We continue our saving tons of money series this week. Now we shift our attention towards your credit score. Do you know how much money that you can save with a high credit score? Do you realize how important your credit score is? I certainly didn’t know how crucial a credit score is until I saw the breakdown of one and how it affects interest rates on loans when I applied for a home mortgage.
Let’s recap what your credit score is made up of:
- Payment History – 35%
- Total Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Type of Credit in Use – 10%
Now that we see what makes up a credit score, how can you save tons of money by taking care of your credit score?
Lower interest rates.
The higher your credit score, the less money that you’ll spend on interest. The logic here is fairly simple. Having a credit score means that you essentially have a history of paying money back on time and making wise financial decisions. This will deem you as being credit worthy by the bank. No lender will want to loan money to someone that has a poor credit history and is known for not making payments on time.
Higher credit score= lower interest rates= less money spent on interest.
Less money wasted on interest.
With a lower interest rate, you won’t have to spend as much money on your home mortgage and car loans in the future. This means more money in your pocket. You really don’t want to get stuck with an absurd interest rate just because you made some poor financial choices in your 20s. You’re ready this because you want to know how to save tons of money. Right?
No need for a co-signor.
Do you really want to ask a family member to be a co-signer for you? I personally hate asking for any favours at all. With a low credit score, you might be stuck asking a family member for help when it comes to getting a loan. This could lead to awkwardness and you might not even find someone willing to sign for you. What will you do then? What if you can’t buy that new car because you don’t have a co-signor?
That’s why a high credit score can save you lots of money in the long run.
Alright so I can save so much money with a solid score. What’s nest? What can I do to start building your credit score in college?
Sign up for a credit card.
I recommend that you grab yourself a basic credit card with a small limit to get started. Now I know that there are many pros and cons to a credit card in college. The reality is that you should get a small limit so that you can handle yourself if you do happen to max out your card.
Pay off the balance.
You need to get into the habit of paying off your balance religiously. Now we can get into excuses but I’m not here for that. I’m a firm believer in paying off your balance. If you don’t have the money in your checking account, then you clearly are not responsible yet for a credit card.
Automate payments.
It will help you build a credit history if you automate our fixed expenses to your card and pay it off on time. My gym membership, utility bills, insurance, and cell phone all go towards my credit card. This has helped me build my credit history, while simplifying my financial life.
The only caveat is that you still need to check your bills for any discrepancies. No excuses!
Over time if you build up your credit score, you can save yourself tons of money in the long run. Have you been working towards improving your credit history? Please share your experiences with us here.
Check out the other article in the series:
The Power of Passive Savings.
You Need to Pay Yourself First.
(photo credit: mint_jinny)
