Raise Your Credit Score, Save Big on Loans

Nov. 2, 2009 — -- This week I'd like to continue our conversation about how to Save Big (not small) -- something we could all stand to do right now. This week's topic: how to raise your credit score to Save Big on credit.

As I've been telling you in the past few columns, I recently wrote a book called "Save Big," but it doesn't come out until January, and I feel like people need the information right now because of the crummy economy. So I'm sharing my favorite tips and tricks in this space each week in an effort to help and to get a conversation going in which you also share big savings ideas with me.

Click here if you have one for me. Remember to qualify it as a "Save Big" idea -- the savings achieved must be more than $1,000 in less than a year.

I maintain that the best places to find Big Savings are among our top five costs: houses, cars, credit, groceries and health care. Sandwiched right in the middle is credit, a puzzling one. Most people don't think of credit as an expense, and I'm trying to change that. We purchase credit just like we purchase houses and cars. The price of credit is the interest. For example, the interest owed on a $200,000 mortgage at 7 percent is $279,160 over the life of the 30-year loan. The credit costs even more than the house!

There are two ways to Save Big on credit: by using less of it or getting it for less. Today let's tackle the latter. The higher your credit score, the lower the interest rate you will be charged for loans. A lower interest rate can save you tens of thousands of dollars over the life of the loan.620 .................. $22,656/year

720 .................. $19,536/year

BIG SAVINGS = $3,120/year

The $3,120 savings a year is nice, but get this. If you kept the loan for 30 years, your total savings would be $93,600. Now let's look at a car loan. In this case, raising your score from 620 to 720 lowers your interest rate from 12.780 percent to 6.348 percent. Amazing. If it's a three-year auto loan for $25,000, here's your savings:

FICO Score … Cost of Loan
620 ..................$30,240/three years
720 .................. $27,504/three years
BIG SAVINGS = $2,736/three years

That's $2,736 that you can put toward your next car! OK, now that I've got you motivated, you'll want to know what steps you can take to raise your credit score. There are a bunch of do's and don'ts. This week I'll tackle the do's, next week the don'ts. Some are slow, steady steps. Others are faster, flashier moves.

• Pay down debt: If you have any extra cash on hand and you can put it toward your credit card debt, your score will rise as soon as the payment is reported to the big three credit bureaus. It is the fastest single step you can take.

• Pay on time: You must do whatever it takes to pay your bills on time. If you're a busy person, I recommend setting up an automatic payment so that you are sure never to pay late. If you've paid late in the past, the good news is that your most recent payment history carries more weight than past mistakes, so beginning to pay on time every time now will raise your score.

• Ask creditors to delete single sins: If your overall payment history with a company is good and you made one glaring mistake, you may be able to get the bank or credit card company to delete it. Just call up the company and ask.

• Keep ratios low: Credit scoring statistical models place a lot of weight on the ratio of how much debt you carry to how much credit you have been approved for. To improve your score, charge up no more than 30 percent of your available limit. (10 percent is even better.) If you carry balances, try to reduce them down to 30 percent.

• Move your money around: Since it's best to charge only up to 30 percent of your balance, one way to game the system a little is to move debt from one card to another. If you have one card that is near the limit and another that has little or no balance, move the debt from the former to the latter. This is no substitute for healthy payment practices, but it can give you an encouraging momentary boost.