Credit Scoring Category
Dear Liz: What is your opinion of debt reduction programs? I am constantly receiving mail from various companies, and I was wondering if they are legit. They claim they can reduce my debt, which sounds promising, but I am hesitant to get involved with them.
Answer: You’ve got good instincts.
Many of the companies sending out these solicitations say they can settle your debt for pennies on the dollar. What they often fail to mention is that the debt settlement process can result in your being sued by your creditors and having your credit trashed. That’s assuming they try to settle your debt at all, rather than just disappearing with any money you pay them in advance.
If you’re struggling with too much debt, you should make two appointments: one with a legitimate credit counselor (visit the National Foundation for Credit Counseling at http://www.nfcc.org for referrals) to see whether you qualify for a debt management program to repay your credit card debt, and another with a bankruptcy attorney (check the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org for referrals) to see whether a bankruptcy filing might be appropriate for your situation.
Dear Liz: I have heard that you should never close credit card accounts of your own volition because that can hurt your credit scores. Are there any exceptions? I received a credit card several years ago, when my credit scores were in the toilet because of a number of collection accounts and delinquencies. I had no other open credit cards, so when they offered me unsecured credit, I accepted it willingly. The interest rate was (and is) 23.99%, and I was charged a $72 annual fee. Now, six years later, my credit scores are greatly increased. But you would never know it by this issuer. They have refused my request to lower the interest rate, and the annual fee has now gone up to $99 a year. My credit limit is $2,100 and a credit line increase of $150 would cost me a $14.95 fee. Under these circumstances, would you still counsel not to close this account?
Answer: Closing credit accounts won’t help your credit scores and may hurt them. But that doesn’t mean you should never close an account.
If you have several other credit cards, your credit scores probably won’t suffer much of a hit from a single account closure and will recover quickly from any damage done. You don’t want to close accounts if you’re still trying to improve your scores or if you’re in the market for a major loan, such as a mortgage or auto loan. Otherwise, though, there’s no reason to continuing paying for a card you no longer need.
If this is still your only credit card, you should use your good scores to open one or two cards with better deals. Then you can say good riddance to this one.
Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?
Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.
Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.
If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.
Dear Liz: I need to refinance my home. My credit score has slipped a bit over the last year (still pretty good) and my wife has lost her job. I’m concerned that if we get denied, that will impact my credit score. Some have told me that inquiries from potential lenders can hurt the score but being denied doesn’t show up. What are the facts?
Answer: The credit scoring formula used by most mortgage lenders, the FICO, combines all mortgage-related inquiries made within a certain period and counts them as a single inquiry. (The period is generally 45 days.) Single inquiries typically knock less than 5 points off your scores. The scoring formula also ignores any inquiries made within the previous 30 days. That allows you to shop for a mortgage without unduly damaging your scores.
Being denied credit doesn’t knock any further points off your scores. Given your situation, though — lower income and lower scores — it would make sense to talk to a few lenders before submitting any applications so you’ll have a better idea of whether you’re wasting your time. Also, consider talking with a housing counselor approved by the Department of Housing and Urban Development. (You’ll find a link at http://www.hud.gov.) These counselors keep up with various refinancing programs and may be able to guide you to one that works in your situation.
Dear Liz: A few years ago when buying my son his college laptop computer, I applied for the store card at a big, well-known electronics store (at the encouragement of the sales associate). I was denied. I have never been denied a credit card before. I have eight cards that are always paid off monthly, own my own home and have a satisfactory retirement income and a top credit score. By receiving the card, I would have had a substantial savings on the computer. The denial has bothered me ever since. Was this a ploy on the company’s part to deny me the savings?
Answer: That kind of bait-and-switch happens sometimes, but there may be other reasons you were denied.
When you were turned down, the company should have provided you with the name, address and phone number of the credit agency it used to evaluate you. You should have immediately requested your report from the agency to see if the information was accurate. Someone may have stolen your identity, and credit denials are often the first sign many victims have that there’s a problem.
A collections account also could have torpedoed your scores. Many people discover that a medical bill, library fine or parking ticket went unpaid only when they find the resulting collections on their credit reports.
Dear Liz: How long must I be punished for my ex’s poor payment history? In our divorce he agreed to pay the credit cards and other bills. He defaulted and has filed for a Chapter 13 bankruptcy. My credit scores plummeted, and recently one of the cards I obtained on my own to help rebuild my credit has dropped me, stating my credit scores as the reason. Do I have any recourse here?
Answer: Not really. As you’ve discovered, creditors don’t have to pay any attention to divorce decrees that say who’s responsible for paying what. You agreed to pay the bill when you signed up for the card. So if your name is on the account, your credit scores will be hurt if it’s not paid.
That’s why it’s so important for separating couples to separate their credit as well. Jointly held accounts should be closed, and any balances transferred to a card that’s in the responsible party’s name only. Otherwise, missed payments and charge-offs will continue to affect both people’s credit for years.
Dear Liz: Two years ago, my husband was denied a revolving $12,000 line of credit. The credit reporting agency indicated that denial was based on “little revolving usage, insufficient or no bank lines, and insufficient open accounts with zero balances.” Nine months ago, however, he was approved for a car loan and received a FICO Auto V2 Score of 808 from the same credit reporting agency. Another credit reporting agency gave him a FICO Auto 04 Score 836. We had wanted to pay cash for this car but thought it would be wise for my husband to improve his credit, so he got an interest-free loan. My husband was recently approved for and obtained a credit card with a $20,000 revolving credit limit. He previously had a card with a $2,000 limit. He will pay off the balances each month. Our question: How long should he wait to pay off the car loan so that the payoff helps his credit and doesn’t hurt it? We don’t like having outstanding debt and have no other loan obligations.
