First Person: 4 Ways To Protect Your Credit Score

Have you ever asked for a free credit report? Do you know how important your credit score is if you apply for a mortgage? Your credit score determines your eligibility to negotiate lower interest rates on your loan and affects your ability to get more credit from banks. The lower your credit score is, the less likely you are to be approved for more credit and loans.

Here are four ways that can help you protect your credit score:

Maintain low credit utilization

Maintaining less than 40 percent utilization of your credit is extremely important for keeping a good credit score. Generally, the lower the percentage of debt you use, the higher your credit score. On your credit card statement your creditors will notify you of your credit card limit. Having a high credit card balance relative to your credit limit increases credit utilization and lowers your credit score.

What to do: Do not max out your credit cards. The optimal credit utilization is under 10 percent of your credit limit or even zero.

Make timely credit card payments

Even if you have a credit score in good standing you should make timely payments on your credit card bill. Making a late payment won't hurt your credit score immediately, but it will incur late fees and set off higher interest rates on your credit card. But, if you skip a 30-day payment cycle, you will severely hurt your credit score. For instance, if your credit score is 780 before skipping a payment, it can plunge down to 680 after missing your payments. A 100 point drop in your FICO score will make credit more expensive and much harder for you to obtain.

What to do: Set up minimum automatic payments that can be withdrawn from your checking account as a protection against late payments. If you have any money left at the end of the month, you can make extra payments toward your credit card to reduce your debt.

Avoid foreclosure

Let's assume that you owe $200,000 on your foreclosed property, but you only get $130,000 from the short sale. Since the short sale does not generate sufficient funds to cover the underlying loan, the bank can take legal action against you for the deficient balance of $70,000 as well as any costs associated with the foreclosure. If the bank wins the deficiency judgment, you are legally required to cover the $70,000. Otherwise, the foreclosure will affect your credit rating for 7 years and your credit score will plunge by 250 points. Moreover, it will be harder to get approved for a mortgage for at least 2 to 4 years.

What to do: Avoid getting behind on your mortgage payments.

Avoid bankruptcy

Bankruptcy should be your last option after you have explored other alternatives including credit counseling, debt consolidation or forbearance. Filling for bankruptcy will hurt your credit score and will remain on your credit report for 10 years.

What to do: Try to keep your finances within control.

You may also ask for a free credit report to check on your credit score regularly. Nonetheless, make sure to know all your debt at any given time so that you are able to control it before it gets too big to handle.

More from this contributor:
How My Bad Credit Costs Me over $100,000
The Impact of Short Sales and Foreclosures on Your Credit Score
How to Get a Credit Card Fee Waived