Credit Scoring Category
Dear Liz: Late last year, I applied for a credit card to buy a new computer on the computer maker’s website. I was declined. I was given the chance to talk to the credit card company’s agent and was belittled for having not-so-perfect credit, not enough credit and using too much credit, all in the same phone call. Needless to say, I got the message. I was also reminded that I’d had a charge-off on a competitor’s card in 1992! I always thought bad credit dropped off after seven years, certainly 10. Maybe you can clarify?
Answer: You need to take a look at your credit reports to see what lenders are seeing.
A charge-off from 1992 should have been removed in 1999, said credit expert John Ulzheimer, president of consumer education at CreditSesame.com. Charge-offs aren’t public records, so there would be no way for a credit card company to know that a competitor wrote your account off as a loss unless it’s still showing on your credit reports.
“This is why it’s a great idea to pull your credit reports from time to time to make sure ancient debts aren’t still on [them],” Ulzheimer said.
If the charge-off is still showing, you should dispute it with the credit bureaus to have it removed.
What might still be a public record is a judgment, if your old creditor filed a lawsuit against you and then took the trouble to renew the judgment to extend how long it could appear on your credit reports.
“That’s a little trick some lawyers play to keep judgments from expiring,” Ulzheimer said. “They’ll re-file them, sometimes in different jurisdictions, and the byproduct is new credit reporting.”
Under the Fair Credit Reporting Act, civil judgments have to be dropped after seven years unless your state has a longer statute of limitations. If it does, the judgment can be reported until the statute expires. The statute for judgments ranges from three years to 20 years. California’s statute of limitations for judgments is 10 years. Bills.com has a list of state statutes of limitation athttp://www.bills.com/statute-of-limitations-on-debt/. If you find a judgment on your credit report that should have expired, dispute it with the credit bureaus.
You also should remedy the other problems the representative brought up. You need to pay down the balances on the credit accounts you’re using (preferably paying them off in full). Once you’ve done that, consider adding another credit card to your mix — but use it only if you can commit to paying the balance in full each month. Paying your bills on time and responsibly using credit will help you put your “not-so-perfect credit” behind you.
Dear Liz: I got my credit reports from http://www.annualcreditreport.com as you recommended in a recent column, but had to go through some hoops to get my actual credit score, which is the main thing I wanted. One of the bureaus required me to subscribe to its newsletter, which cost $29.95 a month after a seven-day free trial. I guess they hope people won’t cancel within seven days, but I did, without any trouble.
Answer: Confusion about the difference between credit reports and credit scores often leads people to sign up for unnecessary, costly products. (You were signing up for credit monitoring, by the way, not a newsletter.) You can get free credit scores from a variety of sites, including Credit.com, Credit Karma and Quizzle, without having to buy a product. The scores you get from these sites aren’t the scores that lenders typically use, but neither is the score the credit bureau provided you. If you want to see scores lenders usually use, you’ll need to buy those for $20 apiece from MyFico.com.
Dear Liz: In February 2015, it will be seven years since my bankruptcy. I have worked hard to rebuild my credit, and my credit score is 735. What do I need to do to make sure my bankruptcy drops off at the seven-year mark?
Answer: By federal law, most negative marks must be removed from credit reports after seven years — but bankruptcy is one of the exceptions. A Chapter 7 bankruptcy, which is the most common, can stay on your reports for up to 10 years from the date you filed. Chapter 13 bankruptcies are typically dropped after seven years. In either case, you shouldn’t need to do anything. Credit bureaus should delete the information automatically. If they don’t, contact the bureaus and request the deletion, but that usually isn’t necessary.
If you have to live with bankruptcy on your reports for a few more years, you shouldn’t be discouraged. It seems you’ve done a good job rebuilding your credit, and your scores should continue to rise as long as you handle credit responsibly.
Dear Liz: My credit reports don’t show any of my old unpaid collection accounts. I also have one judgment that is not showing from 2005. My wife (who has perfect credit) and I are looking to apply for a mortgage. What will the lender find? I recently applied for a credit card to start rebuilding my credit. The issuer approved me for a card with a $1,000 limit and told me my score was in the high 700s. I am so confused.
Answer: If your collection accounts are older than seven years, your lender shouldn’t see them when it reviews your credit reports. Most negative marks have to be dropped from reports seven years and six months after the date the account first went delinquent. Civil judgments also have to be dropped after seven years unless your state has a longer statute of limitations; in that case, the judgment can be reported until the statute expires. California’s statute of limitations for judgments is 10 years.
If none of those negative marks shows on your reports and you’ve handled credit responsibly since then, your credit scores (you have more than one) may well be excellent.
Since you’ll be in the market for a major loan, you and your wife should get your FICO scores from MyFico.com. Mortgage lenders will look at all six scores (one from each of the three credit bureaus for you and your wife), basing your rate and terms on the lower of the two middle scores. If that score is 740 or above, you should get the best rate and terms the lender offers.
Your FICO scores will cost $20 each, which is a bit of an investment. You can get free scores from various online sites, but those aren’t the FICO scores that mortgage lenders use and are of limited help in understanding what rate and terms you’re likely to get.
Dear Liz: I am trying to help my retired parents refinance their home. Currently they are paying over 8% interest. (This loan should be illegal.) The problem is their credit score, which is around 536. They had a tax lien in 2004 (it has been paid off for over four years) and some minor credit card issues. The total card debt is less than $1,000. I see several bad footnotes on these cards. Some of the cards have a balance of less than $100. What is the best and fastest way to help them get the mortgage they deserve?
Answer: Your parents don’t have a single credit score. They each have their own scores. Mortgage lenders typically get FICO scores for each borrower from all three credit bureaus, for a total of six scores. Lenders look at the middle score for each person and typically base rates and terms on the lower of those two middle scores.
If that number is indeed 536, your parents have serious, recent credit problems. You may not think an unpaid credit card is a big deal, but it is to credit scoring formulas, which are designed to help lenders gauge a borrower’s risk of default. People with unpaid bills are far more likely to default on a new loan than people who pay their bills on time, and their respective credit scores reflect that reality. What people “deserve” isn’t a factor. How they handle their credit accounts is.
What you’re calling “bad footnotes” are likely records of late payments and perhaps charge-offs and collections activity. Those typically can’t be erased, but your parents can stop the ongoing damage to their credit by paying their bills on time and paying off any overdue bills to their credit card companies.
If the accounts have been sold to collectors, the process gets trickier. Paying off collections typically won’t help credit scores, but lenders usually want these accounts paid off before they will make a new loan. Your parents can try negotiating to have the collection accounts deleted in return for payment, but they won’t be able to erase the late payments and other negative marks reported by the original creditor.
Once they start handling their credit accounts responsibly, their credit scores will start to improve. The improvements will happen slowly, though, and they may well miss the opportunity to refinance at today’s low levels.
Dear Liz: One of my credit cards offers mediocre rewards — mainly an online store where I can use points to buy products I don’t really need. I would like a card from the same company that offers better rewards, but this is my oldest credit card and I don’t want to hurt my credit score by closing it. Should I just open a new card and use this one sparingly? Can I call the company to seek better rewards without closing the account? Thanks for any help you can offer.
Answer: If you have plenty of other open accounts, don’t be afraid of closing one occasionally. Most credit issuers continue to report the details of closed accounts to the credit bureaus for years, so your good history with this card will continue to contribute positively to your scores even if you close the account.
With that in mind, you can call the issuer and ask for a better deal, which will usually mean opening a new card. You also can shop for new cards at one of the many card comparison sites, such as NerdWallet, Cardratings.com or Creditcards.com.
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.