Your credit score determines whether you get a decent interest rate on any loan you take out, whether you qualify for a car loan or mortgage in the first place, and even the cost of your auto insurance or whether you get a job that you applied for or are allowed to rent the home or apartment that you want in some areas. The better your credit score is the more money you will save. To see your latest credit score go here.
As an example:
You take out a 30 year fixed rate mortgage for a $200,000 home. With a credit score between 760 and 850 you might pay 3.307% interest and have a monthly payment of $877. If your credit score is around 620 – 640 this same mortgage would involve an interest rate of 4.869% and a monthly payment of $1,061. That is an extra $154 every single month, and paying an extra $66,343 over the life of the loan because you have a lower credit score.
Because of this it is definitely in your best interest to keep your credit score as high as possible. With this in mind there are 4 important things that you should avoid in order to prevent any damage to your credit, and a lower score which costs you more as a result.
1. Making Payments Late
Making full payments doesn’t mean much if the payments are late. 35% of your FICO score is made up of your credit payment history, and even a single late payment can wreck a good credit score. Chronic late payments can cause your credit score to drop like a stone, and eventually you will not qualify for credit at all.
The lateness of the payment is also an important factor. If you make a payment 30 days late this will not be as devastating to your credit score as it would be if you make a payment 90 days late. A recent late payment will also have a bigger impact than a late payment 4-5 years ago. Even paying 30 days late could cause a drop of 9-110 points off your credit score according to the FICO data available.
2. Maxing Out your Credit Cards
Maxxing out your credit cards has a negative effect on your credit utilization rate, and will damage your credit score. This rate evaluates the amount of credit you have available and the amount of credit that you have utilized or used. According to myFICO “Credit utilization rate has proven to be extremely predictive of future repayment risk. So it is often an important factor in a person’s score. Generally speaking, the higher your utilization rate is, the greater is the risk that you will default on a credit account within the next two years.”
In order to get the best credit score possible with your credit history and situation it is recommended that you stay below a 10% credit utilization rate. Your account balances make up 30% of your FICO credit score and it is the second most important factor in your creditworthiness.
3. Letting Credit Report Errors go Uncorrected
Credit report errors that are not corrected can do significant damage to your credit score, and the amount that you pay for credit. Some credit report errors could lower your score by hundreds of points. As an example a mistake that shows a foreclosure on your credit report could mean that your score drops by about 160 points. Always correct any mistakes that you find on your credit reports immediately. The longer the mistake goes uncorrected the more damage it can do.
4. Monitor your Credit Reports
The Fair Credit Reporting Act allows all consumers to get a free copy of their credit report from each one of the 3 major credit reporting agencies one time every 12 months. These agencies are TransUnion, Equifax, and Experian. Check your credit reports every year and contact the credit reporting agency if any mistakes are found. Each of the 3 credit reporting agencies may contain accounts and entries that the others do not, depending on which agencies the creditor reported your account to, so make sure to request a copy from each one and then go over it carefully.