With every credit card swipe and loan, someone is keeping score. Well, actually, that "someone" is a computer network and private companies, but they track every purchase.
When the credit industry looks at how credit-worthy you are -- whether you're likely to pay back your bills -- they compile a score based on how much you've borrowed, your income, job history and a number of other factors.
If you borrow judiciously and have a good repayment record, chances are your credit score will be higher than average. If you're a deadbeat, your score will be lower -- and it will cost hundreds of dollars in terms of higher borrowing costs.
So maintaining a solid credit history is in your best interest; you'll be rewarded with the lowest finance charges. But it's surprising how many people don't know how credit scores work.
According to a recent survey by the Consumer Federation of America (CFA) and VantageScore Services, "Low credit scores can cost consumers hundreds, and sometimes thousands, of dollars a year in higher loan and service costs," states Stephen Brobeck, president of the CFA.
What will cause your credit score to decline? "A large majority of consumers correctly identified key factors influencing scores – missed loan payments (91%), high credit card balances (86%), and personal bankruptcy (85%)," the survey found.
There's no question that lower credit scores are going to ding you in the form of higher borrowing expenses, sometimes thousands of dollars more.
A low credit score on a typical auto loan, for example, "would increase loan charges by more than $5,000," the survey found.
What Can You Do
Maintaining a strong credit score is like keeping a good car running. You have to do periodic maintenance.
You don't have to employ a credit "repair" service to take the necessary steps. Many of the firms that offer to fix your credit are scams. You can do everything you need on your own.
Here's what the CFA recommends:
-- Consistently make your loan payments on time every month. A late payment may lower one’s credit scores by dozens of points.
-- Using a small portion of the credit available on a credit card. The higher the percentage of a credit line that is drawn down, the lower one’s credit scores.
-- Paying down credit card debt rather than just shifting it to another credit card or to a home equity loan.
-- Regularly checking one’s credit reports to make sure they are error-free.
Want to see your credit report for free? You can do this by contacting www.annualcreditreport.com or by calling 800-322-8228.
John F. Wasik is the author of "Lightning Strikes," "Keynes's Way to Wealth" and 15 other books on innovation, money and life. Follow him on Twitter and Facebook.