Jan 11, 2019 4 min read

An important part of everyone’s financial health is his or her credit score.

That score reflects your credit history, and is calculated from information contained in your credit report. There are three main credit bureaus that collect payment histories from your creditors. Your reports contain information about how many accounts you have, your credit limits with each creditor, how long you have had them and your payment history.

It does not consider how much you earn or what your net worth is.

Different types of credit are treated differently. A mortgage might be outstanding 15 to 30 years, so the balance will not decrease as fast as a credit card, which hopefully you are paying down every month. Your three credit reports will be similar, but not identical. This is because not all creditors report to all three credit bureaus.

A credit score is calculated from information in your credit files. The most widely used score is the FICO, which ranges from 300 to 850. The average score this year was 704, which is the highest ever. Scores around 750 or better are considered excellent.

There are several reasons you should want to improve your score. People with higher scores often qualify for lower interest rates. NerdWallet found that a good score could save you more than $10,000 on a 30-year mortgage. Another survey found you could save several thousands of dollars on a five-year auto loan. Credit scores are sometimes used to decide who gets a job and may influence insurance rates.

The No. 1 way to improve you credit score is to pay bills on time. Another factor that affects scores is credit utilization, the percentage of each account max you are using. For example, if you have a $10,000 credit line and have a $4,000 balance, you are using 40 percent. Your credit score is higher if you are using a third or less of your credit line.

Because of this, you may not want to cancel credit cards you are no longer using. Cut them up, but leave them open if they do not have a yearly fee. This could make your utilization ratio better. You should have a goal to pay off the entire balance on credit cards every month. Interest rates are sometimes more than 20 percent and paying the minimum may result in taking years to pay off the entire amount.

You should check your credit report on a regular basis. The official government website is www.annualcreditreport.com. It is free to check every 12 months.

This is especially important now because there is so much identity theft going on. Review your credit files to make sure there are not any accounts showing that you did not open. If there are, notify the credit bureau immediately.

You can opt out of receiving any pre-approved credit offers. In fact, it might be a good idea to freeze your credit if you are not planning to open any new accounts soon. Even with a freeze, you can continue to use your existing accounts. You also can easily remove the freeze if needed.

I am hearing and seeing ads on radio and television saying you have a right to cancel some credit card debt that the companies do not want you to know about. Doing so will ruin your credit score and, if not done through bankruptcy court, you will probably receive a 1099 and have to report any forgiven debt as income and pay taxes on it.

Use your credit wisely and you will have less financial stress.

Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.