What’s In A Credit Score?

Your credit score is an important number that determines what interest rate you receive when taking out a loan such as a car loan or a home loan. It also determines what rates your credit card charges you. As I’m sure you could imagine someone with a good credit score is bound to save thousands of dollars over someone with a bad score.

For example, if you have a great credit score and get a home loan at 4% (30 years / $300,000 loan) you’ll have monthly mortgage payments of $1,432.25 and will end up paying $215,608.53 in interest over the course of the loan. If your credit score is less than perfect you’ll be offered a 5% interest rate instead. With this 1% difference your mortgage payments will be $1,610.46 and you will pay $279,767.37 in interest. The difference is $178.21 per month and a total of $64,158.84 over the course of the loan. That’s some serious money.

Before you begin to improve your score you should know how your credit score is constructed. As the graphic depicts, your payment history accounts for 35% of your score. The amount you owe accounts for 30% of your credit score. 15% of your score is determined by the length of your credit history. New credit and types of credit each account for 10% of your credit score.

Something else to note about credit scores is that your most recent negative actions will affect your score the most. For example, say you make a late payment. Your score might drop 20 points. If you check your score a couple of months later your score might have gone up 10 points, meaning that late payment has only affected you 10 points then. A few months after that and that late payment may only be affecting your score 5 points.

So if you want to maintain a healthy credit score concentrate on making your payments on time and having a low balance. If you’re able to do this alone you’ll notice your score creep back up into the 700’s in no time.