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Having a good credit score can mean the difference between achieving your goals and being held back. A bad credit score can hurt you financially for years, even decades. Those three little numbers have more power over our lives than most people know.
So what is a credit score really? And how can you use it to create success in your life?
**INTRO BUMPER**
My name is James Westin and my mission is to help you do one thing: Become more resourceful so you can create true freedom in your life. Okay, sometimes it may not seem like it, but we are so lucky to live in this time. Resources are everywhere, if you know where to look. And I’m here to show you. Credit scores are no exception. Most people see a credit score as something that limits them.
“Oh, I couldn’t get that new car because my credit score was too low!”
Sound familiar?
Yes, having bad credit puts limits on what you can do. But that’s the wrong mindset. In reality, your credit score is an untapped financial resource, so it’s time to start treating it that way. And as soon as you make that mindset shift, things can really start to build momentum.
So here’s what we’re going to do. First, we’ll discuss how a credit score works. Then we’ll look at why it’s so important to keep it as high as possible because, again, we need to see it as a resource not a limitation. And finally, we’ll discuss some of the best techniques you can use to raise your credit score.
So, first, what is a credit score?
A credit score is a risk management tool that tells banks and financial institutions whether you can be trusted with their money. Credit rating agencies like Equifax, Experian and TransUnion monitor your financial behavior – that’s right, they keep tabs on you! – and then they assign your profile a score based on a number of key indicators. They look at things like how long you’ve been using debt, how much you’ve had access to, your payment history and, of course, whether or not you’ve defaulted on any loans or declared bankruptcy.
Okay, so that’s how credit scores work in a nutshell, but what does it mean in reality?
It means that the higher your score, the more banks and other financial institutions are willing to trust you with their money. You’re considered a good investment. That means they’ll compete to offer you lower interest rates. The better your credit score, the cheaper it becomes for you to borrow money.
At a certain point, they’re practically throwing it at you. In short, having a good credit score is important because a score of say 750 or higher means you’re basically a VIP with bottle service at the bank.
On the flip side, having a not-so-good credit score means money becomes more expensive and harder to borrow. And having a really bad score? You’re going to have a hard time with the banks. Having a really bad credit score means you’re basically radioactive. No one wants to lend you money, even if you really can make the payments. It’s a big red flag and it can be difficult to recover from.
Being the victim of a bad credit score has real, life-altering consequences. And it can seem pretty unfair! If a bad credit score has ever impacted your life, I want to hear from you. How did it happen? How did it feel? Leave me a comment below with your credit score horror stories.
At this point you may be so fed up with debt you might be asking yourself, why use credit at all? Why not save up and pay for it yourself? Afterall, aren’t you just paying interest to make some banker richer?
This is outdated thinking: The idea that it’s only through hard work and saving your money that you become wealthy. Yes, working hard gets results, but becoming more and more wealthy means having more and more Capital. And what is credit? Credit is access to capital.
For example: Imagine you’re a farmer in a poor country. You make $2000 a year. The reason you’re so poor is because you have to do everything by hand. Let’s say your land could produce five times more crops and money if you had a tractor, but a tractor would cost you $20,000. Even if you were to somehow save half your annual income, it would take you twenty years to buy a tractor. Good luck with that.
Alternatively, if you have good credit, you could go to a bank and ask for a loan to get the tractor. Because of that $20,000 loan, your farm is now making $10,000 a year. Your farm is happy, the bank is happy you’re able to pay off the loan with interest within just a few years, and your customers get more food. Everybody wins. The world is better off because of the invention of credit.
Chances are your situation is like the farmer in this example. You probably have a job, you make a certain amount of money a year and maybe you’re lucky enough to make ends meet. But if you want to be enterprising and start something that will generate wealth for you, you need to see your credit score as an investment in yourself.
It’s exactly because of this mentality that I’ve been able to leverage credit to increase my production and income. I’ve worked hard to keep my credit score at 750 or above and I have access to hundreds of thousands of dollars of credit available to me. But just because I have access it doesn’t mean I use it all the time. It all comes down to one simple rule when it comes to using credit, one that you should never break.
My number one rule for credit is this: Only use credit when it pays you. You have to treat it like an investment. And of course every investment has a level of risk. Before taking on debt, you need to be able to answer, how is this going to pay off?
