The Wealth Grenade
Volume 202/Get Out of Debt Fast
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Hello it’s Jonathan, picking up on where we left off a few days ago. Now it’s time to start working on credit improvement. But before we begin, did you download your free TransUnion credit report that we talked about a few days ago? If not, please click here to do it now, we’ll need this for this exercise.
Take a look at the report, any mistakes? If yes, you know what to do. Let TransUnion know. If not then the next step to identify what your score actually is.
Please write this down, this is the magic number that you should know cold.
The following are the credit rating bands:
Excellent – 740+
Good – 700 to 739
Fair – 660 to 699
Standard – 625 to 659
Poor – below 625
Why does this matter? Looking back at the categories of excellent, good, fair, standard, and poor, our estimation of the interest cost difference, assuming the average person is “fair,” on a $200,000 home loan ($250,000 with 20% down) is as follows:
Excellent -> 1.0% lower
Good -> 0.50% lower
Fair -> 0%
Standard -> 0.50% higher
Poor -> 1.0% higher
So if you’re paying 5% as a “fair credit” risk on your home loan then you’d be paying 4% as an excellent risk and 6% as a poor risk. On a $200,000 loan the difference is $2000 a year savings or penalty, or $4000 from poor to excellent! What could you do with $4000 extra a year!!! What if you’re loan is higher??? You get the point.
What are the key inputs in determining your credit score?
#1 Payment history:
If you are constantly late, this will damage your score more than any other element.
Action step: simply pay your bills on time
#2 Amount of credit used:
If you’ve used up most of your available credit (home loan aside) your score will be affected. Why is this? Because this means you’ve got less financial flexibility and this scares creditors.
Action step: Go back to your free copy of 21 Ways to Get Out of Debt and Build Massive Wealth! And follow the directions in Lesson Six.
#3 Age of credit:
The older the better. There is something about being a longstanding customer with a credit provider that the credit agencies like. Perhaps it’s their willingness to keep you over a long period of time, perhaps it’s your willingness to protect your credit to keep them over a long period of time, or perhaps it’s a little of both. Whatever the case, longer is better:
Action step: Keep your credit in place, even if you have a zero balance.
#4 Use of Credit:
The inputs to a credit score are a bit manic/depressive. Use credit too much and it’s a bad thing, don’t use it at all and it’s also a bad thing. Credit agencies monitor your use and pay – down of debt – the higher the use and paydown the better.
Action step: Use your credit card and then pay it off. Repeat regularly.
#5 Limit new credit:
New credit could mean more risk. Additional debt is never a good thing to the existing creditors. So keep your new credit card applications to a minimum.
#6 Regularly monitor your credit. Initially, as you get it under control I’d recommend at least once a quarter, perhaps even once a month! Later, when you hit the score your want, then move it to semi annual or annual.
In the next issue of Wealth Grenade we be discussing how to lower the interest you pay on your existing cards – without applying for new ones!