your score by as much.
Clean Up any Errors on Your Credit
Pull your credit report from Annualcreditreport.com and be sure there are no errors that may negatively affect your score.
If you find any, file a dispute with the reporting agency you found it on. This is easy and can be done right on their website. It doesn’t matter if you file the correction with Experian, Transunion, or Equifax. Any of the three are supposed to research and correct it if what you reported is, in fact, a mistake. They will then notify the others to make the same change if the mistake is also on other reports too.
Build These Steps into Habits
If you make these things your normal habits with your money, your score will always be as high as possible.
If Your Score is Below 600 Wait on the Loan
If your score is below 600, wait a while and work on building your credit.
The patience you put in will be rewarded with a lot of money saved that can just go to other things, like that vacation you have been wanting to take!