The Cost of a Credit Score Under 650

There is no better example of how a credit score under 650 will effect your life than the purchase of house. This is the largest purchase of a consumers life. The comparison will be between someone who have an excellent credit and a person who has a credit score below 650. On a $300,000 mortgage the person with an excellent score will wind up with a monthly payment around $1,550 and an interest around 4.8%. The person with the credit score below 650 will have a monthly payment around $1,770 and an interest rate around 5.8%. A whole 1% higher. That might not sound like much but if you look at the total cost of the loan you will really see the effect.

The total cost over 30 years for the person with an excellent credit is $558,000 and for the person with a credit score below is $637,200. That is $79,200 extra spent. If that is not enough to convince you. Then you need to consider all the other loans in a consumer’s life like: auto loans, personal loans, and credit cards.

Actually, this might not be even accurate because getting a mortgage will be pretty tough with a credit score below 650.  This will sometimes push you into the sub prime category based on the lender you are dealing with.

What to do if You Have a Credit Score Below 650

The first thing is to check your credit report for errors. Having any potential errors removed from your credit report will give your score an instant boost. The next thing to do is know the credit score formula and this will point you in the right direction. You will then realize you can never make 30 day late payments, pay down your debt, only apply for credit if you need, and take advantage of your credit mix.

Conclusion

If you are below 650 it is not the end of the world. You can definitely recover, but with anything you need to commit.

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Background on Your Credit Score

First, to understand how higher limits on your credit cards could help your credit score you need to know the credit score formula.  When you do you will find that your debt to credit ratio is the second largest portion of your score and by having more available credit you will lower your percentage.

Possible Issues with Higher Limits

There definitely should be some caution with higher limits.  Chances are that if you are looking to lower your debt to credit ratio is because you are already carrying a high amount of debt.  If you have struggled to control your total debt and having higher limits could be a temptation that you really don’t need.   Worse is that a possible feeling of accomplishment or being less in debt, this is similar to what happens when a person consolidates debt.  You need to know that you are not any better off and you need to have control with these higher limits.

The actual fact is you should be concentrating on paying down the debt you already have, which is no easy matter and it can take time.

The Conclusion to Higher Limits and Credit Score

Well, it will help your overall debt to credit ratio and that is always a bonus for your credit score, but sites like MyFICO put it best; if you don’t need the credit you shouldn’t apply for it.

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Do: Pay your Creditors on Time

This seems obvious but is a struggle for many individuals. This is actually the single worse thing you can do to your credit score becuase your payment history carries such a large weight.

Don’t: Close Old Accounts You Don’t Use

First, closing old accounts could hurt your credit history. More specifically the average of all your accounts. This is a another major factor in your credit score and closing old account will skew the average. Also, you will lower the total available credit you have and thus raise your debt to credit ratio. Another factor that will weight against you in the credit score formula.

Do: Use a Budget Each Month

You need to know where your money is going at all times. A budget is essential to ensure you pay everything on time and pay down any debt you have. This will prevent you from saying at the end of the month where did my money go?

Do: Check Your Credit

You are allowed access to your credit reports free one time a year so take advantage of it. Creditors sometimes make mistakes and you need to check to see if your report is accurage. Cleaning your report of potential errors is a great way to get an instant boost to your credit score.

Don’t: Think You Can Close An Account To Make It Go Away

Many times individual will have an account that has many delinquencies and other issues, but thinking if you close it to make not appear on your credit report is wrong. It will stay on your credit report so there are many times no reason to close it and again you might be hurting your debt to credit ratio.

Do: Shop for Auto Loans and Mortgages

Sometimes you might hear the credit myth that shopping for credit will kill your score because of the credit inquires. Well, this isn’t exactly true. Consumers are allowed to shop for loans that represent a large purchase such as a mortgage or auto loan. They are not suppose to shop for unsecured loans like credit cards. These you know the terms up front and there is no need to shop.

Well, again these are just a few and there are many more, but hopefully there will be more of these down the road for me to write about.

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