Key Points:
What Is a Credit Score?
How could your credit affect your retirement?
Simple steps to improve your credit
Most of us understand the basics of credit: the better your credit is, the more likely you are to be approved for loans. It’s a pretty simple thing – in theory; but the ways credit can affect other areas of your life can actually be quite complex. Over a lifetime, people with lower credit scores can pay thousands of dollars more on things like houses, cars, and bills than their peers with higher scores.
What is a credit score?
Your credit score is a number ranging from 300-850 that lets lenders and services know your creditworthiness. If you have a higher the credit score, you are considered lesk risky (and therefore more attractive). Your credit score is calculated using 5 different factors:
Payment History – Are you consistent and prompt when making payments to other creditors? Every time you’re 30 or more days late paying a creditor, it can result in a ding on your credit.
Total Amount Owed – How much of the credit that you have available to you are you using? For example, if you have a credit card with a $10,000 limit, what amount do you actually owe on that card?
Length of Credit History – How long ago did you open your first credit account? Lenders like to know that you have a good history of managing credit.
Types of Credit – Having different types of credit (credit cards, a mortgage, student loans, etc.) shows how well you can manage different types of debt.
New Credit – How often do you apply for credit? Have you recently taken on a new load of debt? This could alert creditors if you’re applying for lots credit in a small time frame.
These factors are calculated to give you a score. That score will then determine if you can be approved for certain loan products, and what rate you’ll pay. Every financial institution has a different set of scores that they use, to determine who has “poor, fair, good, very good, or excellent” credit. To be safe, you should aim to have at least a 680 score. This will likely put you in at least the good category for most lenders.
How Your Credit Score Can Affect Your Retirement
So, now that you understand how your credit is calculated, you may be wondering how that can affect your retirement?
Let’s start by looking at all of the money you could save over the years if you have great credit. First up: Mortgages. According to MyFICO, the annual percentage rate on a mortgage can vary by over 1.5% depending on your credit score. That may not seem like much, but it makes a huge difference. Over the course of a 30-year mortgage on that home, a person with A-tier credit could save over $80,000 in interest alone! What could you do with an extra $80,000?
That major price difference doesn’t stop at mortgages. Auto loans and credit card rates are higher for people with lower credit too. Beyond loans, credit also affects other things you may want to buy. Your cell phone bill, rent, and utilities may all require deposits and higher payments from those with lower scores.
Simply put, having higher credit saves you money. That money could be used to save more in your TSP and other investment tools, which means a comfier retirement.
Improving Your Credit
Are you ready to make sure you have top-notch credit? The good news is, small changes can make a big difference when it comes to raising your credit score. Here are some things you can do, to maintain and improve your score.
Review your credit report. Before you make a bunch of changes, its important to know where you currently stand. These days, it’s easy to see your credit report online. Look over your report to make sure all of the information is accurate and up-to-date. If there’s inaccurate information on your report, you can report it to one of the three credit bureaus (Experian, Equifax, or Transunion). It’s a good idea to take a look at your report regularly.
Pay your bills on time. This is probably the simplest way to maintain a great credit score. Afterall, it accounts for a hefty 35% of your score calculation. Try setting up your bills to be paid directly from your credit union account. You can “set it & forget it,” with automatic payments. If you find that you’ve got too many payments to manage, it may be beneficial to consolidate your debt. With this option, you can take various loans and credit card debt that you have and combine it into one single loan. This way, you’ll have a lot less payments to worry about every month.
Pay down credit cards. Having high balances on your credit cards can lower your score as well. Come up with a plan to pay down that debt. Aside from raising your score, you’ll also save more in interest by have low or no balances on your credit cards.
Clear up any negative information. If you have unpaid debt on your credit report, it could really drag down your score. Work with your lenders or debt collectors to come up with a plan to pay old debts. After time, you’ll see a boost in your credit.
Use your credit. Before deciding to lend to you, lenders want to know how you’re managing the credit you already have. It’s difficult to do this if you don’t have any credit. You could start with a small credit card that you use and pay off monthly. This will show positively on your credit.
Action Steps:
Set reminders in your calendar to regularly review your credit report
Use online bill pay to set up automated payments, so that your bills are paid on time
Create a plan to pay down high amounts of debt and any old debt on your credit report