How’s My Credit Score?

Poor credit history is equivalent to paying higher taxes. According to a recently updated survey by Experian, the average credit score for Texas is now the lowest of any state in the U.S., and the DFW Metroplex is the lowest in the state. While this just an average, and many members have excellent credit histories, it does indicate that many in our state will pay more for credit.

What does this mean? Low credit scores translate to higher interest rates, and higher borrowing costs. If you only have one credit relationship this higher cost may not be material, however if you have several credit relationships this interest rate disparity could equate to thousands of dollars, and difficulty in acquiring credit.

Let’s assume that your credit score is at a level where pricing for credit is 3% higher than the rates available to those with higher credit scores. Let’s assume that you have three major credit cards (MasterCard or VISA), three department store cards, an auto loan, and a mortgage. Depending on the balance you have with each credit relationship, the overall effect of the additional 3% could equate to a reduction of your monthly net income of 3%, 5%, or even 10%. Since you pay your bills from your net income and your taxes are computed on gross income, your higher costs of credit could equate to paying an additional 8% to 15% in income taxes.

Higher rates for lower scores reflect the associated risk of credit relationships. Higher risk (lower scores) pay more than low risk relationships (high credit scores).

The good news is that credit scores change, and credit scores can and do go up. Taking time to understand what makes the score go up or drop can make a huge difference in your financial picture today, and for many years to come. Paying your monthly bills in a timely manner, not maintaining your credit limits at their maximum amounts, not defaulting on a debt, not acquiring a lot of debt over a short period of time are ways in which you can raise your credit score. The most important way, is to always pay your debts on time.

With the economic downturn during 2008, the new priority should be savings. For the past five years consumers have enjoyed the financial ability to spend more than we earned. This was accomplished by borrowing what we had available, or by spending what we had previously saved. The result is that personal savings levels are at an all time low.

With the economic downturn have come lower interest rates. The “rainy day” savings account has lost its appeal over the years, however in order to restore ones personal wealth, and set aside money for emergencies consumers must get back to establishing a regular savings habit. Set your goal for a specific amount, whether it is a set dollar amount, or two to six months of monthly income. Saving now may make a huge difference in your financial future.

 If your credit union can help you reach these goals, please give us a call. We are all about helping our members secure their financial future!