Further Rewards for Good Credit
You've worked hard to keep your credit score high. Why shouldn't you be rewarded for your effort?
Banks agree and are looking for innovative ways to urge you to keep your credit score as high as possible. Financial institutions have always used negative reinforcement for poor credit scores – higher interest rates, lower credit limits, and further restrictions or outright rejection. The new approach targets positive reinforcement for score improvement.
Jamie Dimon, CEO of JPMorgan Chase, revealed in a recent Business Insider interview that his institution is looking for ways to entice consumers to improve their credit scores. The exact approach is unknown, but Dimon assures that the programs will offer real rewards – for a potential example, reduced loan costs when a threshold improvement value is reached.
JPMorgan is expected to beta-test some of these approaches in the coming months. Your bank may follow suit. Are you ready to take advantage?
Shape Up, Everybody
JPMorgan's program could represent a win-win situation. Just as it's in your interest to have a high score, it's in a lender's interest to urge you to keep credit scores high.
A high score indicates responsible financial habits for borrowers – and therefore, lower risk for lenders. Lenders will still lend money to borrowers with lower credit scores at higher interest rates and increased risk, but lenders prefer a more predictable stream of borrower payments.
Unfortunately, the average credit score in America could use improvement. FICO recently reported the average credit score is now 704, while recent data from ValuePenguin indicates an average score of 673 on the competing VantageScore system (both on a 300-850 scale).
The average American VantageScore is in the middle of the fair credit range (650-699) listed by the credit bureau Experian – meaning the average consumer may be approved for credit but will pay higher rates. Experian considers the average FICO score of 704 to be in the good credit range (670-739) – but the impact is similar.
An increase of 30-50 points in credit score can have a large impact on the rates you pay and translate to hundreds – or even thousands – of dollars in savings on large purchases.
The Many Benefits of a High Credit Score
While a high credit score helps you qualify for loans and save money through lower interest rates, that's not the only benefit.
You'll save on insurance premiums in states where credit-based insurance scoring systems are allowed. You're more likely to be approved for housing and more likely to avoid security deposits on everything from cell phone contracts to utilities. If you ever do need more credit to handle a temporary crunch, you'll have the leverage to acquire it.
The greatest benefit of a high credit score may be indirect. If you have one, you've established excellent fiscal discipline to get to that point. Odds are that if you've earned a high credit score by handling money well, you've reduced one of the major life stressors – probably improving your mental and physical health as well as your fiscal health.
How to Get There
How do you increase your credit score? First, review your existing credit report for any errors or signs of fraud. You may deserve a better credit score than you have.
Excluding fraud or errors, two factors have the greatest impact on your score – on-time bill payments and low credit utilization.
On-time bill payments are the most important factor. Make sure that at least the minimum payment is always received by the due date. Check any automatic payments to make sure the payment is properly posted each month.
Credit utilization refers to the amount of credit you're using compared to your overall credit limits. If you're close to maxing out your cards, lenders consider you higher risk for more credit. Keep your credit utilization ratio well below 30% to keep your credit score high. Aim for 10% or lower if possible.
Other things you can do to improve your score include maintaining older accounts (to show stability over time), limiting requests for new credit, and maintaining different types of credit (both revolving and installment payments).
If you rarely use credit any more or have no credit history, look for a credit-building card with limits and restrictions. Get a secured card backed by a deposit if you must. Make small purchases on those cards, pay them off every month, and you'll build a positive credit history in a short time.
We're glad to see large financial institutions looking for ways to help consumers improve their credit scores. However, they can only provide incentives. It's up to you to take advantage of those incentives and gain the collective benefits of a high credit score.
Review your budget and financial plans today. Are you on the path toward a higher credit score? If not, revise your budget and spending to make sure all bills are paid on time and your overall debt stays at reasonable levels. It doesn't matter what JPMorgan Chase or any other institution offers if you don't have the fiscal discipline to reap the rewards.
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