- 1 What Can You Do with a Good Credit Score: 8 Tips for People with Higher Scores
- 1.1 1. Keep the Momentum of Your Higher Credit Scores Going
- 1.2 2. Compare Yourself to the Average Credit Card User
- 1.3 3. Call Your Credit Card Company & Ask Them to Lower Your Interest Rate
- 1.4 4. Shop Around for a New Car Insurance Company
- 1.5 6. Research Credit Cards in Your New Credit Score Tier
- 1.6 7. Don’t Go Out and Spend More Money Because of Your Credit Scores Are Higher
- 1.7 8. If You’re Prequalified for a Mortgage, Try Getting More Pre-Qualifications
- 1.8 A Final Few Words About Higher Credit Scores
- 2 How to Choose Your First Credit Card
- 3 Average Credit Card Interest Rates Are Way Too High
- 4 What Highest Credit-Card Debt Since '08 Crisis Means for the U.S.
- 5 What is Credit, and Why Is It Important?
What Can You Do with a Good Credit Score: 8 Tips for People with Higher Scores
When your credit score gets higher either by credit scoring changes or good financial habits, there are plenty of things you can do and mentalities you can adopt to get the benefits of a good credit score.
If you’ve had the good fortune of watching your credit score go up 10 or 20 points recently, you deserve a congrats.
But, what can you do with a good credit score? That’s a question all of us should be asking when we see a double-digit rise in our score.
Answering that question can send you down a rabbit hole of Google searches, Reddit threads and an endless buffet of personal finance blogs.
We’re going to save you the time and give you eight tips for what you should do when your credit scores go up.
1. Keep the Momentum of Your Higher Credit Scores Going
You’ve made it this far, right? Maybe the July 2017 credit scoring changes bumped up your scores enough to move you from bad credit to fair credit, or maybe from good credit to very good credit.
Whichever the change, there’s always more you can do. The gold standard of credit scores is anything at 800 or above. According to Experian, 20% of the population has FICO scores at or above 800. Here’s a quick list of the credit scoring tiers:
The way that these credit tiers are organized provides the perfect environment to set goals for increasing your credit scores. Are you in the Very Good tier? Then set a goal to move up into Excellent.
In order to raise your credit scores, you need to set good habits in place. Here are a few tips we’ve dug up through research and interviews with experts:
- Never let a credit card balance go above 30% of the card’s credit limit
- Never let a bill go 30 days past due or more
- Check your credit scores and history once a week
- Set all credit card, loan and mortgage payments to AutoPay
Doing these four things will ensure that you never pay late and that your credit card utilization (balance vs. limit) is always low, two factors that have the most influence on your credit scores.
Checking your credit scores weekly will alert you to any incorrect or fraudulent information.
2. Compare Yourself to the Average Credit Card User
Based on our research of credit card data from sources like Experian, Credit Card Forum and Value Penguin, we’ve discovered that the average credit score of the American consumer hovers in the 6&09rsquo;s and the average debt of someone who carries a balance is around $26,000 across the three credit cards they own.
Take a second to think about how your overall credit balances and your credit scores compare to the national average. Are your scores lower or higher? Is your debt lower or higher? How many credit cards do you have?
It’s easy to get caught up in how high your scores are but this isn’t an excuse for a little self-evaluation. Comparing yourself to the national averages will give you a sense of where you really stand. Maybe you’ve got more credit debt than the average American. If you do, that needs to change. If you’ve got less debt than average, keep it that way.
Credit scores are a lifelong journey. They don’t magically go up hundreds of points overnight without deliberate and beneficial habits, despite what some YouTube videos or blog posts might say. The credit scoring system rewards consistency and discipline.
Don’t take for granted the fact that your scores went up. Keep your head down, work hard to raise your scores even further and don’t let yourself slip into bad habits.
3. Call Your Credit Card Company & Ask Them to Lower Your Interest Rate
We asked a few experts what they thought consumers should do when credit scores go up. Calling your credit card company for better rates was the most popular answer.
