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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.
Dear Liz: Over the last couple of years I have managed to pay off my credit cards. I know that closing those accounts will hurt my credit so I kept them open. When I checked my credit report, I found that my rating had gone down and was told that I had to actually use the credit cards and pay them off to keep my score up. I’ve been doing that over the last year or so and my credit score responded well. This past month my credit score went down again by a few points and I learned that it was because the credit card companies had rewarded my diligence by raising my credit limit. This apparently hurt my score. What’s up with this? Is there any way not to get dinged by the reporting agencies?
Answer: Higher credit limits would reduce the percentage of available credit you are using, and that should help your credit scores, rather than hurt them. So the score you’re seeing either isn’t a FICO score, which is the score used by most lenders, or you are being given questionable information about what affects your scores. Many score monitoring systems are set up to give you explanations for any change in your numbers, but those explanations might be vague or might not accurately depict what’s truly influencing your scores.
Your FICO credit scores change all the time, based on the ever-changing information in your credit reports. Variations of a few points shouldn’t be a cause of concern. Continue to use your cards lightly but regularly, paying the balances off in full each month. Over time, the variations will smooth out into higher scores.
Dear Liz: I just finished paying off my last credit card and checked my credit report as I am now separated from my wife. I found we had one joint account that she had not been paying. There are two stretches of five months each of no payment.
I immediately called up the creditor and paid off the balance and the creditor closed the account due to the lack of payments. This one account killed my credit score. I also found two old accounts on my credit report that are both still active but I have not used them for years. Both accounts are in good standing.
I was thinking that if I started using the accounts again, paying them off each month, it would boost my credit score faster. I am looking to buy a house this summer and would have an easier time with a better score. Do you think using the old accounts would help improve my score faster or do you think my score would be better if I closed those accounts?
Answer: Closing accounts can’t help your credit scores and may hurt them. You should avoid closing any credit account when you’re trying to improve your credit rating.
Your experience shows why it’s so important to separate financial accounts when you’re separating from a spouse. Failure to pay any joint account can hurt both parties’ scores. This would be true even if you were divorced and had a divorce decree making her responsible for the debt. Your creditors don’t have to pay attention to such agreements.
Lightly using a few credit cards can help you recover from missteps like this one. “Lightly” means charging 10% or less of their credit limits, and you should pay the balances in full each month, since carrying credit card debt doesn’t help your scores. You shouldn’t expect your scores to bounce back overnight, however. If you had good scores before this incident, it may take you a few years to recover completely.
Experian stopped offering FICO scores to consumers a few years ago, even though it continued to sell the scores to lenders. This refusal made it tough for consumers to know what rates they should expect from mortgage lenders, which typically take the middle of your three FICO scores (one from each bureau). You could still get your TransUnion and Equifax FICOs from MyFico.com, but not your Experian FICO.
That’s apparently about to change. Buried in a press release today was an announcement that Experian will once again “make FICO Scores available to consumers through myFICO.com and through third parties.”
Dear Liz: My husband and I are in the process of refinancing our mortgage. I just received my credit report in the mail, and my score was 724. The report indicated that a delinquency resulted in my less-than-stellar score. When I went to the credit bureau site to see where the problem was, I saw that I had a $34 charge on a Visa last year. I rarely use that card, so I did not realize that I had a balance. As a result, I had a delinquent balance for five months last year. I am sick about this, as I always pay my bills on time. To think that my credit score was affected by something so insignificant is really bumming me out. Is there anything I can do to fix this?
Answer: You can try, but creditors are often reluctant to delete true negative information from your credit files. That’s why it’s so important to monitor all of your credit accounts, and to consider signing up for automatic payments so that this doesn’t happen again.
You should know that your mortgage lender won’t look at just one credit score when evaluating your application. Typically, mortgage lenders would request FICO credit scores from each of the three bureaus for both you and your husband, then use the lower of the two middle scores to determine your rate. Even if 724 did turn out to be the lowest of the six scores, you should still get a decent rate, since that’s considered a good score.
Dear Liz: We have four credit cards that generate airline miles, each of which has a yearly fee. We also have a Capital One card with no fee that we use for travel to avoid currency conversion fees. We pay all cards off every month. Since it is getting so hard to use miles, we are thinking of closing all but the Capital One account, which also accrues points toward air travel. I have read that closing credit cards is not a good thing to do. I am 73, my husband 79, so I doubt we will need to incur debt in the future.
Answer: You may want to preserve your good credit scores even if you don’t anticipate taking out any loans. Insurers in many states use credit information to set premiums (although not in California).
If you do still care about your scores, you could consider asking your credit card issuers if you could switch to one of their no-fee cards. The closures of your current accounts may still affect your scores, but having several open, active accounts probably will offset the damage over time.
Or you could just take your chances and close card accounts rather than pay unnecessary fees. But consider having at least one additional credit card, in case your Capital One card is compromised or lost and you need a temporary backup.