Improving bad scores takes time, patience

Dear Liz: I’m 27 and have been working hard for the last few years to bring up my FICO credit score. I’ve paid off all my credit card debt and disputed errors on my credit report. I’d like to purchase a home in the next few years and am trying to get my score over 700 (I am currently at 615). I have three credit cards that I regularly use and pay off. Do you have any suggestions on how I can continue to bring up my credit score? Should I take out a personal loan? Should I apply for another credit card? An auto loan, perhaps? This has been a frustrating experience, so anything that you can offer would be appreciated.

Answer: First, you need to understand that you don’t have one FICO credit score — you have three, one from each of the three major credit bureaus. You can buy two of your three FICOs from MyFico.com, the only source for the FICO scores that lenders use. (You can’t buy your third FICO because credit bureau Experian has stopped selling those scores to consumers, although it continues to sell them to lenders.)

Your mortgage lender will use the middle of your three scores to help determine your interest rate, so it’s important to review all three of your credit reports for errors and other problems. You can get free access to your reports at http://www.annualcreditreport.com.

Ignore the pitches for credit scores you see when you visit that site, since the scores typically offered aren’t FICOs.

If you continue to use your credit cards responsibly — charging no more than 30% of your limits, and preferably 10% or less — your scores should improve over time. You don’t need to carry a balance to improve your numbers.

An installment loan could help you rehabilitate your scores somewhat faster. The problem is that it may be difficult for you to get a loan, and the interest rate is likely to be sky high. If you’re considering an auto loan, make sure you can make a substantial down payment (25% or more) so that you can refinance to a more reasonable rate when your scores improve. Another option is getting a small personal loan from a credit union or bank that reports to all three credit bureaus.

There’s no easy, quick fix for battered credit scores, so be patient. In the meantime, you can work on saving up a substantial down payment so that you can better afford to be a homeowner when the time comes.

Why “free” credit scores aren’t

Dear Liz: Why are companies allowed to advertised “free credit scores” when they’re not really free? They want you to give them a credit card number, then charge you a dollar, and if you don’t call them within seven days to cancel they will charge you $14.95 a month for a credit monitoring service. That’s not free.

Answer: No, it’s not, but these companies profit from people’s confusion about scores.

Many people think we have a right to a free credit score, but we don’t. What we have is a federally mandated right to see our credit reports, which are different from our credit scores. Reports list your credit accounts, whether you’ve paid on time and whether you have negative public records, such as a bankruptcy or foreclosure. Credit scores are three-digit numbers compiled from those reports, but your scores aren’t a part of your reports. The only place to get your free credit reports is http://www.annualcreditreport.com.

If you’re being offered a free score, it’s almost certainly got strings attached like the ones you described, or the score isn’t the FICO score commonly used by lenders.

Sometimes it’s okay to close a credit card

Dear Liz: When our daughter turned 18, I was able to get her a credit card with a $750 limit by opening the account myself, with her named as an authorized user. I did not plan to use the credit card myself and did not. We were then able to order her a credit card with her name on it. She used the card for five years, paying the balance each month. When she graduated from college, the same credit card company offered her a rewards card with a $3,000 limit in her name only, leaving me off the account. This was just as I planned it. Now she wants to close the account with the $750 limit that was opened five years ago. Will this hurt anyone’s credit scores? Neither one of us plans to ever use this account again.

Answer: Closing accounts can’t help your credit scores and may hurt them. But if both of you have good scores (FICOs of 740 or above) and other open credit accounts, then canceling this account shouldn’t have disastrous effects on your scores.

Credit scores include your business cards, too

Dear Liz: When your credit scores are determined, do the formulas consider your business credit cards or just your personal cards? If I’m carrying balances on both types of cards, does it matter which I pay off first if I’m concerned about my scores?

Answer: If your business cards show up on your personal credit reports, and they often do, then those accounts are used to help calculate your credit scores.

You can see what accounts appear on your reports by using www.annualcreditreport.com, the only site that offers your federally-mandated, annual free look at your credit files.

The FICO scoring formula, which creates the numbers used by most lenders, doesn’t distinguish between business and personal accounts. If you’re carrying debt on both types of cards at similar interest rates, you should pay down the account that’s closest to its limit if you want the best chance of improving your scores.

“Too many credit cards” boosts insurance premiums

Dear Liz: My husband and I are in our late 60s and debt free. We recently were informed of a $200 annual increase in our auto insurance. Our insurer explained we have too many credit cards (all paid in full each month) and too many department store credit cards (including some we haven’t used in years, and all with a zero balance). What does car insurance have to do with credit cards? Can the insurer do this? Should we close some cards?

Answer: Only three states — California, Hawaii and Massachusetts — prohibit insurers from using credit information when calculating premiums. In other states, the practice is common, since insurers have discovered a strong correlation between people’s credit histories and their likelihood of costing an insurer money. (The worse the credit, the more likely they are to file claims, essentially.)

The states typically don’t regulate how insurers use credit information, so behavior that might not affect premiums at one company could jack them up at another. Closing credit cards might not help, because that could inflict its own damage by changing the credit-utilization portion of your insurance score with that company.

This is yet another reason it’s important to shop around occasionally for insurance: You can often find a better deal if you look.