Financial Education
Make your good credit work for you in a down economy
By Laura Stack, Chief Financial Officer for Pioneer Services, the Military Banking Division of MidCountry Bank
Having a good credit score takes more than just paying bills on time—it requires an overall commitment to spending within limits, checking your report each year, and not getting in too much debt over all. (For ways to increase your score, read the article “Important changes to credit reports for 2008.”)
Once you have that good score, there are a number of ways to take advantage of it.
Low interest rates
Consumers with higher credit scores usually pay less in interest anyway, but banks and lenders are trying to increase business in this struggling economy by offering historically low rates. Car loans, personal loans, and even mortgages now feature such low rates that financial expert Dave Ramsey has suggested taking advantage of them now, before they go back up.
If you are in need of a new car, major home repairs, or even a new computer or cell phone, now is a great time due to businesses needing to show a positive bottom line. The key, of course, is to use the same common sense that led to your high score—only as much debt as you can afford, and only if you still have enough after the purchase to set some aside into savings.
Buying vs. renting
There have been thousands of media reports on the declining real estate market, subprime mortgages, bailouts, and all other manner of bad news. But if you’re looking for a home, now is one of the best times to buy, especially for those with good credit scores.
There is a glut of houses on the market, and most of their owners want to sell quickly. And while housing prices continue to drop, they will level off eventually. Even so, try to only buy a home you know you’ll be in for a while so you don’t lose a lot of equity. This may be difficult for military families, but the ability to rent the home if you or your spouse is relocated makes it easier.
When it comes to mortgages, a good credit score can make a huge difference in the rate you receive, as well as the type of mortgage a lender may offer. Just like with any other bill, do not spend more than you can afford, make sure to read all of the paperwork so there are no hidden surprises down the road (e.g. a mortgage with a variable rate that could lead to hundreds of dollars more a month), and shop around—competition is strong in the industry right now, and your good credit means you have bargaining power. So use it.
Debt consolidation
Even those with good credit scores may have more debt than they’d like. And since part of your score is based on how much debt you are using compared to how much is available, you may want to consider paying off some of it.
For example, the scoring models see a credit card with $3,000 of charges on a $5,000 limit as a negative since you’re using 60% of the available credit. But if you pay it off with an installment loan, your total amount of available credit will increase, while the amount you are using will decrease. So a debt consolidation loan will not only get you out of the minimum credit card payment trap (where it can take literally years to pay off even a modest balance), it can also help increase your credit score.
Insurance
Another advantage to having good credit is lower insurance rates. But if you haven’t shopped around for a while, now is the time to do so.
Either go online to a site that offers multiple quotes (such as Progressive.com), or visit several different ones to get rate quotes. While the rates they provide are not guaranteed, they can give you a good idea of which company will offer the coverage you need at less cost.
Remember when getting the quote to include not just your car(s), but also any other vehicle you may own (e.g. a motorcycle or boat) and your homeowner’s or renter’s policy. This is because nearly every large insurer offers multiple policy discounts, potentially saving you hundreds of dollars a year.
Also play around with different deductibles, checking prices on both low- and high-deductible plans, to see if you can find additional savings. Just remember to take into consideration your financial situation and the chances of filing a claim—while a high-deductible plan can save you money in premiums, it may cause problems if you file a claim, yet are unable to meet the increased out-of-pocket costs that come with such a plan.
Maintain the score
Through it all, remember how you got and kept a good credit score: controlled spending, smart purchasing, and a focus on the long-term impacts of your financial decisions. Set up an emergency savings account (if you haven’t already) so you can use cash instead of credit pay unexpected bills, and use the same discipline you have used thus far when it comes to your money. Because while there are some great opportunities out there today for those with high scores, they won’t help much if they lead to a lower score tomorrow.
About the author
Laura Stack, Chief Financial Officer for Pioneer Services, has more than 20 years experience in finance in the financial services, leasing and media sectors. A graduate of Kansas State University, Stack is a member of several professional and military organizations, including the Central Exchange and Financial Executives International, and the Association of the United States Army.
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