Some people don't fully understand the importance of having a good credit score. A poor credit score can effect many areas of your life. It can determine the interest rate you can get on a house, car, and credit cards - it can even keep you from getting a good rate on your insurance. Your credit rating is a way for businesses to determine how likely you are to pay back the money you owe it. The lower the number the less likely you are to pay it back.

Credit scores range from 300 to 850; anything under 620 is considered 'subprime' and normally represents people with a blemished or insufficient credit history. A good credit score is anything above 750. Assuming you could get a loan in the current market; having a 'subprime' credit score can really cost you - about 1.5%!

Let's put that into perspective. Say you have a 'subprime' score and purchase a $200,000 home. Your mortgage payments will be about $200 higher a month than someone with a 750 credit score (pure interest). That's $2,400 a year!

So, how is your credit score calculated you ask? FICO (Fair Isaac Corporation) determines your score based on 5 factors:

• Payment history - Having good 'credit behavior' will increase your score. Pay your full payment due, pay on time, don't have more then a couple of late payments on your report. Your payment history accounts for 35% of your overall score.
• Amount owed to total available credit - This is the amount of debt you have compared to the amount of credit you have been given. The best way to explain this is by looking at your credit card. Your credit card has a limit of $10,000 and you've spent $3,000 on the card. Thirty percent of your available credit is being used. That is better then spending $9,000 but not as good as only spending $1,000. This accounts for 30% of your total FICO score.
• Credit history length - The longer you've had credit the better your score will be. This is 15% of your score.
• New credit - The more credit you've apply for recently (like a credit card) shows that you need money and can lower your score. Shopping around for a good mortgage rate will not effect your credit as negatively as shopping around for new credit cards - just remember to do it in a short time frame. New credit is 10% of your score.
• Type of credit - You need a mix of 'good' and 'bad' credit; installment (mortgages and loans) and revolving credit (credit cards). This is 10% of your FICO score.

Knowing your credit score when you decide to start looking for a house is very important (you can buy a lot more house for an extra $200 a month). But it's not important only when you're ready to make a big purchase. You should monitor your credit score annually. Annualcreditreport.com is a great resource to do just that. It is a free service mandated by the government. Every year you are allowed to get a copy of your credit report from the three reporters (Experian, TransUnion, Equifax). These reports will not give you your credit score (however you can pay a small fee to get your credit score) but it will get you what others see when you have your credit 'pulled'.

Spend some time looking over your credit report for accuracy. If you see something that is not correct, report it. All the information should be found on the report itself or on the website of the agency. Wrong credit information can hurt your credit score just as much as right credit information.

And when you've taken a look at your credit report and decided it was time to buy your new home remember to come to Webster Team!