An article by BudgetQueen
When I was car shopping once, I wanted to test drive a car. I look really young for my age and I was dressed in a t-shirt and jeans and I think that the salesman thought that I was wasting his time. He even had the nerve to say, “Are you really interested in this car?” before he went to the effort of getting the keys. I was amused. He didn’t know I had wanted this car, researched this car, and saved up for this car for four years.
Later the guy came back to me with his mouth hanging down to his knees saying, “Did you know that credit-wise you are in the top 3%?” I shrugged and said, “Yes.” Boy did he treat me differently after that!
Do you think that my credit has always been good? Let’s just have a chat with my 19-year old self and how I was the fish down at the bottom of the tank struggling for air. I may even have had a credit agency knocking at the door. Fortunately I got that turned around quickly! The point is that can be turned around, and the sooner you understand how, the sooner you can change your financial situation for the better.
What is the difference between good and bad credit?
I have never been rich but I know sometimes having great credit makes a world of difference. For example you get great interest rates and the processing of loans goes much smoother and faster. A good interest rate can mean thousands of dollars saved in interest.
I also know that a lot of time it isn’t detrimental when there are a couple dents in the credit. I have seen what it takes to go from poor credit to good credit within a few months and poor to great credit within a couple years. I also know some of the tricks to keep it high once you get there.
How to go from poor credit…
You don’t always have to have flawless credit, but here is a huge difference between mediocre credit and poor credit. You do want to avoid bad credit by all means possible. If you are there you want to get out.
They say that someone with bad credit pays tens of thousands, if not hundreds of thousands more in interest payments in a lifetime than someone who has good credit. I don’t think that it is entirely accurate, but it is a good statement to keep in mind, because it is more accurate than not accurate…let me explain…
But poor can affect everything from the interest rate you pay to whether or not you get a job. I don’t need to tell you if you are down at the bottom of the credit score ratings almost no one but the payday loan places will give you money. But you want to avoid them at all costs!! You think that 18% or 24% interest is high on a credit card — well a payday loan place charges you a fee that equates to 50% compounded interest – even if you pay it off in the few short days! It is even worse if you don’t pay it off. Stay away from the payday loan places if you can!
It is very important to remember that if you are there that you can get out. It just requires some effort.
…to good credit…
It takes just a second for your credit to go down, and months (if not years) for it to come back up. But that doesn’t mean that you shouldn’t try!
For good credit, it is essential to pay your bills on time. If you are more than 30 days late on a mortgage payment or a car payment, not only will that institution charge you late fees, your credit goes down. Even with one late payment it can take you three-six months to get the score back where it was before the late payment.
Credit is tricky. Just because you pay your bills on time and have no credit card debt doesn’t always mean that your credit is great. Credit is mostly based more on how you manage your already-existing debt.
Does this mean that you should put more on credit cards or take out more debt? No, not if you don’t need to. Let’s say you get a new credit card with $5,000 limit. Your credit score gets a little nervous, because based on consumer experience; many people would blow through that new credit quickly. But you are smart – you only have it for emergencies. So as you go months of keeping the balance low and paying it off every month, your credit score goes up.
However, an emergency comes up and you charge over $2,000 on the card. Believe it or not, going over the 50% mark is another gauge of credit – so your credit goes down.
So you decide not to use your card. After time you are surprised to see that your credit card balance has gone from $4,000 to $2,500 and that affects your credit negatively as well. Not all companies lower credit card balances, but oftentimes it is used to protect you (and them) in case someone else gets his or her hands on it and uses it since you are not using it.
…to great credit…and stay there
There are hundreds of “checks and balances” that credit agencies use to determine your score. It would take hundreds of pages to explain them all. I help keep my score high by using my card for purchases and continuing to pay off balances every month. This way there is activity on the card and the balance stays put while the credit agencies also see that I am being responsible in paying it off.
Having great credit is an accomplishment. Like running a marathon or giving a good speech. But it can just as easily go bad again. As you have more unused credit, it is especially important to keep an eye on all of it. Thieves can easily use a card and you may not notice for months.
Do you think that I am on “Easy Street” just because I have good credit? Not always so. When I saw that my credit card had risen to 15% I called and asked them if they could lower it. They said, “That is the best rate that we can offer at this time” (aka the “prime rate” which is the base rate of interest rate). You can always speak to a supervisor and see if this limit can be lowered.
Having great credit is like eating smart and healthy – you may rarely notice the effects on an everyday basis, but when faced with a life-changing event, it is good to know that you have done for a while.
As you build up your assets and pay down your debt your credit slowly goes up. Invest in a money market account.