Your credit score can mean the difference between a great rate on a car loan and lousy one, notes the team at Smart Payment Plan, a bill paying service that lets you pair smaller payments to your paychecks. While plenty of people know that a three-digit number guides their financial lives, few understand what goes into it and how they can make it better.
Credit score companies do use a bit of a magic formula to determine each person’s score. But, once you understand the basics of what makes up your score, you can take action to improve it and to improve your overall financial wellbeing.
So, What’s In Your Score?
The Fair Isaac Corporation (FICO) is one of the companies that create credit scores in the U.S. While not every lender uses FICO scores, many do. The FICO scores range from 300 to 850. The closer you are to 850, the better your credit.
When looking at your credit history, FICO looks at five areas to figure out what type of score to give you. The first and most important aspect of your credit report is your payment history, which accounts for 35 percent of your score. Do you have a history of paying late, or do you always pay on time? Late payments, or worse, missed payments, can drop your score considerably.
Another big part of your score is how much you owe compared to the amount of credit that you have available. If you have a credit card with a $5,000 limit and your balance on it is $3,500, that will negatively impact your score. It’s typically recommended that you keep balances on credit cards to under 10 percent of your credit limit.
Having a car loan that you’ve just started to pay off will also bring down your score. But, the closer you are to paying off that loan, the better your score will be.
The type of credit you have and the amount of new credit accounts you have each make up 10 percent of your total score. It’s usually recommended that you try to have a mix of credit, such as a car loan and credit card, and use both wisely. Opening new lines of credit will drop your score temporarily. To avoid too much damage, it’s suggested that you space out new accounts or avoid opening several new accounts at the same time.
Finally, how long you’ve had credit makes up the last 15 percent of your score. A longer credit history, especially one that shows you’ve made on-time payments, is great for the health of your score. You can still have a great score even if you’ve only been in the credit game for a few years, though, as long as you focus on keeping your debt owed low and on paying on time, all the time.
Improving Your On Time Payments
One of the reasons why people struggle to pay on time is because their payment due dates don’t match the dates they actually get paid. You might get paid on the 1st and 15th of the month, but have to pay your car loan on the 20th. A program such as Smart Payment Plan takes the stress out of paying your bills, as it allows you to schedule smaller payments based on when you get paid.
Instead of hoping that you have the $600 you owe for your car on the 20th of the month, you can schedule a payment of $300 on the 1st of the month and a payment of $300 on the 15th. That way, you don’t have to worry about spending all of your money before the 20th rolls around.
Since you can also schedule payments in advance with a service such as Smart Payment Plan, you don’t have to worry about missing the due date and potentially lowering your credit score.
Payday Payments Help Lower the Amount You Owe
If you get paid twice a month (or more), scheduling your bill payments to match your paydays can mean that the amount you owe drops even more quickly, potentially boosting your credit score.
For example, you borrowed $15,000 to purchase a car. The monthly payment is $300 with interest. Instead of making a single payment of $300 every month, you can schedule two payments of $150: one when you receive your first paycheck of the month and the second when you receive your other paycheck. If you get paid weekly, you can set-up weekly payments of $75 instead.
With some car loans stretching as many as eight years, making smaller, more frequent payments means that you can pay off your loan much faster — moving up your debt-free time-line. Schedule smaller payments to match your paychecks and watch your debt decrease more quickly and your credit score increase, suggests the team at Smart Payment Plan.
Amy Freeman contributed to this article.