Lesson 2 - Reduce Cost of Credit
Objective: Implement at least one realistic strategy that reduces the cost of credit in the short term, and one strategy that reduces the cost of credit in the long term.
Now that we have our debts organized, we need to look at ways to both reduce the cost of credit in the short term, and how your credit and debt behaviors can impact the cost of credit or debt in the long term. First for the short term – this primarily has to do with reducing the cost of interest paid. For credit cards, this would mean increasing your monthly payments, thus reducing your credit card debt, or in a best case scenario, not carrying a balance at all. In fact, for the vast majority of credit cards, if you never carry a balance, paying the credit card bill in full every month, you’ll never pay any interest!
For the long term, reducing the cost of credit generally has to do with improving your credit score. Your FICO credit scores include 5 factors, your payment history – whether or not you’ve been paying on time, your credit utilization – how much of your open credit (like the credit limits on your credit card) you’re currently using, your length of credit history, your mix of credit and loan accounts, and your new credit – how many new accounts you’ve opened or applied for in the recent past. By ensuring you’re not missing payments, not using a high percentage of your credit limit, establishing and maintaining credit, and not opening up too many accounts at the same time, you can help to build credit and become eligible for better rates in the future!
Example
Here is the debt example for Carlos from the last lesson. To improve his short-term cost of credit, he doubled his payment on his MasterVisa credit card (from $100 to $200), and put an extra $100 towards his car loan. By doing this, he reduced total interest payment from $1580 to $1402, resulting in almost $200 less in interest! To improve his credit score, he plans to spend less on his credit card, resulting in a lower debt utilization on his credit card. Lastly, having missed payments on his personal loan, he plans to get back on track with paying that loan, and catching up on missed payments, which will also help with improving his credit score!
Assignment
Use your own personal financial debt and credit situation. Identify at least one realistic strategy that reduces the cost of credit in the short term (reduce immediate cost of credit), and one strategy that reduces the cost of credit in the long term (improve credit score for better future rates).
Note: For this assignment, we would like you to use www.powerpay.org and to take screenshot, paste the screenshots into a Word document, and email the results. This link will provide you with instructions to creating screenshots. If you need any guidance with pasting images into a Word document, contact your course facilitator. The Word document should also include a written explanation of both your short-term and long-term strategy/strategies. Your course facilitator will provide feedback via email.