Credit scores are a financial tool, but whether they're a lever or a hammer depends on how good they are. You can leverage great scores into great deals — on loans, credit cards, insurance premiums and cell phone plans. Bad scores can hammer you into missing out or paying more.
The lifetime cost of higher interest rates from bad or mediocre credit can exceed six figures. For example, according to interest rates gathered by Informa Research Services:
• Someone with FICO scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with FICOs over 760. (Most FICOs and VantageScores are on a 300-to-850 scale.)
• On a five-year, $30,000 auto loan, the borrower with lower scores would pay $5,100 more.
• A 15-year home equity loan of $50,000 would cost a low scorer $22,500 more than someone with high scores.
Since credit scores have become such an integral part of our financial lives, it pays to keep track of yours and understand how your actions affect the numbers. You can build, grow, defend and take advantage of great credit regardless of your age or income.
Most people don't have one score; they have many, and the scores change all the time. Your scores also differ based on the scoring formula used and which of the three credit bureaus supplied the information used to create the score. If you want to track your credit score progress over time, monitor the same type of score from the same bureau. You don't have to pay for a score; you may be able to get a FICO or VantageScore for free from your credit card issuer or your bank. Financial sites such as NerdWallet also offer free credit scores, typically VantageScore 3.0, which measures the same behaviors that a FICO does.
Some of the things you can do with what you find:
Millions of people don't have credit scores because they haven't used credit, or haven't used it recently enough to generate scores.
A smart first step can be to apply for a credit-builder loan, which places the money you borrow into a certificate of deposit or savings account that you can claim after you make 12 monthly payments. Many credit unions and community development financial institutions offer credit-builder loans, as does online lender Self Lender.
A secured credit card, which gives you a line of credit equal to the amount you deposit with the issuing bank, also helps build credit. Once you have a score, you can use a credit score simulator to see what actions might help and hurt it.
Paying your bills on time is crucial to building your scores. Nothing counts more.
Light but regular use of your credit accounts is also important. Know your credit limit on each card and charge no more than 30 percent of that limit.
Pay balances in full. There's no need to carry debt when your goal is boosting your scores. If you do carry balances, try to pay them down as quickly as possible.
Avoid closing accounts if you're trying to improve your scores. Once your scores are high — over 760 or so — you can shutter an account or two without major damage, but try to keep your highest-limit credit cards open.
You have a lot to lose once you have good scores, generally 690 or above.
A single skipped payment can knock more than 100 points off your numbers. Consider putting all your credit accounts on auto-payment.
A collection account or lawsuit judgment can dent your scores as well. Stay on top of medical bills , since many go to collections with little notice.
Identity theft can devastate scores, a good reason to check all three credit reports at least once a year at AnnualCreditReport.com. Not all information shows up at each bureau.
Once your scores near 700 or so, you're considered a good risk. When they're over 760, you're golden. You should expect the best rates and terms lenders have to offer, since they'll be competing hard for your business.
Reconsider your auto insurance as well, especially if your credit has improved substantially since your policy was set up. Your current insurer may not check your credit at renewal time; ask it to re-run your rates. It's a good time to shop around as well.
With all the money you save, you can make progress on important financial goals such as saving for retirement, boosting your emergency fund or getting out of debt faster.
That's the real power of great credit scores. Instead of begging for loans, paying too much and trying to make do with what's left over, you'll finally have some options to get ahead.
Liz Weston is a certified financial planner and columnist at NerdWallet. Email: email@example.com.