Think your credit score isn’t a big deal? Think again. Having a low credit score could cost you as much at $45,000 in a lifetime of purchases.  Having a good credit score is important for more than when it comes time to buying a home and getting a good rate for your mortgage.

Here are just some examples of where having a lower credit score can cost you money over your lifetime. Businesses use your credit score to predict your potential success or failure in repaying them.   Your score shows them how well you’ve handled past credit card payments and loan repayments in the past.  

There are 5 factors that make up your credit score and each has a different impact on your score.  Knowing each of the factors and what impact it has on your score can help you in improving and maintaining a good credit score.

1. New Credit – 10%  Every time you open a new line of credit it can impact your credit score.  So be wise about opening a new credit line as too many new credit inquiries can be a signal to the credit bureaus that you might be overextending yourself.
2. Credit Mix – 10%  Having more than one type of credit line shows the credit bureau you are responsible with different types of credit. So having both installment payments (mortgage, car loan) and revolving credit (credit card) is good to show you can balance loan payments.
3. Credit History – 15% –  This is the amount of time each account has been open and the amount of time since the account’s most recent action.  It’s a good idea to not close out a line of credit you’ve had for a long time as that’s reflected in your credit history.  Just let that credit sit without using it to keep your credit history strong.
4. Amounts Owed – 30% – This is the amount of credit taken out against your credit limit. You don’t want to always be maxing out your credit cards.  If you have an opportunity to increase your credit limit take it but then be sure to not run your credit up higher. The lower the percentage of credit used against the credit limit provides you with a better score.
5. Payment History – 35% This is how frequently you are making on-time payments for all of your accounts. Making payments on time on a consistent basis helps secure a better credit score.

Now that you know the factors affecting your credit score here are the top 3 things to do to improve it:

1. Make all payments on time.  Even if you can’t pay your balance in full, it’s better to make on-time payments for all accounts than to not make a payment at all.  One late payment can affect your score for a year.
2. Call if you miss a payment. Call your credit card or loan company as soon as possible should you miss a payment.  Typically late payments aren’t reported to the credit bureaus until 30+ days of being late.  If you have a good payment history by making a phone call can help stop a late payment from being reported.  
3. Keep your credit card balances low. It’s best to keep your balances below 20% of your total credit line. The higher your credit card balances, the lower your score. Keep your balances as low as possible or pay off your balance every month.  Having a high balance on your credit card can lower your score.  If given the opportunity to raise your limit, do so to give you a bit more room, but then don’t use that to spend more.

Now that you understand what makes up your credit score and what you can do to improve it, it’s a good idea to check up on your score on a regular basis.  You’re entitled to a free credit report from each of the 3 credit bureaus; Experian, TransUnion & Equifax once a year.  You can opt to get them all at the same time or an even better option is to stagger them and get one per quarter.  Then it’s easier to spot if there’s an error on your report and get it resolved quickly.

Should you find an error check here’s how to file a dispute. It can take some time to get a resolution on an error on your credit report which is also a good reason to keep regular tabs on your credit score. If you see a sudden drop in your score for no apparent reason it’s wise to check it out and get things corrected in a timely manner so it doesn’t hurt you when you need a good-excellent credit score.