The Path to Prosperity is Understanding Consumer Credit

It’s often said that there are two things in life that no person can escape: death and taxes. However, another significant factor that folks need is credit. Credit is necessary unless you’re independently wealthy and pay cash for everything you purchase. Getting a good deal and an affordable interest rate is impossible without a thumbs-up from the bank.

When your FICO score is above 720, it’s as if the world is your oyster. You can easily buy that nice vehicle you want, snag that dream apartment, or take out a loan for college. Think of it as a golden ticket to an easier financial life. When a lender pulls your score and sees a number between 700-900s, it signals to them that you have all your ducks in a row.

The Evolution of Consumer Credit

Before the FICO or Vantage scores, people didn’t have credit to show lenders they were financially sound. In the olden days, people had to build relationships and develop a track record of paying things on time with their reputation. Rather than pulling a number, they went off the security of their possessions and used them as collateral.

Just like today, lenders looked at things like employment and assets to decide on lending money. The banks of old relied on financial circumstances. However, this process was very time-consuming and wasn’t always an accurate predictor.

In the 1950s, it was time for a change, so the FICO score was created. It was the brainchild of two people, Bill Fair and Earl Isaac, who called it the Fair Isaac Corporation. Developing a system that analyzed credit risk helped lenders and consumers alike. No longer were personal factors necessary in approving a loan, as the discrepancies and ineffectiveness of that process were duly noted.

So, credit turned into a number that evaluated the borrower’s risk. The numbers go from 300-900, and where you fell on this scale meant everything. Today, maintaining your credit can be a significant chore, as just one past-due payment can make your FICO drop significantly. Thankfully, understanding consumer credit and how to keep your numbers in check can put you on the path to prosperity.

A Higher Score Saves You Money

If you’ve ever purchased a vehicle, you know that a lender first wants to pull your credit. They will only talk numbers once they get an accurate picture of your credit. Why is this number so significant?

If you want to buy a used truck, the interest rates can be anywhere from 9.72 – 21.55%. So, if your credit score falls in the 661-780 category, you can get the best current interest rate of 9.72%. However, if your FICO is in the 300-500 range, you can expect to pay 21.5% on the vehicle.

It all comes down to payment. If the truck was $25,000, an interest rate of 9.73 without a down payment and a 60-month term would be around $528 a month. However, the same vehicle with the same terms on a 21.5% interest rate would be around $685 a month. So, you will pay an extra $157 a month for the same vehicle, or $9,420 more than someone more creditworthy.

When you look at things from this perspective, having a good FICO is so important. Imagine paying more for your home and your car than necessary, and all the other things you can do with the money you save by having good credit.

Tips for Keeping Your FICO In a Good Range

While many people wish for that desirable score in the higher ranges, they don’t know how to maintain it. So, here’s some tips to ensure you’re creditworthy.

•Pay All Bills On Time – Never let your bills fall behind. Once a bill is 30 days past due, your credit will show a slow pay. Call your lender and ask them to work with you if you find yourself in trouble.

•Watch Your Credit Utilization – Your debt-to-credit ratio is important, as it needs to be minimal. The amount of money you have coming in versus what’s going out is a significant factor in your score. Never use more than 30% of a credit card, as this will cause your score to take a hit.

•Diversify – You don’t want ten credit cards and nothing else on your report. It would help to get the best ranking if you had a healthy mix of credit, such as a mortgage, car loan, and credit cards.

•Stay the Course – The longer your credit is open and in good standing, the better your chances of having a higher score. Opening new cards won’t help you, but having cards with a positive payment history for three years or more will be a plus.

•Watch Inquiries – Every time you apply for a loan, your credit takes a hit. You can monitor your credit and there’s no effect as it’s considered a soft hit. Too many inquiries shows that you could be a risk as you’re applying for new credit too much.

•Be Responsible – Building a good credit report takes time, so you need to do all these things for years to build a favorable history. One moment of weakness or a slip up can have a lasting impact for 7-10 years, so be careful and responsible with your credit usage, payment history, credit inquiries, and the types of loans you get.

The Path to Prosperity

While there are many factors that go into the credit equation, the path to prosperity begins with the right credit score. Like relationships, your credit report takes time and effort to maintain, so you want to ensure that even if you mess up and have a slight problem, you rebound quickly.

Having a high FICO is the ticket to a good, credit worthy life. While you need a job and a strong mindset to succeed, having a credit score in the right range will save you money and open doors that were previously impossible.