Credit card debt
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It happens. You forget to mail in a payment, or maybe you hold off because you don't quite have the funds in your checking account. You know a late or missed payment will ding your credit score, but how much do a few points matter, really?

A lot, it turns out.

Consider a hypothetical borrower in my home town of Alexandria, Va., who takes out a $500,000 mortgage. According to MyFICO.com, she could get a rate anywhere between 4.019 percent and 5.602 percent depending on her credit score.

Take a look at how the difference in rate affects her monthly payments and the total interest she'll pay over the life of her 30-year loan.

FICO Score APR Monthly Payment Total Interest Paid
760-850 4.019% $2,393 $361,320
700-759 4.24% $2,457 $384,438
680-699 4.417% $2,509 $403,178
660-679 4.63% $2,572 $425,990
640-659 5.058% $2,702 $472,669
620-639 5.602% $2,871 $533,569
As of Jan. 26, 2014. Source: MyFICO.com.

The $64,000 Question

Let's say you have a better-than-average FICO score falling somewhere in the 730 range. With that score you're in good standing to qualify for a mortgage APR of 4.24 percent.

But a few small slip-ups -- like a few late or missed payments -- could cost our hypothetical homeowner a lot. At 736, she'd pay $2,457 per month and $384,438 total interest for the life of the loan. But with a ding or two that drops her score down to 679, she'd pay $115 more per month and $41,552 more in interest payments overall. That's a whopping $64,670 more over the life of the loan than a borrower whose score is just 81 points higher, at 760. (And it doesn't take much to cause a quick drop in your credit score. MyFico offers these details about how much specific mistakes will hit your credit score.)

Not in the market for a mortgage? Less-than-stellar credit will cost you on a car loan, too. A borrower with an average credit score of 736 will pay $39 more per month on a three-year, $20,000 loan than her neighbor who has a score above 760 -- that's an extra $1,404 over the life of the loan.

So What Can You Do?

Far too many Americans -- 47 percent according to a CouponCabin.com survey -- don't even know their credit scores. If you're one of them, your first step should be to get your credit report from annualcreditreport.com. (That's the site set up by the three major credit agencies to fulfill their legal mandate to provide us with free, no-strings attached copies of your credit reports.)

Keep in mind that there is no single, universal score -- each of us has at least three, and credit blog ReadyForZero says we may have as many as 40! These scores can vary, making it hard to get a handle on your creditworthiness, but you have to start somewhere, so getting a hold of any of your scores is a good start.

Once you know where you stand, you can take steps to improve your standing. The most effective strategy is the simplest: Pay your bills on time every month. If you find yourself in a bind, don't shove the bill in a drawer: Call the creditor and ask for an extension. Do you have a bill that always comes due just before payday? Ask if you can change the payment due date.

Also, don't close any credit accounts while you're working to build up your score. Doing so may seem like a good way to avoid racking up more debt, but it can actually hurt your credit score.

You also don't want to apply for a bunch of new cards, either, as that can also ding you. (Find more tips on boosting your score here.)

Most important, don't get discouraged by past mishaps; recent credit activity counts more for your score than past behavior, so even if you've messed up in the past, resolve to turn over a new credit leaf right now. You'll see an improvement in your score after just a few months of on-time payments.

Whatever you do, don't ignore your credit score. It's one of the most important grades you'll ever get.

Understanding Your Credit Score

Robyn Gearey is a Motley Fool contributing writer. Try any of our Foolish newsletter services free for 30 days. ​

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6 Comments

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frank1946

Every Year there are 3-4 Errors on my FICO.

Takes 60 Days and lots of letters and calls to get them removed.

FICO a method to boost Margins on Loans or Cards ?

So, when I miss a favorable offer how do I get FICO to Indemnify me ?

Clowns and Frowns !

February 09 2014 at 12:31 AM Report abuse rate up rate down Reply
arenadood

Actually, if you have no credit and no loans your credit score will be way down.

February 08 2014 at 12:58 PM Report abuse +1 rate up rate down Reply
unitedpaintings

Clowns like Evan don't have dings, they have major crashes to the score

February 06 2014 at 12:30 PM Report abuse rate up rate down Reply
k4jlp

I burped the other day while outside, my FICO score dropped 75 points....

February 03 2014 at 3:12 PM Report abuse +2 rate up rate down Reply
jdykbpl45

Nothing; I pay cash.

February 03 2014 at 2:45 PM Report abuse +2 rate up rate down Reply
2 replies to jdykbpl45's comment
obamasam0r0nl

So you have no credit. That works . Just make sure you stay liquid, the Ol' Banco de Posturepedico. You'll go far. Let's do the math 10K in the mattress and in 10 years it's worth 6k…… NICE !

February 03 2014 at 10:25 PM Report abuse +2 rate up rate down Reply
wclark3350

For your new car? And your new home? Good luck with that.

February 08 2014 at 11:28 PM Report abuse rate up rate down Reply