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Each year Fidelity Investments fields a study to ask people (over the age of 18) what their New Year’s Resolutions are for the coming year.  These results don’t change much year over year, which isn’t surprising.  All three of these resolutions make financial sense but given 7 out of 10 Americans live paycheck-to-paycheck, it’s not likely most people will be able to get through the year and declare a success for all three .

Plan of attack – There’s only two ways to save more money: make more and/or spend less.  I can’t help you with making more money other than to suggest you ask for a raise, find a better paying job, or add a side hustle to your current income – but you already knew that.  But spending less can be achieved in two ways.   The first is by actually spending less and part of that is doing the little things like clipping coupons, eating out less, or avoiding that expensive coffee on the way to work. The second, and perhaps more important, is to make the money you have go farther.

Making your money go farther – One important way you can make your money go farther is to improve your credit score.    While everyone should strive to live within their means, there are times where people must borrow to handle life’s little emergencies.  That is where your credit score becomes important.  Your credit score is the key to the terms you’ll pay for loans and with credit cards you already have, or intend to apply for. 

Our company is focused on helping people build better credit scores.  Why is this so important?  Because your credit score is an essential component of how you use your hard-earned cash to impact these three areas of your daily financial life.  The key is to better understand the role your credit score plays and how to think about your credit score.

The cost of funds – This is a term that people who lend money use every day, and you should use every day too.  A lender has a sophisticated formula they use to understand how much it costs them to acquire the capital necessary to offer you loans or lines of credit.  You should think about the cost of funds in relation to the interest rate you’ll pay on a car loan or personal loan.  This also applies to credit cards, where the rate offered to you by the issuer is highly dependent on your credit score.  If you have a credit card with a balance of $2,500 on the card and you have an Annual Percentage Rate (APR) of 29.99%, the issuer will charge you $62.36 this month.  If you have an APR of 16.99%, the issuer will charge you $35.15 this month.  That’s only $27.21 per month difference, but every little bit adds up over the course of a year.  People with a credit score of 740 or higher will likely qualify for the card with the lowest interest rate.  People with a credit score below 640 will likely qualify for the card with the highest interest rate.

Where to start? – Paying more interest reduces the amount of money you can apply towards “saving more money”.  “Spending less money” allows you to “pay down debt” which in turn reduces your balances due on loans and credit cards.  If you can reduce the balances due on your credit cards, you can lower your utilization rate which makes up 30% of your credit score calculation.  This increases your credit score, which allows you to renegotiate the current APR you are paying on credit cards or stop using those cards and apply for a new one with a lower rate.  Now you can eliminate more expenses going towards payments, which gives you more money to add to your “save your money” resolution!

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