Credit is vitally important when it comes to building and growing businesses. A real estate business is a great example. Let’s say you want to be a landlord and you have some money for a downpayment on a house, but you need a mortgage to cover the rest of the price. Having good credit is the difference between getting that property or not. Once you get it, then you rent it out and use the rents you’re charging your tenants to pay the mortgage and build equity in the property over time. Eventually you can refinance and get another house and start the process over again. That’s how many real estate empires are built. Using credit, investmenting, refinanncing, and then re-investing. It’s all about leveraging the capital thats available to you and that’s why having a good credit score is important!
That’s a big picture example, but credit can pay off even in smaller consumer habits.
For example, a simpel one is getting is one of those rewards credit cards that gives you 1% cash back on your purchases. As long as you pay off your balance every month, you’re literally getting paid to use that card instead of your debit card or cash. If you spend $10,000 a year on that card in a year, and you never carry a balance, you’re getting $100 for free by the end of the year just for using credit, plus you will build up a good payment history.
Another common example is debt consolidation. If you have a credit card with an outstanding balance and you’re paying 15% to 20% in interest on that balance. You can use good credit to get a consolidation loan to pay off that balance and then you’re looking at only maybe 5% or 7% interest. Paying off that debt is building savings, because it means you’ll pay less in interest over time, and not to mention, you’ll be doing your credit score a favor.
That same investment mentality should come with building your credit score. Increasing your credit score is an investment in future you. You’ll have better access to capital in the future to live the lifestyle you want and you won’t have to pay as much.
So how do you increase your credit score?
Well, there’s only one tried and true way and that’s to have good credit history. That said, here are four tips to keep in mind when you’re looking to raise your score.
First, if you’re just starting to build your credit score – maybe you’re young or you simply haven’t had much experience with financial institutions – then it’s important to start out on the right foot. Ever go to college campus on opening week and there are those kiosks just giving away credit cards? Far too many students get a credit card for the first time, spend to the limit and get saddled with absurd interest rates. Don’t do this! It’s the wrong first impression for these rating agencies. That said, it’s important to establish your credit sooner rather than later because the age of your credit report is a factor in the score.
So, tip number one: If you’re just getting started, consider getting a secured credit card or getting co-signer who has more established credit to back you, like a relative. The more positive things on your report and the more money you’ve had access to and handle responsibly, the more trustworthy you are in their eyes.
Keeping with the credit card example, tip number two is this: Forget 65% of your credit limit on your card. Pretend it doesn’t exist. MasterCard, Visa, Amex, these companies all have an incentive to get you to spend more than you can pay off in a month. Treating your card limit as if it only has 35% of what it actually has will help you avoid that spending trap if you ever happen to need to carry a balance. For example, if you have a $1000 limit, treat it like it really has a limit of only $350. Never carry a balance if can help it, but avoiding carrying a balance over that 35% limit will really help you in the long run. Remember, the credit score companies are always watching.
Tip number three: Check Your Credit Report for Anything That Seems Off
Look, errors and fraud happen, so it’s not uncommon for people’s credit scores to take a hit through no fault of their own. Or often it can be something that’s your responsibility but because you’re human and you make mistakes, something got missed and it’s affecting your score. These are called derogatory marks. They could be things like missed payments, old bills that went to collections and you didn’t know about it, or accounts that you didn’t actually open but somehow got on your report. Review your report from the big three bureaus and make sure everything on it correct. If you find something on there that is incorrect and hurting your score, you can google how to dispute it or hire a credit repair company.
Finally, tip #4: Give Your Score a Boost!
There are two programs called ExperianBoost and UltraFICO that allows you to beef up your credit report even if you don’t currently have access to a lot of credit.
They do this by linking up with your bank account and adding your payment history on things like your electric bill, water bill, and cable to your credit report.
The cool thing is that it pulls up to 24 months on payment history so this can add years to the age of your report and payment history. If you’ve got a low score, but you’ve been diligent with those other payments, getting one of these boosts will really help you, since credit will become cheaper and easier to access. If used correctly, it can pay for itself.
Alright so in summary, having a good credit score is important because having access to capital can help you jump frog from success to success, instead of having to waste years trying to build up that nest egg for yourself. It’s a tool and one you can learn how to leverage to access capital and make good investments with it.
Ultimately, the most limited resource on the planet is time. Bill Gates and Elon Musk have the same 24 hours in a day that you do. And no one lives forever. But credit – if used wisely – is a powerful economic accelerator. The speed of your success in life can depend a lot on whether or not you’re trusted in the eyes of financial institutions. Once you stop seeing credit as a burden or limitation placed on you and start to see it as powerful investment resource, then you can fully unlock your future financial potential and use it to build the life you want.
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Let me know in the comments if you have any stories about how you were able to use credit effectively to improve your life and to suggest future topics for the channel to cover.
