How To Lower The Cost Of Your Entire Financial Life

Keeping your accounts current, lowering your credit usage, and fixing errors on your credit report can have significant and immediate impact on your credit score.

Your credit score makes your financial world go around. It is the standardized way that creditors determine if you are a financially responsible person. The more responsible they determine you are, the less risky you seem and as a result, the less interest you will typically have to pay. In short, your credit score determines how expensive your financial life is going to be.

No really, what is the benefit of a strong credit score?

For starters, one is lower interest rates on personal loans, mortgages, credit cards, auto loans, and lower insurance policy rates. In addition, it can eliminate the need for large security deposits, and it can help you secure that amazing job you have been dreaming about. Would you agree that all of that is pretty important?

How can you transform your credit score?

The two areas that will give you the most bang for your proverbial buck are “payment history” and “credit utilization” Together they generally make up 65 percent of your score. Here are three simple steps you can take towards giving your credit score a powerful boost and putting money back in your pocket.

Your credit improvement checklist:

1. Review your credit report and fix any errors and inconsistencies. This step has the potential to positively impact your FICO score across all areas. Your credit report could have errors ranging from:

• Erroneous accounts being listed

• Inaccurate payment history

• Incorrect credit balances and credit usage data

• Stale or erroneous negative information

How to Execute:

• Obtain and review your credit report annually for free by going to annualcreditreport.com. You can get access to your credit report from the three credit reporting agencies: Equifax, Experian, and Transunion. Once you access each report, save it, review it carefully, and note every error, omission, or inconsistency.

• Next, dispute these errors either online, via phone, or mail. (Tip: the online process is considerably faster!) Please note that each agency typically has up to 30 days to investigate and respond to your dispute, or the dispute must be removed from your credit report. This could lead to an immediate improvement to your credit score. When I first did this, my score jumped over 30 points in one month!

• Sign up for a free credit monitoring service. There are quite a few services out there, but I believe Creditkarma and Credit Sesame are great options to track and monitor your Vantage score and even help you detect fraud. To obtain your free FICO score (which is still used 90% of the time for lending decisions), you can leverage the free FICO score reporting service that many banks, lenders, and credit card providers offer.

2. Pay your bills on time. (This is typically a 35 percent weighting.) Payment history helps determine your track record of reliability. This is usually weighted the heaviest in determining your credit score. Your payment history stays on your credit report for up to seven years, so it is critical that you take the steps necessary to get all your accounts current and pay every bill on time.

How to Execute:

• Get caught up on all payments that are due. Take the extra step to give the creditor a call and confirm the amount due. While you have them on the phone, share that your goal is to improve your credit score and request that any previous late payments be rescinded from your report. A little heart to heart can go a long way, and it’s a win-win for you and the creditor (who just wants to get paid).

• Set up automatic bill pay on all your monthly obligations. Even if you feel that you can only make the minimum payment, making the minimum payment is ALWAYS better than a late payment. Putting these things on auto pilot will ensure that your payments will be made on time. Are you worried about over drafting your account or properly budgeting? Take the extra step of creating a separate checking account for your monthly bills and automatically deposit what you need to meet those obligations every month.

3. Use less than 30% of your credit limit. This is another credit score heavyweight (typically a 30 percent weighting). Creditors want to see that you are using your credit responsibly and not biting off more than you can chew. A good rule of thumb is to keep your credit usage to less than 30 percent of your credit line. Ideally, you want this number as close to zero as possible.

How to Execute:

• Focus on paying off your credit balances by highest credit usage. This will allow you to make the biggest impact on reducing that important utilization number. When I did this, I bumped my score by another 50 points over a 6-month period.[JJ1]

• Request a credit line increase. If your account is in good standing, you can often get approved for credit line increases, which generally improves your credit usage numbers. As you improve your credit and keep your accounts in good standing, it can make sense to request a credit line increase every 6-12 months. I also suggest that when you contact your creditor, confirm if the credit check they use can be a soft pull versus a hard pull. The hard pull can impact your credit score negatively if you’ve had several “new inquiries” on your credit in the past 24 months.

• Consider consolidating your debt. This is one way of taking control of your debts, lowering your interest rates, and decreasing your credit usage. Caution: consolidation loans can be a slippery slope if they become a bandage for your spending. BEFORE doing this, make sure you are ready to not add further debt. This means feeling confident with the way you manage your spending/cashflow[JJ2] , having at least $1,000 or more for emergencies set aside, and having a plan to pay off your high interest rate debts (and have them on automatic!).

Set yourself up for success and reap the benefits

When making life improvement decisions, it is important to have a method of accountability and follow through. If, like many of us, it can take a lot to get you going or to keep you going, then involve a friend, spouse, family member, or a trusted and unbiased financial professional that can be a partner in helping you take the action necessary towards improving your financial life. Now go live your best financial life. You’ve got this!

by Juan Carlos Medina / https://www.forbes.com/sites/financialfinesse