Credit 101: Part 5 – The Dollar Cost of Your Credit Score

Interest Image

Understanding the Real Cost of Your Credit Score

Today, every financial institution charges interest to borrowers as a return for lending money.  The amount you borrow (the principal) + interest + length of your loan (term) = your total cost of credit.

Let’s assume two people borrow $20,000 for five years (60 months) to purchase a vehicle.  Borrower #1 has a high credit score, allowing them to have a lower interest rate.  Borrower #2 has a lower credit score, which will make their interest rate much higher:

  1. At 2.9% interest, the first borrower will pay a total of $21,509.62 for this vehicle by the end of the loan.
  2. At 14.9% interest, the second borrower will pay a total of $28,487.49 for this vehicle by the end of the loan.

Based on this example, you can see that not taking care of your credit comes at a large cost.  By simply taking care of your credit you would save nearly $7,000!!

Continue Reading…

Credit 101: Part 4 – How to Read Your Credit Report

Credit History

Reading Your Credit Report

Once you have obtained your credit report, the first section to review is your personal information.  Be sure your name, address (past and present) and social security number are correct.  If there is an error, contact the credit reporting agency that is reporting your information incorrectly.

The next section of your credit report that you should review contains your credit score (if you ordered a report from a credit bureau) and the factors of your credit score.  There are several factors credit reporting agencies consider when determining your score.  Some of the more common factors include:

  • Serious delinquency and Public Records Filed – This would appear if you have collections, charge-offs, bankruptcies or judgments.
  • Ratio of balance to limit on revolving accounts too high – This appears when your credit card balances are close to the limit.  There are not many factors that can affect your score in the short-term other than this one, especially if you have more than one card near the limit.  Keeping your credit card balances at 20% or less of the limit every month is your best bet if you want to ensure this factor doesn’t affect your score. Continue Reading…