November 7th, 2012
Forget lattes. This financial move can save you over $65,000.
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Ramit Sethi is the New York Times best-selling author of the book I Will Teach You to Be Rich. In this three-part blog series, Ramit will teach us how to optimize our finances. This week: Forget lattes. This financial move can save you over $65,000.
Here’s something that you’ll almost never see on a financial TV show:
Consider 2 people…
One has great credit
One has poor credit
In their 30s, they decide to buy houses of similar prices. How much do you think they pay?
Just because of their credit scores, the person with poor credit will pay over $65,000 more than the person with excellent credit.*
Over $65,000. How many lattes is that worth?
THAT is the power of having a great credit score. Yet most “experts” will either (1) continue yammering on about lattes and clipping coupons, or (2) give worthless, high-level advice like “Improve your credit!”
They do this because lattes and coupons are obvious tips — even though it’s more effective to focus on the 7 big wins in your life.
My goal is to show you what’s beneath the surface — what’s important, but not obvious — to get you these big wins, so you never have to worry about buying your morning latte or ordering appetizers when you eat out.
So today, I’ll show you a step-by-step process to improve your credit score, which can save you tens of thousands of dollars.
How to improve your credit score
You don’t need to become a credit weirdo like me and read 50 books on credit optimization to raise your credit score. You can actually ignore most advice and simply do a few, key things to dramatically improve your score.
In fact, there are 3 major steps that will have the biggest impact in improving your credit score. I’m not going to give you 50,000 tips on how to improve your credit score. Instead, I’ll show you 3 that work:
1. Automate your credit card payments
35% of your score reflects your payment history, so even missing 1 payment can cause your credit score to drop 100 points, jack your APR up 30%, add $200+/month to your monthly mortgage payment (insane, I know), and more.
Set up automatic payments using my system. My last post included a video showing you the exact accounts that should pay each other.
Notes on automating your payments:
- Since 35% of your credit score is based on your payment history, setting up automatic payments is your Big Win here.
- Instead of doing what most people do (wait until the end of the month, then try to remember to pay…and when they forget, they get slapped with huge penalties), set up automation so you never have to worry about this again.
- You should ideally be paying off your entire credit card balance each month, but if you can’t, you can still improve your score by paying at least the minimums, on time, every month.
And if you do miss a credit card payment, don’t worry. You can use my proven script for getting late fees waived.
2. Pay off your debt
If you have credit card debt, read on…
Too many people decide that since they have debt, they should game the system and play the 0% balance transfer game, switching balances from card to card to save a few percentage points on debt interest. Yeah!! Let’s stick it to the man!
What I’ve found is that they spend more time transferring balances from card to card instead of actually paying their debt off. Honestly, the credit card companies are smarter than you, so if you try to game them, it’s only a matter of time before they destroy you.
Instead, here’s what I want you to do:
- Go to http://www.whatsthecost.com/snowball.aspx (my favorite debt calculator) and plug in your numbers
- You will see EXACTLY how long until you pay off your debt. Stick to the plan via automation (see step 1 of this email)
- Decide, optionally, to use the negotiation material from chapter 1 of my book (free download) to lower your interest rates.
3. Keep your old accounts open — and set up a $5 monthly charge on them
So many times, when people get motivated to “do something” about their credit cards, the first thing they do is close all the cards they haven’t used in a long time. Sounds logical! Let’s clean out the old cobwebs in our wallet!
In general, however, this is a bad idea: 15% of your credit score reflects the length of your credit history, so if you wipe out old cards, you’re erasing that history.
Plus, you’re also lowering your “credit utilization rate,” which basically means “how much you owe” / “total credit available.”
Bottom line? Even if you don’t use a card, consider putting a small charge — say, $5/month — and automating it each month. In this way, you ensure your card is active and maintains your credit history.
Notes on keeping your accounts open:
- If you’re applying for a major loan— for a car, home, or education—don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.
- However, if you know that an open account will entice you to spend, and you want to close your credit card to prevent that, you should do it. You may take a slight hit on your credit score, but over time, it will recover—and that’s better than overspending.
Improving your credit score is one of the top Big Wins you can have in your life. While others are scrounging around and worrying about ordering a medium Diet Coke, you can focus on something that will pay off with tens of thousands of dollars when you make the large purchases that we’ll all make in our lives.
Most people try to do everything (e.g., balance transfers) EXCEPT doing what really matters: Automating, Paying That Damn Debt Off, and Keeping Old Accounts Open.
Stay focused on these 3 steps, use my word-for-word script for getting fees waived, and your score will improve over time. It’s not sexy, but it WILL save you tens of thousands of dollars.
Ramit Sethi is the author of the New York Times bestseller, I Will Teach You To Be Rich. To get free word-for-word negotiation scripts and techniques to beat your credit cards, sign up for free at iwillteachyoutoberich.com.
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The opinions expressed in this post are those of the author himself, and not necessarily Credit Karma or its affiliates.
*The numbers in this chart are based on just one FICO model. It’s important to note that there are many credit score models, not just FICO.