As you know, the interest rate you pay significantly impacts the amount of money you ultimately pay back to the lender over the life of a loan; the longer the term of the loan, the more money you’ll pay.
What affects the interest rate you pay? The market is the biggest factor, of which you obviously have no control; however, you can control another area: your credit score. Therefore, it’s in your best interest to increase your credit score so you can decrease the interest rate you pay on your loans.
Interestingly, your credit score affects other financial aspects: the higher your credit score, a number between 300 and 850, the lower the premium on your home and auto insurance. If you’ve interviewed for a job, all else being equal, the job will go to the candidate with the highest credit score.
Here are a few steps you can take to increase that number:
Have a Long History
Your history accounts for 35 percent of your score. Ideally, paying off a credit card with a long history would increase your score substantially. It’s important that you don’t close that account because it’s rich in history; many make that mistake too often.
Conversely, if you have a card with a short history that isn’t very good, it would be wise to pay it off and close the account.
Keep Credit Inquiries to a Minimum
Every time an inquiry is made to your credit, your score gets dinged. Red flags go up when there are many inquiries in a short period of time because it looks like you’re trying to get many loans all at once. The exception is if you’re shopping for a car or you’re trying to take out a mortgage. The credit bureaus understand you’re shopping for the best rate, so all of the inquiries for a mortgage are counted only as a single inquiry.
The 30 Percent Rule
The balance on your credit card should never exceed 30 percent of the limit on the card. For instance, if you have a $10,000 limit, your balance should be kept under $3,000, preferably, $2,500. If you check your balance online and you see it’s exceeding 30 percent of your limit, it would be a good idea to send a check to your credit card company to pay the balance down before your account is closed for the month and your statement is printed. The credit bureaus only see your statement balance, once a month when the statement is sent to you. If you can make sure your statement balance never exceeds 30 percent of your limit, then you’ll see your credit score soar.
Keeping these guidelines in mind will make sure your credit score increases, making the interest you pay on your loans and the premiums you pay on your insurance as small as possible, while increasing the likelihood of landing that next job!