A good credit score can save you hundreds to thousands of dollars by helping you get a car loan, a mortgage, even an insurance policy. A bad credit score can cost you even more than higher interest rates – it can eliminate you as a candidate for a job! 

You may not even know where your credit score comes from, but you have more control over this important number than you may realize. Here’s the essential information you need to know to make your score work in your favor instead of against you.

Q: What exactly is a credit score?

A: Your credit score is a three-digit number between 300 and 850 that measures how creditworthy you are. (It’s called a FICO score, after Fair Isaac Corp., the company that created it.) Banks use this number to determine how risky it is to lend you money. The lower your score, the higher the bank’s risk, so the more you’ll pay for a loan. For example, a person whose score is 580 may pay three percentage points more for a mortgage than someone with a score of 720, according to Fair Isaac Corp and the Consumer Federation of America. Paying 8% instead of 5% on a $200,000, 30-year fixed rate mortgage would cost you an extra $394 a month. That adds up to a whopping $141,840 over the life of the loan.

Q: How can I find out what my credit score is?

A: A number of online sites offer this information, usually for a fee.

Q: Can I improve my score?

A: Absolutely! You boost your score by taking these four important steps:

1. Check your credit history to correct mistakes. To create your credit score, FICO studies your credit history, which is the record of what lenders and merchants have reported about their transactions with you. The company gets this history from the three big credit agencies: Experian, TransUnion and Equifax. Unfortunately, it isn’t always accurate. Studies have shown that up to 80% of all credit reports contain errors. Some are insignificant; others are serious mistakes that can hurt your credit score.

You’re legally entitled to a free annual credit report from each of the three agencies. You can obtain them online at annualcreditreport.com. By asking for a report from a different agency every four months, you can monitor your credit history free all year long, dispute any inaccurate information and make sure it’s removed from your file.

2. Reduce your credit card balances. Credit utilization accounts for 30% of your FICO score. The closer you are to your credit limit, the worse your score. Avoid maxing out on a card. It’s much better to use only 25% of your total available credit than to use 90% of it. 

It’s particularly important to reduce your existing card balances before closing a card you don’t use, or the termination could have a negative impact on your score. For example, let’s say the total balance on all your cards together is $4,000 and your total limit is $16,000: You’re using 25% of your available credit. If you close one card and your total credit limit falls to $10,000, you’re now using 40% of your total credit. That hurts your score.

3. Pay your bills on time. Your payment history is the single most important factor in your credit score, accounting for 35% of your profile. Bills that are overdue for 30 days or more show up on your credit report. A track record of late payments lowers your score and drives up your interest rates. This is true of ALL bills (gas/electric, mortgage, etc.), not just your credit card bills.

4. Limit your applications for credit. Each time you apply for credit, the lender checks your credit report. If several lenders check your record within a few months, it looks as if you’re being turned down for loans or taking on more debt than you can handle. Either way, that’s bad for your credit score.

Don’t be afraid to comparison shop for the best loan, though. All inquiries about your credit history within one 30-day period from providers of car loans and mortgages are treated as a single inquiry. That’s to make sure you can shop for the best rate on a car loan or a mortgage without hurting your credit score.

Time is on your side

The most important thing to remember about the FICO credit score formula is that it gives greater weight to recent events. As a result, even if you have a poor credit history, you can turn things around by changing your behavior. Your score will improve if you begin to consistently pay your bills on time and reduce your debt.