You see, when a credit card company gets your application, they determine what your interest rate will be based on your credit scores.
Your credit scores tell them how much of a risk you are. So, lower scores mean you’re a greater risk.
To offset that risk, credit card companies will charge you a higher interest rate with the hope that you’ll carry a balance and the higher interest rate will earn the company more money.
Now that your credit scores have gone up, your risk, in theory, has gone down. Use that to your advantage, says Lauren Freeman of PDL Help, a company dedicated to getting people out of high-interest payday loans.
“With a high credit score and a history of good payments, consumers can get their interest rates significantly reduced,” Freeman said. “This type of phone call shouldn’t take more than 10-15 minutes and you'll see instant results.”
4. Shop Around for a New Car Insurance Company
Auto insurance is one product whose price is influenced by credit scores. While your scores aren’t the only factor taken into account when determining premiums, they do play an important role. Why?
Well, statistics show that people with lower credit scores are more likely to make a claim. Claims cost the insurance company money, so they recoup this by either raising your rates after an accident or starting out with higher premiums because of your scores.
HighYa Senior Editor Derek Lakin pointed out that car insurance companies typically run your credit score every two years. If your score has gone up in double-digit amounts, call your insurance company and let them know.
Also, leverage your higher scores by shopping around with new companies. Not only will your lower scores get you better quotes, but, in some cases, insurance companies will offer better (or worse) rates than they did the year before.
Shopping around for new rates to match your new credit scores could save you around $360 a year, Lakin wrote.
Think back to when you first got any auto loans that you have right now. What were your credit scores?
Now that your scores have gone up, it might be time to look for an auto loan refinance. This is something you can do with your current lender and you can also shop around to banks and credit unions to find good rates.
Refinancing is a relatively straightforward process. You’re getting a new loan on your car, but since your interest rates will be lower thanks to your higher credit scores, you’ll save more in interest and monthly payments.
USA Today did a great job of talking about exactly how much you can save on a refinance assuming you went from really bad to really good credit scores.
“A $20,000, 6-year car loan at a 10.4% rate equals monthly payments of about $375. After two years, the balance on the loan would be $14,657; but the consumer would still be facing $18,000 worth of payments (because of interest),” they wrote. “If the loan is refinanced at that point, the savings are dramatic. Payments would drop to $324 per month and the total remaining payments drop to $15,552. That’s just about $2,500 over the life of the loan.”
Now, this situation assumes that you’ve moved from subprime (the worst scores) to prime (really good scores). Most people don’t experience that big of a jump, but it all depends on when you got your auto loan. If it was two years ago, there’s a chance your scores could’ve moved from subprime to prime.
However, if you’ve only recently seen a big jump in your scores, you may not experience the same amount of savings you saw in the example above.
The best thing to do is to research lenders, pick two or three and get quotes for refinancing. When you decide which lender you’ll use, fill out your application and read through what they’re offering.
The key numbers are your interest rate, what you’ll pay each month and how much you’ll pay by the end of the loan.
6. Research Credit Cards in Your New Credit Score Tier
If you’ve moved up from bad to fair credit or from fair to good, there’s a good chance your eligible to apply for a new class of credit cards that weren’t available to you when your credit scores were lower.
When you make the jump from credit cards for bad scores to credit cards for fair credit scores, you’ll notice that, in general, fees are lower and perks are more frequent.
The same thing will happen when you move from fair to good credit, too. One of the biggest differences will be APR, the interest rate you’re charged when you don’t pay your balance in full.
A classic example of the difference between a credit card for people with bad credit and credit cards for people with good credit is the Build Card and the Citi Simplicity.
The Build Card’s APR is 29.9% and applies to all purchases the moment you make them, whereas the Citi Simplicity has an introductory APR of 0% for 21 months and a regular APR of between 13.99% and 23.99%.
The APR alone on these cards is a clear indication of the advantages you have with higher scores.
