Did you know that you could get hit with an extra $5,000 in interest payments on a $20,000, five-year car loan because you didn't treat your credit score with the utmost of care?
That ups the total cost of the car by 25% because you didn't pay your bills on time or you charged up a credit card to the limit. And, that lost $5,000 could have been money you put toward that maxed-out card that would have helped your credit score to begin with.
"A bad score can be costly," said Stephen Brobeck, executive director of the Consumer Federal of America, a nonprofit association of consumer groups.
A growing number of people you do business with -- landlords, mortgage brokers, insurance agents, cell-phone providers -- all look to your credit score to determine if you're a credit risk worth taking on, how much credit they might extend and at what price, meaning what rate of interest they will charge you.
"These credit scores can significantly influence the financial lives of consumers," Brobeck said.
And the sad truth is that many consumers still don't understand the machinations of their credit scores, according to a survey CFA conducted in partnership with VantageScore Solutions, a credit-scoring company that uses scores from all three major credit-reporting companies, Experian, Equifax and TransUnion, in its calculations.
On average, those polled only scored a 60 on the survey, what Brobeck points out is "a low passing grade" on a school level. (You can take the quiz yourself at www.creditscorequiz.org.)
Here are a few other things that most respondents didn't seem to know:
Credit scores aren't about your ability to pay the loan but about the risk of you not paying the loan. Your income could be high and outstanding debt more than manageable to easily assume that $20,000 car loan, but if your track record of paying bills on time is far from stellar, that makes you a credit risk that most lenders won't take on without just rewards, or a high interest rate, for doing so.
The strength of your credit score depends on the scale used. A FICO score of 700 is great because FICO scores from a low of 300 to 850. But a 700 on a VantageScore, which starts at 501 to a high end of 990, wouldn't be so good. Know what credit field you're playing in to understand your rank. Age and marital status aren't calculated into your credit score but the length of time you've had a score does. If you're 30 and you've spent a few years accumulating an excellent score, then you're as good as the golden 45-year-old who has done the same.
Your credit is not just one tidy score, but many different scores that are either generic or lender-based. To make matters worse, different lenders look at different scores when making their decisions. Your scores are available through FICO and the three credit-reporting companies, as well as websites such as www.annualcreditreport.com, where you can get a free credit report every year. Most scores at other websites are based on information that the three bureaus use and tend to give you an idea of what your score is, not an absolute rank.
Accuracy is key to your score. Sometimes information is wrong on your report. Check it frequently and request updates or corrections if needed.
Liens, foreclosures, short sales and bankruptcies can wreak havoc on your credit score, wiping out 100 to 300 points. But you can recover from a lien or even poor on-time payments in about nine months of good performance. Foreclosures, short sales or bankruptcies, however, will haunt you for years.
Finally there are three important ways for you to get and keep your scores glistening:
1. Pay your bills on time every month. Lenders are unforgiving of late payments and will probably charge you for it, too.
2. Never max out credit cards. And that applies to all of them, not just one or two. Keep your debt level at about 25% to 30% of available credit, per card, not the total of all cards.
3. Never open up multiple cards at the same time. Each time a card issuer takes a look at your credit score, you get nicked.
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