An important part of everyone’s financial health is their credit score. Your credit score reflects your credit history. It 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 fifteen to thirty years so the balance will not go down as fast as a credit card, which hopefully you are paying off every month. Your three credit reports will be similar, but not identical. This is because not all creditors report to all three credit bureaus.
From the information in your credit files, a credit score is calculated. The most widely used score is the FICO score. It 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 thirty year mortgage. Another survey found you could save several thousand dollars on a five year auto loan. Credit scores are sometimes used to decide who gets a job and may influence insurance rates.
The number one way to improve you credit score is to pay your bills on time. Another factor that affects scores includes credit utilization. This means the percent 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%. 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 whole balance on credit cards every month. Interest rates are sometimes more than 20% and paying the minimum can last for years.
You should check your credit report on a regular basis. The official government web site is www.annualcreditreport.com. It is free to check every twelve months. This is especially important now since there is so much identity theft going on. Review your credit files to make sure that 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 can also easily remove the freeze if needed.
I am hearing and seeing ads on the radio and television saying you have a right to cancel some of your 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.