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Leverage Your Credit: What it Means and How to Do it

Gina-Freeman
leverage your credit

Credit Sesame on what it means to leverage your credit.

The term “leverage” simply means using something you have to get the result you want. In this case, what you have is excellent credit. And you can use it to:

  • Save money on loans and insurance.
  • Make investments.
  • Earn cash, travel or merchandise for free.

The old saying, “It takes money to make money” is only partly true. You can achieve top-drawer credit without a high income, and you can use your excellent credit score to improve your finances every day.

How to leverage your credit

You can leverage your credit to save on insurance, pay less interest, make investments and earn freebies. Here’s how.

Save on insurance

In all but eight states, insurers can consider your credit score when setting insurance rates. If you have an excellent credit score and haven’t burned down your house or caused any highway pileups, you probably qualify for great rates.

Leveraging your credit score means shopping your insurance in these circumstances:

  • Every other year (to avoid “rate creep”).
  • If your renewal rate increases by 10% or more.
  • When you have a life change like marriage, divorce, or kids moving out.
  • Three years after a moving violation or accident.
  • When your credit rating changes significantly.

Check with several companies or use an online shopping site to help compare rates and programs. And compare rates for every type of insurance you have — bundling can seem like a great idea, but it does not always save you money.

Pay less interest

It’s no secret that people with better credit pay lower interest rates. According to the Consumer Financial Protection Bureau (CFPB), the average credit card rates for people with the best credit run at least eight percentage points lower than those for people with poor credit.

You can use your good credit to save on other loans as well. Personal loan interest rates for consumers with the highest credit scores are competitive with home equity loan rates — without putting up your home as collateral. A quick online search finds example rates of just under 6% for the most desirable applicants, while those for borrowers with poor-to-fair credit run as high as 36%. At these rates, for a $10,000 five-year personal loan the prime borrower would pay interest of $1,600 while the subprime borrower would pay $11,680.

If you have a large auto loan or mortgage, it never hurts to shop for a lower refinance rate. People with less-than-excellent credit are unlikely to qualify for the lowest advertised interest rates. However, you can be reasonably confident that those deals are available to you.

Make investments

Even if you can afford to pay for purchases in cash, taking advantage of low- to no-interest promotions allows you to leave money in your bank or brokerage — where it continues to grow.

If you invest in home improvements, a business or other opportunities, the cost of money impacts your return on investment (ROI). Adding a $25,000 garage to your home might increase your property value by $35,000, but pulling money out of an investment account earning 10% per year or borrowing at a 10% annual rate offsets some or all of that gain. When you can take advantage of a zero-interest deal for a year or two, you can leave a few thousand dollars in your account.

Another way to leverage your credit is to set up a home equity line of credit (HELOC) for emergencies. Having access to emergency cash at a rock-bottom interest rate allows you to tie up your money in better-paying investments instead of savings or checking accounts. Read the fine print, however. Some HELOCs penalize you with fees if you never use them or if you close them out too early.

When evaluating investments, understand the risk involved as well as the potential return. Make sure that you’re comfortable with the downside because if an investment goes south, you’ll still need to repay the loan behind it.

Earn freebies

You can leverage your credit by taking advantage of offers that may be available only to those with stellar scores:

  • Rewards cards.
  • Cash-back cards.
  • Signing bonuses.
  • Zero-interest credit cards.

Rewards and cash-back credit cards are free money as long as you don’t carry a balance and the annual fee is low or zero. As long as you use them only for items that you would buy anyway, you can take advantage of credit cards’ safety, convenience and rewards at no cost. And when credit card issuers compete for customers with excellent credit, you may snag compelling incentives — like hundreds of dollars in cash, big discounts from retailers, or tens of thousands in air miles for signing up and spending a certain amount in the first few months.

Leverage your credit but beware of pitfalls

When your credit score hits the excellent range, you may receive offers every day — in your mailbox, online and when you shop. It can be tempting to say yes to all of them, especially when the credit card has no annual fee and includes a tempting bonus.

However, you should choose carefully and be mindful when paying with credit. Applying for a new account, even if it’s pre-approved, generates an inquiry on your credit report and drops your credit score a few points. And opening new accounts decreases the average age of your accounts. New credit (inquiries) impacts 10% of your credit score and lowering the age of your accounts affects 15%.

Another issue is being incentivized to use credit when you otherwise would not. Those generous signing bonuses don’t usually kick in unless you add a few thousand dollars to the account within three months or so. If that is more than you spend and can comfortably pay off, that offer might not be for you.

When you learn to leverage your credit, you can improve your bottom line and add a little fun to your life. Just make sure you’re disciplined enough to borrow and spend wisely, so you don’t lose the great score you worked so hard to achieve.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Published October 24, 2022
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