Leveraging Credit Without Borrowing
As average credit scores for Americans continue to rise, the question for many becomes how to use their excellent credit rating to optimize their lives without borrowing money or adding risk.
Capitalizing on great credit doesn’t have to mean incurring great debt; instead, it’s about using your money reputation for a financial advantage.
“In the right hands, a good credit rating can be a real asset,” said Jordan Goodman, editor of MoneyAnswers.com and author of “Master Your Debt.”
From higher credit card bonuses and rewards to lower insurance premiums and interest rates, hundreds or even thousands of dollars worth of goodies are available to those with great credit. And they don’t need to borrow a dime.
USE YOUR LEVERAGE
Nearly 40 percent of Americans have excellent FICO credit scores of 750 and above, according to credit scoring company Fair Isaac Corp . Half of those have scores of 800 or higher, considered “super-prime.” They get the best lending terms and lots of special treatment.
Leveraging credit to access these benefits works best for people with responsible financial habits, like paying bills on time, every time, and paying monthly credit card balances in full.
“You want to make sure you have discipline,” said Roger Wohlner, a personal finance writer and financial planner in Arlington Heights, Illinois. “This is for someone who has all the basics covered.”
If that’s you, here are ways to use a great credit rating:
¯ Shop your insurances: It’s a good idea to regularly shop for better insurance rates; you can often find identical auto and home coverage for less. When you have great credit, you’ll get even better rates .
¯ Snag credit card bonuses: The market for rewards credit cards is sizzling, with generous sign-up bonuses and rewards for consumers who can qualify. With a travel credit card, for example, you might be able to use points or miles to pay for a trip if you can meet the card’s minimum spending requirement. It’s not about “churning” cards, or opening accounts to get bonuses and then closing them. It’s about not hesitating to apply for a lucrative card that meets your needs. If the card has an annual fee, make sure you extract more value than you pay.
“If you are fiscally responsible and enjoy playing the game to earn these sign-up bonuses, then you do have a real opportunity to win at the expense of credit card companies,” said Byrke Sestok, president of Rightirement Wealth Partners in White Plains, New York.
¯ Get a HELOC for emergencies: Homeowners can supplement an emergency fund for free by opening a home equity line of credit. The point isn’t to borrow more money with the credit line on your house–instead, leave it unused–but to have it available in case financial tragedy hits. “Everyone who can control their spending should have a HELOC that they can tap in case of an emergency,” said John Eckel, a certified financial planner and financial analyst in Simsbury, Connecticut.
¯ Lower your interest rates: High credit scores should mean low interest rates. Make sure you’re paying rock-bottom rates for loans, especially big-ticket items like your mortgage and auto loans. If not, you can refinance.
¯ Get no-interest deals: Paying in full is a solid habit. But if a car dealership is willing to lend you money at 0 percent because of your great credit, you can take the loan and make monthly payments, while banking the money you were planning to use to pay outright — preferably in an interest-earning account.
¯ Apply for retailer credit cards: Signing up for a credit card at the checkout counter has risks if you don’t pay in full because interest rates are usually high. But if you’re diligent about paying bills, why not apply for a card to get 15 percent off a $2,000 furniture purchase? It’s an easy $300. Diligence is key.
“Merchants are very good at offering carrots, but you slip up for one microsecond and they bang you over the head,” Goodman said.
Exploiting your great credit rating in these ways can actually improve it over the long run, assuming you continue to pay bills on time, because credit scoring formulas reward responsible use of credit. Just space out applications so the small dip in your scores can disappear before the next, and be wary of diluting your average age of accounts.
Even if you take none of these actions now, you can rest easier knowing you’ll have plenty of options when a financial crisis hits.