Q&A: Helping a friend build credit

Dear Liz: I am selling my car to an old friend with no credit history. (The used car salesman wanted to charge her 6.5% interest.) Is there a way that I can report her timely payments to the credit reporting services to help her build her credit?

Answer: It’s not really practical for individuals to report payments, since subscribing to credit bureaus is expensive.

The rate your friend was quoted actually isn’t bad given her lack of credit history. If she kept the loan term relatively short (four years or less), she might be able to build up enough equity and credit history to refinance it to a lower rate in a year or two.

If she’d prefer not to take that route, you might suggest she explore credit builder loans. These loans, offered by credit unions, banks and some online lenders, are designed to help establish credit histories at the bureaus. The lenders typically put the borrowers monthly payments, minus a small interest charge, into a certificate of deposit that is the borrowers to keep after the final payment.

Secured credit cards are another good way to build credit scores. Borrowers make a refundable deposit with the issuing bank and get a credit line that’s typical equal to that deposit.

Q&A: Taking out a loan to boost credit scores

Dear Liz: I have little to no information — good or bad — in my credit reports. I am considering obtaining a secured loan from my credit union to establish better credit. Does it make any difference to my credit score if the credit union reports the loan as “secured”?

Answer: Credit scores don’t treat installment loans differently based on whether they’re unsecured, with just your promise to repay, or secured, which means backed by an asset such as an amount on deposit with the credit union.

What matters is how you pay off the loan (every payment should be on time) and whether the account will be reported to all three credit bureaus, so that you’re building scores at all three. Call and ask, because not all credit unions report to all three bureaus.

You also might want to consider a secured credit card, because having both types of credit accounts — installment and revolving — can boost your scores. Again, it’s important that you pay on time and that the card is reported to all three bureaus. You should use the card lightly but regularly and pay the balance in full each month for best results.

Q&A: Cosigning a loan

Dear Liz: Our son graduated from college last year and was recently hired as a permanent employee for a company he was contracted with for the past year. He wants to buy a new car but has limited credit history.

He has a credit card he has had since starting college. He uses it lightly and pays the balance off every month. If we are asked to cosign a loan, will paying for the car positively impact his credit scores?

Answer: Yes, an auto loan if paid on time should help his credit scores, but you shouldn’t cosign for it.

Many people who cosign loans somehow miss the important point that they are putting their good credit into someone else’s hands — and that one missed payment can trash that good credit, knocking 100 points or more from their scores.

Your son may be the most responsible 20-something on the planet, but he could still make a mistake. The only time that it makes sense to cosign a loan is when you are going to make all the payments on the debt.

He shouldn’t assume that his credit history is insufficient to get a loan. He can get his FICO scores, including the auto scores most often used by lenders, for about $20 apiece at MyFico.com. He should then take those scores to his local credit union to see what interest rate he would be offered on a car loan.

If it turns out his credit isn’t quite up to snuff, the credit union may have some kind of “credit builder” personal loan that can help improve it. (Credit unions are owned by their members and tend to have better rates and terms than many other lenders.)

Since he hasn’t had an auto loan before, discuss with him how easy it is to overspend on a car when you aren’t paying cash.

The costs of insuring, maintaining and repairing a car, plus the depreciation, can be as much as the monthly payment. In other words, the vehicle is likely to cost him twice what he thinks it will.

Once he sees how much of his paycheck is eaten up by car costs, he might be willing to consider buying a used car instead of a new one or saving up to pay cash.

If he does go ahead, make sure he understands the dangers of being “upside down” on a loan. Owing more than a car is worth leaves you vulnerable if the car is stolen or totaled, since you won’t get enough from the insurer to pay off the loan.

You can buy extra coverage for the gap, but a better approach is to make a large down payment and limit the loan term to three or four years.

Q&A: Free credit report

Dear Liz: I was trying to get my free credit report as you suggested in a recent column. I was asked to pay $1, which made me very uneasy. Why do they do this?

Answer: The fact that you were asked to pay for your free credit report — even a nominal amount such as $1 — shows that you went to the wrong site.

That can happen if you typed the correct site, www.annualcreditreport.com, into a search engine, rather than into your browser address bar, and didn’t carefully review the options before you clicked.

These look-alike sites are supposed to disclose that they’re not the real thing, but sometimes those disclosures are easy to miss.

