Why it pays to know your credit score

Last Updated Jul 26, 2016 2:11 PM EDT

Anyone who has a credit card, auto loan, student loan or mortgage has a credit score. What your score is and how you use credit every day should be as important to you as it is to the many others who do know your score and use it for their own purposes.

Your credit score provides an indication of how likely you are to make payments on time and if you'll use responsibly any new credit you get.

Lenders use your score to determine whether they'll approve your loan and the interest rate you'll pay. Car insurance companies look at your score to decide if they'll insure you and how much to charge for the policy. Cell phone companies use it to approve an application for a new account. Landlords use it when deciding if they'll rent an apartment to you.

For these reasons, if you have a low credit score you need to know about it before others find out. And you should know how to take steps to improve it.

The most commonly used credit score is your FICO score, developed by San Jose, California-based Fair Isaac Corp. Its three-digit score ranges from 300 to 850.

Another one, the VantageScore, was developed by the major credit reporting agencies, Experian, Equifax and TransUnion, and it also ranges from 300 to 850. Other similar credit scores are around, but the FICO score is used in over 90 percent of lending decisions in the U.S. Lenders purchase over 27 million FICO scores every day.

While no single credit score is universally used by all financial institutions, extensive data indicates that people with FICO scores below 670 to 700 have a significantly higher likelihood of making late payments.

Having a higher FICO score can help you save money when you get a new loan because lenders give their best rates to borrowers with higher scores.

Here's an example from FICO: Compare two people, one with a credit score of 620 and another with a score of 760. Each is borrowing $280,000 for a 30-year fixed-rate mortgage. The borrower with the 620 score would qualify for a mortgage with an interest rate of about 5.08 percent, but the person with the score of 720 would get a rate of about 3.49 percent.

In this scenario, the borrower with the 720 FICO score would pay $261 less per month and save $93,960 over the life of the loan.

Don't know your score? You can get it free at sites like Credit Karma, and you can get your credit report from each of the three major credit bureaus for free once a year at annualcreditreport.com. The first step toward improving your score is to review your report because if it has any incorrect negative information, it can lower your credit score.

Don't be surprised to see different information on your report from each of the three credit bureaus. If you want a complete picture of all your credit info, you should get your reports from all three bureaus.

If you find any incorrect information that you think should be removed, file a dispute with the credit bureau. Then it has the burden of asking the creditor to either remove it or prove that it's correct.

In a follow-up article, I'll write about the key things that make up your credit score and what you can do to improve it.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.