Answer: Occasionally there’s a conflict between doing what’s best for your finances and doing what’s best for your credit scores.
Paying off an installment loan early, for example, normally is good for your wallet since you’re saving money on interest. But this payoff may come with a cost. While the closed account can remain on your credit report for years, contributing positively to your scores, you’ll get somewhat more of a positive impact if you don’t rush to pay it off. The open account will do more good for your scores than a closed account.
In your case, however, there is no conflict. This is an interest-free loan, so you’re paying absolutely nothing for the option of keeping the account open as long as possible. If your primary concern is supporting your husband’s excellent credit scores, consider getting over your aversion to debt and enjoy the free use of the lender’s money.
(OK, it may not be totally free. Buyers who get zero-interest loans often pay more for their cars than those who get market interest rates, according to Edmunds.com. But we’ll assume you thrifty folks bargained hard and really did get free money.)
If your husband can’t tolerate having any debt, he can keep good scores simply by using those credit cards lightly but regularly. The less he uses of his credit limit on the cards each month, the better: 30% or less is good, 20% or less is better, 10% or less is best. Paying the balances in full will ensure he doesn’t have to pay a dime in interest to keep his scores in good standing.
Dear Liz: I had a 730 credit score and went shopping for a car. The inquiries on my credit report took my score down to 704. Now that I have the auto loan, does it help my score to make larger payments and reduce the principal faster? The payment is currently $375 but I could pay $500 a month if this is advantageous.
Answer: It’s unlikely the auto loan inquiries lowered your credit score by that much. An inquiry typically dings your scores by less than five points. Even if the dealership queried several lenders on your behalf, all the auto loan inquiries typically would be combined and counted as one. What’s far more likely is that other information on your credit report changed, affecting your score. A higher balance on a single credit card could have that effect.
By the way, you don’t have one credit score, you have many. Each credit bureau sells different versions of the FICO score to lenders, and auto lenders typically use a version of the FICO tweaked for their industry. It’s possible your lender used just one of these FICO scores to evaluate you, but others might use three — one from each bureau. Also, if you’re monitoring your score using a free service or one sold by a bureau, the number you’re seeing might not be a FICO at all but some alternate credit score that lenders don’t typically use.
To answer your question: Reducing the balance on an installment loan, such as a car loan or mortgage, would help your scores, but not nearly as much as paying down revolving accounts, such as credit cards. If you have any credit card debt, you’d be far better off using your extra money to pay off those bills. Not only would doing so help your scores more, but it also would have a bigger effect on your finances, since credit card interest is typically far higher than that charged on an auto loan.
Dear Liz: I am confused. I have always thought there was one FICO score, prepared by a private company. I thought each credit agency also had its own credit score but it was not scaled the same as FICO. Your recent column said one can buy two of the three FICO scores (Equifax and TransUnion), and the third (Experian) will soon offer its FICO through the MyFICO website. Please clarify.
Answer: It’s no wonder you’re confused. Many of the companies marketing credit scores don’t make it clear that there are many types of credit scores, and even many types of FICOs, which is the leading credit scoring formula.
The credit bureaus typically sell their own proprietary scores to individuals, either “consumer education” scores that lenders might not use or some version of the VantageScore, a credit scoring formula that was created as a rival to the FICO. Older versions of the VantageScore ranged from 500 to 990, but the latest version has the same 300-to-850 scale as the FICO.
The bureaus also sell FICO scores of various types to lenders. The FICO formulas were created by a separate company, Fair Isaac. Bureaus apply the proprietary FICO formula to the data in your credit reports to create your FICO scores.
Individuals usually can’t purchase their FICO scores directly from the credit bureaus. People can, however, buy their FICOs from the MyFICO website, which now offers FICOs from all three bureaus: Equifax, Experian and TransUnion. (For a few years Experian had refused to sell its FICOs to individuals, but that’s now changed.)
Something else you should know is that the FICOs you see may be different from the ones lenders see. The underlying data in your credit reports may change between the time you see your scores and the time the lenders see them. Or the lenders may buy FICO scores that are tweaked for their industry, such as for credit cards or auto loans. Another possibility is that lenders may use a different (usually older) version of the formula from the ones used to create the MyFICO scores.
Still, the scores you get from MyFICO at least should be in the same ballpark as the ones your lenders use. The same might not be true of any credit score that’s not specifically labeled FICO.
Dear Liz: I want to see all three of my credit reports with scores and fix some things on there that could be in error. What site do you recommend to get all three with scores?
Answer: You have a federally mandated right to see your credit reports once a year, and you can access those reports at http://www.annualcreditreport.com. That is the one and only federally authorized site. There are plenty of look-alikes, so make sure you get to the right place. Each of your three reports will include links that will allow you to dispute errors.
When you access your reports, you may be offered credit scores either for a fee or as an inducement to sign up for credit monitoring. Typically, these scores are not the FICO scores that most lenders use. If the word “FICO” is not in the name of the credit score being offered, it’s not an actual FICO score.
To get your FICOs, you’ll need to go to MyFico.com. Currently, you can buy two of your three FICOs — the ones from Equifax and TransUnion — for $19.95 each. Experian has announced it will soon offer FICOs through MyFico.com as well.