Tuesday, July 30, 2013, AM | Leave Comment
Being able to manage your credit effectively is a must in this credit-driven world. Unless you do, you may find that you already have a bad credit score when you do a credit check on your accounts. We show you how to manage credit the right way in this article.
There are always two extremes in any spectrum: The extremely positive, and the extremely negative. Either end of the extreme is just not right. In terms of credit cards, learning how to manage your credit effectively is a matter of finding a way to use credit cards somewhere in the balanced middle: Not too permissively (i.e. maxing out your credit limit), and neither too conservatively (i.e. ever getting a credit card at all).
In all honesty, a credit card could be a good thing: it is a way to build a good credit score, which could prove to be an asset in the long run.
Credit scores are also either of two extremes: Good or Bad credit. A good credit score will open so many financial doors for you, while a bad credit score will close those same doors. In fact, a bad credit score may actually cost you so much more in the long run.
RamitSethi points out in his book, “I Will Teach You To Be Rich”:
“Why are your credit report and credit score important? Because a good credit score can save you hundreds of thousands of dollars in interest charges. How? Well, if you have good credit, it makes you less risky to lenders, meaning they can offer you a better interest rate on loans.”
Being in good credit standing could mean that you may pay a total of $70,000 less on a 30-year mortgage contract. RamitSethi illustrates it with a table showing ranges of credit scores describing the interest rates a person with good credit will get, as well as the total amount that he will pay, at those interest rates. We’ll show you the two extremes:
Mortgage Term (Years): 30
Mortgage Loan Amount: $200,000
Good Credit Score: 760 to 850
Interest Rate Banks Will Be Willing To Give: 4.384%
Total Amount to Pay: $359,867
Bad Credit Score: 620 to 639
Interest Rate Banks Will Be Willing To Give: 5.973%
Total Amount to Pay: $430,427
The difference of the total amounts that either hypothetical credit account holder will pay is a total of $70,560. In short, the credit account holder with good credit standing stands to save $70,560 on a 30-year mortgage loan.
What can $70,560 buy? A car. Several used cars. A business. A meager wage earner’s salary good for 2 years. A mid-range employee’s salary good for a whole year. Several years worth of groceries. A few years’ worth of rent.And so much more. As you can see, if you can only manage credit the right way, credit becomes an asset rather than a liability.
Not being able to manage your credit effectively comes with a lot of consequences. You’ll start with a growing, ballooning credit card debt. Then your credit card debt will hurt your credit report, which will then cause your credit score to plummet.
As you already know, a bad credit score can affect the way loans will be approved for you. We have already illustrated how it can cost you more to take out a loan if you have bad credit. Thanks to RamitSethi and his book, we now realize that people with bad credit scores are charged with higher interest rates on loans.
So how do you begin to manage your credit effectively? It starts with a credit check.
First, you have to know whether you have good credit or bad credit. If you know a bad credit score, you can then learn how to fix it.
Next, you can start to go about turning around your bad credit score.
You can use a secured credit card to demonstrate a desire and ability to pay credit card bills. The moment that you can show that you can pay for your credit card spending, your bad credit can incrementally turn into better credit.
Once you have demonstrated that you can manage your credit effectively, your credit report may then reflect that you are in a good credit standing. When you are in good credit standing, as we said earlier, doors will fly open for you.
Optimizing your credit card is a matter of knowing how to manage credit and maintaining a good credit standing. Pay your credit card bills on time, never max out your credit limit, and demonstrate the capacity to be disciplined with your credit card use. Credit is best used as leverage for bigger loans.
Financial institutions will trust you when you’ve demonstrated the capacity to be “faithful in little.” As the Good Book does say, “He who is faithful in little will be faithful in much.” As you show that you can manage your credit effectively, the institutions will then trust you with the major leagues in credit — home loans and mortgages, auto loans, and the like.
As you can see, these are but the benefits of being able to manage your credit effectively. And this, is the optimum way to use credit.
Amy Johnson is an active finance blogger who is fond of sharing interesting finance related articles to encourage people to manage and protect their finances.