If you want to save thousands of dollars over your lifetime and minimize the interest on your loan payments, check your credit score now and make a goal to increase it to over 720. How much does your credit score matter? Take a look at the FICO scores and their different APR, monthly payments, and total interest paid on a 5 year $20,000 car loan.
For this example, the difference between a credit score of 500 and 720 is $135/month extra interest payments and $8,100 extra interest paid in total over the five year loan.
How do you increase your credit score? First, let’s take a look at how your FICO score is calculated:
Next, follow these steps:
- Check Your Credit Report – You can get a non-FICO credit score for free at CreditKarma.com. You can also request one free credit report from each of the three major credit bureaus (TransUnion, Equifax, and Experian) once every 12 months from annualcreditreport.com. When you get your credit report and/or score, check it for errors and if you find any on your report, dispute them with the credit bureau and reporting agency.
- Pay Your Bills on Time – 35% FICO score. Set up automatic bill payments from your bank accounts. Also, make sure to set up automatic payments on any debt, such as auto, student, home, and personal loans.
- Optimize Credit Card Utilization – 30% FICO score. In addition to paying your bills on time, focus on reducing credit card debt. Keep your credit card balances below 30% of your credit card limit. If your total credit card limit is $10,000, your monthly credit card balance should not go over $3,000. The utilization rate shows lenders that you use credit responsibly and that you don’t rely too heavily on borrowed money and don’t carry balances month to month.
- Maintain 2 credit cards – 15% FICO score. Consumers with more credit accounts generally have better credit scores because it shows that more lenders have extended credit to you. On the other hand, closing a credit card reduces the amount of credit that is available to you and may also reduce your overall credit history.