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Make meaningful improvements to your finances every week.

Cost of Debt: Reasons You Need a Kick Ass Credit Score

 

In the personal finance world there is a lot of talk about the cost of debt and credit scores.  But what makes up a credit score and why is it important to have a good one?

Put simply, a credit score is a way to tell if you are good at paying bills on time. But a credit score can impact your life in ways you may never have thought of.

1.  Insurance rates.  The higher your score, the lower your rates for home, car, and life insurance.  Conversely, the lower your score the higher the cost. The reasoning is that people with high scores are less of a risk because they are more responsible whether that means less car accidents or less cooking accidents.

2.  Using a credit card for purchases offers buyer’s protection.  If your credit card is stolen, you don’t lose any money, the bank eats it.  If your cash is stolen, it’s gone.  Some credit cards also offer free extended warranties on some purchases, insurance on rental cars and some travel protection like reimbursement for money spent while bags were delayed or lost.  Check the fine print, there are a lot of great perks to some credit cards.

3.  A good credit score helps you with renting.  Landlords run credit checks and will either reject you or charge you a much higher deposit for a lower score.

4.   Lower interest rates when buying a home or car. The higher your rating the lower the interest rates banks will charge when lending you money and thus reducing your cost of debt.

5. Employers sometimes run a credit check.  An employer must have your permission and tell you if your credit rating cost you the job.  It’s not fair but we need to be aware of it.

It’s important to monitor your credit score but don’t pay for it. Credit Karma will give you a free credit score.  It’s not exact but it’s close enough to let you know where you stand.

How can you improve your credit score?

1.  Pay your bills on time.

2.  Keep your credit utilization under 20% of your total credit limit.

3.  Avoid mistakes that leave a bad mark on your credit.  This includes things like paying not only credit cards on time but things like cable and phone bills as well.

We’ve done a few shows and articles that will give you more information on credit scores, credit cards and how to build credit without credit cards.

Show Notes

E Credit Attorney: A company that can help clean up mistakes on your credit report.

Maxed Out:  A documentary about credit practices.

Ready For Zero:  A service to help you track and pay off your debts faster.

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  • It’s just recently that I know that if you don’t have a credit card, then it would be a long process for you for an approval of the mortgage. And I didn’t know that it would affect the Insurance rates also.

  • Erin

    On the employer checking credit thing: those with bad credit are more likely to be in financial straits which provides incentive to steal from the company. Employers most likely to pull reports are in sensitive industries, like finance and government as the employee may have the opportunity to embezzle in these fields.

    • That’s a great point Erin, I didn’t even think of that!

    • That’s a great point Erin, I didn’t even think of that!

  • Shannon_ReadyForZero

    Great show guys! Thanks for the shout out – let us know how the payoff goes for you :).

  • Bron

    Did you know that having a 0% utilization is a negative factor in your score. I pay my balances before the statement closes and I end up have a 0% utilization which lowers my score a bit. Best practice is to pay your card in full after your statement is issued. This part of the scoring algorithm frustrates the crap out of me.

    • Very interesting, that I did not know! And I just thought I was keeping a revolving balance cause I was milking their free cash ;)