7. Don’t Go Out and Spend More Money Because of Your Credit Scores Are Higher
It can be easy to fall into the financial trap of thinking that you should immediately use your credit scores to your advantage.
Kevin Gallegos, vice president of Freedom Financial Network’s Phoenix operations, reinforced this to us as he talked to us about what consumers should do with their increased credit scores.
“Be happy, breathe a sigh of relief – and do nothing out of the ordinary,” he said. “A higher credit score is not a license to buy something. You should, however, maintain and improve it.”
The problem with excess spending due to higher scores is that, while your credit scores have gotten higher, your budget remains the same. Your salary is probably still the same as it was before your scores went up and so are your bills.
Basically, there’s nothing about your income and expenses that says you should spend more.
Can you get better auto insurance rates? Sure, and that’s worth pursuing. But should you use that saved money to go out and buy a new car or buy a home with your shiny new score? No.
“It may be time to pursue a loan application,” Gallegos said, “but only if you have created and are using a budget and if the payments for the new purchase fit into that budget.”
This is great advice; we’ve written about the importance of budgets and how, in our opinion, they are the single most powerful tool a consumer has. And, it only takes one or two hours to make one.
8. If You’re Prequalified for a Mortgage, Try Getting More Pre-Qualifications
This one is a tricky one because it won’t apply to a lot of consumers but for those who can use it, it could save you thousands.
The process of buying a home usually starts with a prequalification. You fill out a preliminary application with a lender and they generate a rough idea of your max mortgage amount, interest rate and various fees, all of which are based on your income, debt an credit scores.
A pre-qualification isn’t a contract, so you aren’t under an obligation to sign. Also, most credit scoring models will lump any credit checks you use for mortgage pre-qualification into one check instead of one for every application.
So, the idea is that, if your credit scores get a considerable boost, getting a new or other pre-qualifications could get you a lower interest rate based on your new scores. Even a change of a half a percent can save you thousands of dollars over the life of your mortgage.
The downside is that your score will drop one or two points if all your mortgage inquiries are done in a two-week span.
A Final Few Words About Higher Credit Scores
When your credit scores go up, it’s a cause for a little celebration. Higher credit scores mean better rates and better long-term financial options.
However, it’s important not to get so excited about your scores that you go out and make financial decisions that stretch your budget or are being done only because you have higher scores.
Here’s a quick summary of the advice in this article:
- Make a plan for moving up to the next credit tier
- Compare yourself to the average American’s credit stats
- Call credit card company for lower rates
- Shop for a better car insurance rate
- Refinance your auto loan
- Research credit cards in your credit-score tier
- Don’t go overboard with spending
- Consider a new pre-qualification
Aside from these tips, we’d say the most important thing you can do is create a budget and do everything you can to boost your credit scores higher and higher.
How to Choose Your First Credit Card
Opening your first credit card is an important step towards financial independence in a young adult’s life. Credit cards are a great way to build your credit history, to make large purchases, and to use during emergencies. However, you should proceed carefully. As with most financial decisions, there are risks and benefits associated with opening and using your first credit card. If you weigh your options carefully and are aware of the risks, opening your first credit card can be hassle free.
Evaluating Your Current Financial Situation Edit
Average Credit Card Interest Rates Are Way Too High
Average credit card interest rate by card type 2017
The average consumer credit card rate is 16.75% as of January 13, 2017 according to the latest credit card tracking bureau. With the US Bank Prime Rate at 3.25%, credit card companies are charging 13.5% over Prime. In other words, credit card companies are making big bucks off you!
The US Bank Prime Rate or “lending rate” has averaged 3% above the Federal Funds rate, which is currently at 0.25% thanks to BenGenie. The Prime Rate is used to adjust the interest rates for HELOCs, credit cards, and student loans. The Prime Rate is considered the rate at which banks lend to the most creditworthy borrowers.
With a 13.5% spread over Prime, credit card companies are essentially saying they require a 13.5% return over Prime in order to be in the business of lending credit with a card to the average consumer. If all consumers paid their credit card debts in full and never welched on a payment, the spread over Prime rate would probably be close to zero. The other way to lower credit card rates is if consumers reduce demand for credit card usage and the government either regulates more tightly and/or encourages more competition.
