Raising a credit score saves a fortune in a lifetime of borrowing

Raising a credit score will save money on interest payments that can be invested to finance retirement. Thinkstock photo.

A good credit score is more important than ever. The  credit crunch has raised the bar on credit scores. Raising a credit score is necessary now to get a loan and get a good interest rate on that loan. A good credit score saves money. A bad credit score costs money. A FICO credit score of 650 is considered fair to poor. A FICO credit score of 750 is considered good to excellent. A select few, with discipline and focus have credit scores higher than 800. A man in Arkansas is doing everything he can to achieve a FICO credit score of 850. His diligence could translate into a rich retirement.

Raising a credit score to 850

A FICO credit score of 850 has been achieved by 0.5 percent of Americans, according to FICO. A CNN profile of Chris Plepinski of Rogers, Ark., chronicles his quest to achieve that elusive number. Plepinski is currently at 813, putting him ahead of more than 82 percent of his fellow Americans. His burly credit score will save him a fortune over his lifetime. But CNN reports that Plepinski won’t be satisfied until he hits 850. To do that he studies every factor of a FICO score in detail. He checks his FICO score every 90 days and adjusts his personal finances to squeeze out every possible point. He once took out a car loan even though he could pay cash, figuring that adding the variety to his credit mix could bump up his score.

FICO credit scores and how to raise them

A FICO credit score is distilled from credit report data collected by the Equifax, Experian and TransUnion credit bureaus. Bankrate.com reports that FICO scores range from lows of 300 to 400 to highs of 800 and higher. The number is a result of the following:

  1. Payment history – 35 percent
  2. Total debt load – 30 percent
  3. Length of established credit – 15 percent
  4. Types of available credit – 10 percent
  5. Recent new credit – 10 percent

Based on the above, tips for raising credit scores include always paying on time, making up missed payments, maintaining low credit card balances, paying off debt instead of transferring it, not requesting new loans or credit cards and not closing existing credit card accounts.

A higher credit score brings a better quality of life

A fair-to-poor credit score can cost a fortune over a lifetime, according to Liz Pulliam Weston at MSN Money. Weston penciled out a comparison between two people over 50 years. One has a credit score of 750 and the other 650. She calculated the difference each person paid in interest on several loans, including student loans, credit cards, auto loans, mortgages and home equity loans. Over a lifetime of borrowing, the person with the 650 credit score paid $201, 712 more than the person with a 750 score. Weston divided $201,712 over 50 years and figured an 8 percent average return. In interest saved, the higher credit score could allow a retirement account to grow to more than $2.3 million.