The real site notes that it’s the only site for free credit reports and is authorized by federal law. You don’t need to provide a debit or credit card to get your reports, although you will have to provide identifying information such as your Social Security number.

Q&A: Paying for credit repair

Dear Liz: I’m seeking help in reviewing my credit report and how to fix any issues. I am not financially distressed, but have FICO scores in the 675 range. Could you recommend someone I can hire to assist as I need to refinance a house I bought for cash?

Answer: There’s so much fraud in the credit repair industry that you’re likely better off doing it yourself rather than exposing yourself to rip-offs.

Credit repair companies aren’t supposed to take money upfront or promise things they can’t deliver, but many do.

One of the scammers’ most common ploys is to flood the credit bureau with disputes and to take credit for any negative information that temporarily disappears. By the time the negative information pops back up on the file, the scam artists have disappeared with your money.

Another approach they recommend is starting over with a “clean” slate, sometimes using borrowed or stolen identification numbers. That’s fraud, and even if it works, you’ll often find yourself worse off with no credit history than with a flawed history.

The Federal Trade Commission has some helpful advice on do-it-yourself credit repair.

You’ll need to first get copies of your credit reports from each of the three credit bureaus, which you can do once a year for free at www.annualcreditreport.com. Dispute any inaccurate information, such as collection accounts that aren’t yours or late payments that you made on time.

Follow up with any creditors that persist in reporting bogus information.

One relatively fast way to improve your scores is to pay down any credit card debt to 10% or less of the accounts’ credit limits. Don’t close any accounts while trying to improve your scores, since that won’t help your score and could hurt.

Opening new accounts can ding your scores as well, but it can be worth it to add another credit card to the mix if you only have one or two.

Q&A: Co-pays and collections

Dear Liz: My primary care physician referred me to a gynecologist for a medical issue. I called the office three times and asked that the appointment be made as an annual exam.
During the appointment, the doctor was rude and critical of my body and lifestyle. (I am obese.) I left the appointment in tears before it was over.

Five months later, I got a $160 bill for the appointment. My insurance denied the claim twice, saying the doctor was double charging, but the office fought back, saying the charge was for the referral, not the annual exam.

I have tried to work with the doctor’s office and my insurance, but now the bill has gone to collections. It’s knocked my FICO score from 780 to 680 in a matter of months.

Part of me does not want to pay the bill because of the abuse I received from the doctor. However, this is affecting my finances. Would it help my FICO score if I negotiated with the bill collector and then repaid a part of the bill? What are my options?

Answer: Your best option is to ask the doctor’s office, politely, to take back the collection account in exchange for your paying the bill in full.

The doctor should not have been rude to you. But you shouldn’t have tried to get a referral for a medical issue treated as an annual exam. You were probably trying to avoid a co-pay, because health plans typically cover this type of preventive care, but that’s not why you were there.

You could ask whether the bill collector will delete the account from your credit reports. You would almost certainly have to pay the bill in full to win this concession, and even then the odds are against it.

That’s why it’s better to ask the medical provider to take back the account. In many cases, medical providers place accounts with collectors on assignment and have the ability to pull them back if they want.

The latest version of the FICO credit scoring formula ignores paid collections and treats unpaid medical collections less harshly than other collections. But that formula is just starting to be adopted, and the more commonly used previous version, FICO 8, ignores only collections worth less than $100.

As you’ve seen, even one dispute can lead to a big drop in your scores. If you feel an issue is worth pursuing, it often makes sense to pay the disputed bill and then seek justice in Small Claims court.

Q&A: Credit score changes

Dear Liz: My Discover card started including a complimentary credit score with my statement. My first report was 840. Each month since has been lower.

Two months ago it was 812 and the last one was 800. I have not applied for any new loans, cards or other credit. My limit on this card is $4,000, and I never charge more than $500 each month, which is paid in full. Why does my number keep dropping when I’m doing nothing different?

Answer: You may not be doing anything different, but the underlying information used to create your credit scores changes all the time.

The company that creates the leading credit scoring formula, FICO, says 8 of 10 people experience changes to their FICO scores by up to 20 points from month to month.

One factor that typically changes: the balances reported by your creditors. The fact that you pay your credit card in full is wise, but irrelevant to your scores.

