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Just how valuable is your credit score?

By: Humberto Cruz

The Savings Game

I always cancel credit cards I've stopped using even if closing the accounts hurts my credit score by raising my debt-to-credit ratio. Why keep unneeded accounts open and risk identity theft?

I don't follow the advice to split charges evenly among cards. The idea is to use only a small portion of each card's credit limit to boost our credit score. But since the only two cards I use offer rebates, I'd rather pick the one that gives the most cash back for each purchase (one does at grocery stores, for example, and the other at gas stations).

Naturally, I always pay my card bills in full. Your e-mails show many of you carry a balance because you think doing so improves your credit score. It doesn't. Even if it did, I'd rather save on the interest charges.

My credit score? The last time I checked two years ago it was over 800 (760 or above generally qualifies for the best credit terms). I don't know my score now and can't think of any compelling reason to find out, not if I have to pay for it.

To be sure, monitoring our credit history is important, and improving our credit score can save us thousands of dollars through lower interest rates. But in making our financial decisions, "we should not be ruled by credit scores," said Craig Watts, spokesman for MyFico.com.

That's a remarkably candid statement considering MyFico.com is the consumer division of Fair Isaac Corporation, the company that invented - and markets and sells - the widely used FICO credit scores.

A credit score measures lenders' perception of how likely we are to pay back a loan on time. The FICO score, typically a number between 300 and 850, is derived from information in our credit reports. These reports are files of our credit history as reported by lenders to the three major credit-reporting agencies, Equifax, Experian and TransUnion. Since details on the files differ, our FICO score for each agency is often different.

By federal law, consumers can get a free copy of their credit report from each of the three agencies once a year. I always do, checking for accuracy (go to www.annualcreditreport.com). But reporting agencies can charge a "fair and reasonable" fee for credit scores. You can also buy them from MyFico.com and a host of credit-monitoring services. (For example, you can get all three credit scores and reports from MyFico.com for $47.85).

Knowing your score - and improving it, beginning with paying bills on time - is particularly important when you're establishing credit or applying for a mortgage or other consumer loan.

But if you have no foreseeable plans to borrow money and have verified your credit report is accurate and solid, "there is no huge compelling reason to keep checking your score," Watts said.

"If you check your credit reports and see nothing to be concerned about, then it's your personal decision" how often to check your credit score, said Janet Kincaid, senior consumer affairs officer with the Federal Deposit Insurance Corporation.

When closing inactive accounts, your score may dip because any outstanding balance on other cards will represent a bigger percentage of your total available credit. But over time, your score will recover. "If you are pretty sure you are never going to use that card again, closing the account is an excellent way to remove temptation," Watts said.

As to carrying a balance to raise credit scores, "that's not only wrong information, it's bad advice," Watts said. "Always paying your credit card in full every month is a terrific habit to get into."