My one and only personal credit card has a interest rate of 10.25%, or a full 7% points over prime. I’ve had the card for 10 years and have never missed a payment in 120+ billing cycles. Sure my rate is still 6.5% below the average, however, compared to mortgage rates below 4% and student loan rates below 3%, 10.25% is ridiculously high.
I gave my credit card company a ring to see if they can lower the rate, even though I never plan to give them the satisfaction of making 10.25% off me, and they politely declined. Since I only have one personal credit card, I don’t easily have a backup to switch to, leading me not wanting to spend the time to apply a new.
High interest rates should discourage you from using your credit card and at the very least, never carry a balance. We know in practice, this is not the case as credit card companies earn billions a year from consumer’s lack of spending discipline. I hope as a Financial Samurai reader, you know better than to ever spend more than you earn and carry a balance.
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What Highest Credit-Card Debt Since '08 Crisis Means for the U.S.
Editor's pick: Originally published Dec. 23.
Consumers' happiness with the economy right now has led to elevated spending as 2016 comes to a close.
And as consumers spend, one area to watch is the rise in credit card debt levels as Americans now owe as much on those cards as in the quarter before the 2008 financial crisis began, according to a recent WalletHub study. Their balances rose to $747 billion at the end of this year's third quarter, making up 6% of a total $12.35 trillion in U.S. household debt, a separate report from the Federal Reserve Bank of New York shows.
The question for economists is whether that surge in spending represents a justifiable optimism that consumers will benefit under the administration of President-elect Donald Trump or if it's an early sign that shoppers lack the cash to buy necessities.
Card debt may climb even further next year, topping $1 trillion, but Eric Higgins, an associate finance professor at Kansas State University, said that isn't necessarily a problem -- unless the bills start to go unpaid.
"Until those delinquency rates and default rates start to increase a lot, I wouldn't be terribly worried about credit card debt," Higgins said in a phone interview. "When you get an overall economic contraction, then the credit card debt, student loan debt and everything else starts adding up."
For now, however, charge-off rates are near historic lows: at 2.86% in the third quarter, down from 3.95% in the third quarter of 2007 as the financial crisis was building, WalletHub found.
"Overall, the credit-card delinquency rate has been trending down since the height of the financial crisis," researchers at the New York Fed wrote in a blog post this summer. "The downward trend is consistent with the movement in credit extensions toward borrowers with higher credit scores as well as an improvement in overall economic conditions."
Still, WalletHub predicts that charge-offs, which banks use to remove debt that's more than six months old from their books, may be as high as high as $30 billion in 2017, which would limit credit availability.
One of the factors at play is the Fed's 25 basis-point interest-rate hike in December. Such increases typically spur banks to boost their lending rates, since they benefit from passing higher interest on to borrowers more quickly than to the depositors who provide their funding base.
The average credit card interest rate now is 16.26%, according to Bankrate, and forecasters expect at least two or three interest-rate increases during 2017.
"I think anybody who has an outstanding balance on their credit cards should certainly be worried," Jill Gonzalez, a WalletHub analyst, said in a phone interview.
Consumers are using credit cards more for everyday expenses partly because of improving perks due to heightened competition between financial institutions like JPMorgan Chase (JPM) , Citigroup (C) , American Express (AXP) and Capital One (COF) .
Not only are the firms boosting cash-back incentives for everything from travel, groceries and gas, some are offering 0% interest deals for as long as 21 months on balance transfers and new purchases.
"Because credit card deals are so appealing now, more and more people are applying for them and they're also using them for basic needs," Gonzalez said. "But when you are unable to pay that back, hopefully by the end of your billing cycle, that's when it really adds up. That's where we see these rotating balances that are not being paid off."