The balances transmitted to the credit bureaus and used to calculate your scores may be the balances from your last statement, or from a random date in the previous month. If you have other credit accounts and loans, the balances from those factor into your scores as well.

Other things can also change. For example, an old, closed account may “fall off” your credit report, which could affect your credit utilization (how much of your available credit you’re using) as well as the average age of your credit accounts.

Also, every month your active accounts get older, which is typically a positive factor.

So you’ll see changes even when you’re looking at the same type of score from the same credit bureau.

You would see even more variation if you could see all your scores, since lenders use various formulas and pull scores from three credit bureaus.

Although the FICO score is the leading formula, that doesn’t mean the FICO you’re seeing is the FICO a particular lender is using. The lender may use a newer or older version of the formula — or one tweaked to the auto lending or credit card industry, for example.

You don’t have much to worry about, in any case. Scores over 800 indicate that you’re quite unlikely to default, so lenders should give you their best rates and terms if you do decide to apply for credit.

Q&A: Personal loan debt vs credit card debt

Dear Liz: I need to understand how credit reporting agencies treat personal unsecured loan debt versus credit card debt.

I am considering getting a personal loan from a reputable lender to pay down my credit card debt. The amount of my overall debt will still be the same, just in a different category. How will my credit score be affected?

Answer: What you need to understand is how credit scoring formulas treat installment debt (loans) versus revolving debt (credit cards). Credit reporting agencies maintain the credit reports used to create scores — but don’t bless (or curse) particular types of debt.

The personal loan’s overall effect on your credit scores is likely to be positive if you pay the loan on time. What you owe on an installment loan is typically treated more favorably than a similar balance on a credit card.

Installment loans have other advantages: You typically get a fixed rate, rather than the variable one charged on most credit cards, and your balance will be paid off over the term of the loan, which is usually three years. If you stop carrying balances on your credit cards, you should be in much better shape: free of debt with potentially higher scores.

Often the best place to get installment loans is from credit unions, which are member-owned financial institutions that may offer lower interest rates.

Avoid any lender that gives you a high-pressure sales pitch, that offers you a loan if you have bad credit or that pitches debt settlement, which is far more dangerous to your finances than a personal loan.

If the lender tries to tell you about a new “government program” that wipes out credit card debt or tries to collect big upfront fees, you’ve stumbled onto a scam.

Q&A: Credit scores and new accounts

Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Q&A: Credit freezes

Dear Liz: Is there a way to lock my credit history and access to prevent the unscrupulous from opening accounts in my name? Maybe I’m rare, but I have enough existing credit cards, don’t have a mortgage and essentially have no debt, and I want to keep it that way. I suspect businesses that make their living issuing credit reports will resist this ability, but I want to do all I can to make it tough for anyone to steal my identity.

Answer: You can lock up your credit reports with what’s known as a credit freeze (also called a security freeze). The three major credit bureaus — Equifax, Experian and TransUnion — have information about how to do this on their websites. You also can find general information about credit freezes on Consumer Reports’ site.

Credit freezes can prevent new account identity theft — someone opening new credit accounts in your name. Lenders typically check credit reports when they get new credit applications. If they can’t access your reports thanks to a credit freeze, they’re unlikely to approve the application.

Of course, the freeze applies to you as well. If you change your mind and want to apply for a new account, you’ll need to temporarily thaw the freeze.

Other entities also check credit reports, so you may need to lift the freeze if you apply for a job, insurance, new utilities or cellphone service. You typically have to pay fees (which range from $2 to $15, depending on your state) to each bureau to lock up your credit and another set of fees to thaw it.

Credit freezes won’t interfere with your ability to use your credit cards or prevent your current lenders from accessing your reports.

Credit freezes also won’t prevent other types of identity theft, including tax refund fraud, medical identity theft and criminal identity theft (which occurs when criminals give law enforcement your information when they get arrested, rather than their own).

Still, credit freezes are a good solution if your identity has already been stolen or you’re at high risk because your Social Security number has been swiped or exposed in a data breach.

Credit bureaus may suggest you put a temporary fraud alert on your reports instead, or pay for credit monitoring or identity theft “protection” (which actually doesn’t protect you against anything but simply offers an early warning if your reports are compromised). A credit freeze is a more secure solution, but you have to weigh the potential hassle and cost against the benefit.