As we reach the end of our discussion of insurance in this series, we come across a key personal finance tip that has not only a big impact on your insurance, but also impacts many other aspects of your financial life.
Your credit score is a single number, but it has so many powerful effects on your life.
First, what exactly is a credit score? It’s a topic we discuss regularly on The Simple Dollar, but as there are new readers all the time and it’s such an important topic, it’s well worth mentioning again.
From an earlier article:
A credit report is a record of an individual’s history of borrowing and repaying. This includes information about lines of credit, late payments, bankruptcies, credit defaults, and so on.
A credit score is just a single number that summarizes most or all of the information in your credit report. Think of it as an “executive summary” of your credit report – all of the information boiled down to just one number.
The full article is well worth reading if you want a more detailed description of credit scores and credit reports.
In any case, the stronger your history of making your payments on time, keeping credit cards open for a long time, avoiding bankruptcies, and so on, the higher your credit score.
The higher your credit score is, the more trustworthy you appear to people who don’t know you personally – in other words, businesses. Many businesses use your credit score as a quick way to check out whether you’re trustworthy or not. The more trustworthy you are, the more businesses are going to want you as a customer, and they’ll reward you with lower rates and other benefits.
Your insurance rates are one prime example of this. The stronger your credit score, the more likely you are to get a better quote from an insurance company. (Of course, your credit score affects many other things, too, such as the interest rates on your mortgage and car loans, as well as things like your ability to get a lease or even to get a job.)
So, how do you improve your credit score? It’s impossible to know exactly how to maximize it because the precise formula for calculating it is a trade secret, but there are some tactics that will work to raise your score.
First, pay all your bills on time. If you’re very late on your bills, it will show up on your credit report. This includes your debts, of course, but it can also include other bills as well. Keep up to date on all of your bills.
Second, keep your oldest credit card around, even if you don’t use it. The length of your credit history is a big factor and, unless you have other debts that have been around longer than your oldest credit card, keep that old card around.
Third, don’t push your credit limits on your credit cards. One big factor in your credit score is your debt-to-credit ratio, which essentially means that the closer you are to your credit limit on your cards overall, the lower your credit score is. You’re not in bad shape if you’re carrying some credit card debt (although that’s a poor idea itself), but if you’re pushing credit limits, your credit score is suffering.
Follow those steps and your credit score will be in solid shape.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.