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This 3-Digit Number Could Save You Thousands

Debt. Most people immediately think all debt is bad, however you could segregate debt into good vs. bad. Good debt is typically associated with appreciating assets, such as a mortgage, or an investment such as education or student loans (although I do not always agree with student loans - more on that at a later time). Bad debt is lended at a higher interest rate and is most commonly associated with credit cards and depreciating assets such as boats and cars.


Regardless of the category of debt, both good and bad contribute to your credit score. That elusive 3-digit number (300-850) calculated by 3 separate credit bureaus (Experian, Transunion, and Equifax) in 3 separate ways, resulting in 3 potentially different scores and ranges. However, most lenders use a FICO score when determining your credit worthiness. Credit score and FICO are similar and are used synonymously, but calculated different. For simplicity and due to its wider use, I will refer to FICO score going forward.


FICO is calculated using 5 components:

  1. Payment history: 35%

  2. Amounts owed: 30%

  3. Length of credit history: 15%

  4. New credit: 10%

  5. Credit mix: 10%

FICO affects whether or not you can borrow, the interest rate at which you can borrow, and if you may need a co-signer or have to pay an up front fee or deposit. Your FICO score could also affect applying to some jobs, renting an apartment, and even your car insurance rates. Most lenders agree a score above 700 is good.


This 3-digit number can potentially save you thousands over your lifetime and it's imperative that you get it right from the start or take steps to repair it, if necessary. The difference between a 4% and 6% interest rate over 30 years on a $250,000 home is close to $110,000! I can find other ways to spend $110,000 than to give it to a mortgage lender for the mere privilege of borrowing.


If you are in your 20's, you are probably just starting your first full-time job, living on your own or with a roommate or two, and have a few debts (student loans, car, credit card). Now is the time to ensure you do not fall behind on payments. Even one missed payment could result in a 100 point drop in your score. No credit history? Well, that actually hurts your score too. Apply for a cash or travel rewards card with no annual fee and pay off the balance each month. A larger purchase, such as furniture, may offer a 6 month same as cash financing option. Pay it off in 6 months and you have established good credit.


The first step to check your credit is to request a free copy of your credit report from all 3 bureaus: www.annualcreditreport.com. Next, go through all of your trade lines (accounts) ensuring there are no mistakes. If there is a discrepancy, notify the appropriate credit bureau immediately. I have done this in the past and it was a fairly simple process. Plus, it will save you time trying to correct something while you are in the process of applying for a loan. If everything looks good but your score is low, try contacting that lender to see if there is a way to refinance or lower your payment if you are having trouble making ends meet. Perhaps you do not have enough credit? Most people find that having 2 credit cards is manageable, but be sure to pay off the balance each month.


Your credit or FICO score should be monitored at least on an annual basis. Many credit cards and online budgeting software, such as Mint offer a free FICO score and update it monthly or quarterly. Keep tabs on this 3-digit number and you could save thousands over your lifetime.

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