The amount at risk has grown recently, with consumer spending hitting the highest average ever recorded by polling firm Gallup -- rising by $5 to an average of $98 daily -- following Trump's surprise victory in the presidential campaign in November.
Another reason for concern about the mounting card debt is the historical pattern of economic troubles in the U.S. coming to a head about every eight years. The last such event was the 2008 financial crisis, which was preceded by the bursting of the dotcom bubble in 2001, the bond-market turbulence of 1994 and the savings-and-loan failures of the late 1980s.
A recent report by the Federal Reserve Bank of New York noted that credit card limits have increased for 15 consecutive quarters, auto loan orginations are at the highest levels in six years, and student loan balances increased over the past 18 years.
There is going to be a "tipping point" where household debt could become unsustainable, Gonzalez predicts. Right before the financial crisis in the fourth quarter of 2007, average credit card household debt was $8,463, the highest since 1986.
As of the third quarter of this year, household credit card debt reached $7,941, missing the pre-recession mark by a little over $500. That compares with median 2015 household income in the U.S. of $56,516, according to the U.S. Census Bureau.
"There will be a point where people can't afford to make their minimum monthly payment," Gonzalez said in a phone interview. "We think that will be in 2017 when we reach that unsustainable household debt level, of around $8,400."
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What is Credit, and Why Is It Important?
A credit score is a tool. At its heart, it reflects your willingness and ability to repay debt.
Whether it’s a mortgage lender, a car dealer or even a department store, anyone who’s thinking about extending credit to you is taking a risk. They’re giving you the opportunity to purchase something today and pay for it tomorrow.
Creditors and lenders want to do whatever they can to hedge that risk and make sure you’re a safe bet – that you’re someone who’s likely to fulfill their obligations and repay that money on time every month.
A credit score allows lenders to make an instant judgment about your ability to repay debt. The higher your score, the more likely you are to pay back that money on time every month. Or that’s at least how lenders and creditors tend to look at it.
People with higher scores have shown over time that they can handle credit responsibly. And that’s really important, because your credit score comes into play with so many financial needs, such as home loans, car loans, student loans, business loans and more. Even landlords in some parts of the country run a credit check with your rental application.
But it’s not just about showing lenders you’re a safe bet. Your credit score can also play a big role in determining what it costs to borrow that money. Generally speaking, with home loans, people with higher credit scores can tap into lower interest rates. That can save you thousands of dollars over 15 or 30 years.
So how do you get a credit score?
There are three major credit reporting agencies: Equifax, Experian and TransUnion. You’ll sometimes hear them called the Big Three. Many of the lenders that offer you credit will turn around and report how you use it to one, two or all three of these credit reporting companies. And it’s at the Big Three where your credit history and your credit score take shape.
Generally, things like your payment history, your amounts owed, your length of credit history and more can all affect your score, for both good and bad. Paying your bills on time every month and keeping a healthy balance of debt in relation to available credit can boost your credit profile. Negative events like late payments, bankruptcies, foreclosures and collections can hurt your score and even force you to put your homebuying plans on hold.
Because not all creditors report to all three credit bureaus, you may have a different credit profile at each. What can be even more confusing for consumers is you don’t have just one credit score. In fact, there are dozens and dozens of credit scores out there.
But when we talk about VA home loans and the mortgage industry as a whole, we’re usually talking about one type of credit score in particular. That’s called the FICO score, which falls on a range from 300 to 850.
The FICO score relies on your credit information from each of the three credit bureaus. FICO uses sophisticated modeling and software to create scores for specific forms of borrowing, including car loans, credit cards and mortgages. Each of the three credit bureaus can use a slightly different FICO scoring formula to create your score.
That’s a big reason why lenders will pull your mortgage-focused credit scores from all three credit bureaus and use the middle, or median, score as your credit score. It’s also why consumers often see different credit scores than what lenders see.
When you purchase or otherwise get a look at your credit scores from FICO or other agencies, you’re typically seeing a broad-based “educational” score. That’s a more basic credit score, and it’s often different from the industry-specific scores mortgage lenders will see.