How to Lower Your Monthly Debt Payments by Enhancing Your Credit Score
The lower your credit score the more you pay when borrow money on a credit card, personal loan, car loan or a home mortgage. Over time the difference in higher versus lower interest rates can really add up. When assessing what they will charge you to borrow money, lenders look at your credit score which may differ depending on which reporting service they look at.
The two companies most frequently used in the U.S. are FICO and Vantage. The goal of both companies is to use their credit scoring models to provide a lender with a prediction of how likely it is that a borrower will be more than 90 days late on a payment over the next 24 months. Both of these models generate a generic credit score for a wide variety of creditors such as credit card issuers, auto and mortgage lenders as well as student loan companies. For Vantage a person may be scoreable as long as their report has at leas one account in it regardless of the length of time. For FICO a borrower would need at least one account that it at least 6 months old.
Vantage creates a single score that can be used with a credit report from Equifax, Experian or TransUnion. FICO which has been around longer, uses credit bureau specific reporting which means that a person could apply for a loan and have three different scores depending on which credit reporting bureau was used to run the score.
The most recent version of Vantage as well as FICO use a score range from a low of 300 to a high of 850. For Vantage a score of 700 or better qualifies as having good credit while for FICO a score of 670 is considered good and over 740 very good. These credit scores take into account multiple factors such your payment history including how many payments you’ve been late on, if you have had any accounts sent to collections or have defaulted on a debt or declared bankruptcy. The models will also take into account how much credit you are using versus how much you have available. The length of time your accounts have been open as well as the account mix such as credit cards, auto and mortgages also affect the score. Finally, the model looks at whether you have recently applied for credit and how many times.
If you have too many inquiries over a 30-day period it can cause your score to decrease.
Under FICO the weighting of credit factors in generally about 35% for payment history, 30% for amounts owed, 15% for length of credit history, 10% for your credit mix and 10% based on the amount of new credit you have opened. In general, under FICO the scores translate like this; 300 to 579 is very poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and 800 to 850 is excellent. If you are looking to buy a car, credit scores between 550 and 679 are considered subprime and could translate to an interest rate somewhere between 13% and 18% versus a score of 770 or higher that might qualify you for 0% financing.
If you’re looking to buy a $250,000 house, a credit score of 620 may qualify you for a rate of 4.75% which would equate to a monthly payment of $1,304.12 versus a score of 760 which would qualify you for a rate of 3.12% which would equal a monthly payment of $1,088.02. This means that on a 30 year loan the lower credit score would cost you more than $75,000 over the life of the loan.
In addition to credit score lenders will also assess your level of debt, income, savings and assets. When you apply for credit, banks are required to provide you with a free copy of your credit score if you are approved for a higher rather than lower interest rate. The credit score disclosure will also include some information as to what is impacting your credit score. You can also get a free copy of your credit report here https://tinyurl.com/y3msywnb.
Higher interest rates may make carrying a balance more expense than it otherwise would be. If you have a $5,000 balance at 18.50 % APR and make a payment of $128.33 per month it will take you 60 months to pay nearly $2,700 in interest. On the other hand, if you could lower the interest rate to 10%, you could pay off the loan in just under 4 years and save over $1,600 in interest payments.
If you are looking to open a credit card, take out a personal loan, buy a car, rent an apartment or buy a house you may want to see what you can do to get your credit report and profile in shape before you apply. The best way to improve your score is to pay your bills on time and reduce your outstanding balances. If you have some late payments, you can look to apply for some additional credit to lower your ratio of credit used to credit available and thereby increase your credit score.
If you are still having trouble qualifying, you might consider using a credit repair service such as this one https://tinyurl.com/72nwnjw. They can review your credit report and address any negative items by working with the credit bureaus on your behalf. Although you can do many of the things that they will do for you on your own, just like a do it yourself home repair, you may not have the time, comfort level or desire to do so.
Most credit repair companies start by requesting a copy of your credit report from the three reporting bureaus. They will then look for negative issues like charge-offs, tax liens and bankruptcies. Their next step will be to develop a plan to confirm information on the reports, dispute errors, negotiate with creditors to remove the negative items and send cease and desist letters to debt collectors.
If you decide to use a credit repair company, you can check out the company your are considering on the Better Business Bureau website at www.bbb.org/us/category/credit-repair-services.