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Dear Kathe,

How important is your credit score – what should I know about it?

Your credit score is more important than you might think! Many people never consider is how much their “not so great” credit is costing them.  Just a 100 point differential in a credit score, from a 720 to a 620 for example, could cost you in excess of $91,000 in additional interest fees paid on a $300,000 loan over the life of that loan!  That’s a lot of money to forego because of credit issues.

It is therefore well worth your time to understand what goes into credit, what makes your score go up or down, and how to positively influence your credit score.  Your payment history forms the largest part of the score.  Just one 30-day late payment can reduce your score a full 50 points!  Ouch!  Put your bills on auto-pay whenever possible and you will be making great progress toward avoiding this costly mistake!  If you miss one payment once, take the time to call the credit card company and beg them not to report it – most will forgive one late pay each year.

How much you currently owe on your credit cards is the second largest piece of the equation.  Ideally, you do not use more than 15% of your outstanding credit line, but in no event should you exceed 30%.  So, for example, if you have $10,000 in credit available to use, you should not be using more than $1500 – $3000 of that credit.  This number is easy enough to manipulate when you are planning on buying a home or refinancing – just refrain from charging in excess of 15% – 30% of the available credit line in the 6 – 12 months immediately preceding your mortgage application and you can positively impact your score.

Credit inquiries can also reduce your score – avoid applying for new credit cards or other loans during the months prior to your planned application.    Also avoid closing old lines of credit – having open but unused lines of credit will positively impact your credit utilization percentage.  When a credit card company chooses to increase your line of credit that also increases your score, but beware – if they decrease your line due to overuse or late payments, this can reduce your score as much as 100 points.

Lenders generally require scores to exceed 650 in order to obtain a loan at all, and the best rates go to borrowers with scores exceeding 760.  Even insurance companies look at credit scores these days and give the best rates to customers with the best credit.  There is simply no getting away from the impact your credit can have on your budget.  So do yourself a favor and take the time to monitor your own credit and understand how your choices impact your scores – you’ll thank yourself in the long run when you have more money left over to spend on the things you love!