Installment loans can boost credit scores

Dear Liz: I am working on paying my bad debt from the past to rebuild my scores. I have one credit card that I pay in full every month, but no installment loan. I recently was given the opportunity to take a car loan with monthly payments I could easily afford. Here is my confusion: Taking on more debt while trying to eliminate past debt is usually not advisable. But I also know creditors like to see both revolving and installment credit. Am I OK to take the car loan to improve my mix of credit, or should I just use that extra money to pay off my past debt?

Answer: Adding an installment loan such as an auto loan, mortgage or student loan to your credit mix can indeed help rehabilitate troubled scores. But it’s advisable only if you’re well on your way to having the rest of your debt paid off. Otherwise, you risk stalling on your debt repayment or — worst-case scenario — adding another bad debt to the pile.

If your scores are still troubled, the car loan probably has sky-high interest rates. If you go this route, put down at least 20% of the purchase price so that you can refinance to more favorable terms in a year or two when your scores improve.

A better option may be to skip the car loan and try to get a three-year personal loan from your credit union. This fixed-rate loan would allow you to pay off some of your other debt while improving your scores.

Once your debt is paid off, you can save up to either buy your next car with cash or at least make a substantial down payment so you have to finance only a portion of the purchase.

Finally, you should know that although using and paying off your credit card is definitely helping your scores, paying off old debts may not be so helpful to your numbers. If the bills are already in collections, you may not see dramatic improvements in your scores as you retire those debts. That’s why you would be smart to look for other means to improve your scores.

“Piggybacking” can pose a serious risk

Dear Liz: You’ve written about helping teenagers get started with credit. One of your suggestions to parents is to consider adding the youngster to one of their credit cards as an authorized user. I agree with the spirit of the suggestion (that it will help the parent monitor any irresponsible spending), but I think in practice that can be dangerous to the kid.

At 16, my then-stepmother added me as an authorized user on her credit card “for emergencies.” I never used the card without permission, and I learned that credit cards are not free money. When I was in college, she and my father divorced, and we lost touch. I haven’t used that account in more than four years. Last fall I applied for a new credit card to use for business expenses and was rejected. I checked my credit report, and lo and behold, the account I am an authorized user on is now in serious straits.

Apparently after the divorce, my former stepmom had some financial trouble and eventually ran up that card to its limit, then filed for bankruptcy in 2010, leaving a glaring (and, according to the bank, immutable because the account is closed) spot on my credit. I have very little else as credit history, which makes this an even larger problem. My fiance and I are planning on buying a home in the next few years, and we’ll probably have to leave my name off to avoid serious increases in interest or even face being turned down for a mortgage.

In uncertain financial times even for the responsible, parents who add their children to their accounts need to know they are signing up to pass on all of their credit history, good and bad, to their children. Sometimes that’s more of a burden than a blessing.

Answer: Your experience shows the real potential downside for anyone who is added as the authorized user of a credit card. But you shouldn’t accept the bank’s initial response as final.

You can be removed from this account if the bank is willing to do so. Take your case to the bank’s chief executive. You can find his name and the bank’s corporate address on the bank’s website (check its regulatory filings under “investor relations” if the bank doesn’t make the information obvious).

Your experience also shows the importance of checking your credit reports at least once a year, since you could have spotted the problem and asked your former stepmother to remove your name from the card long ago. Also, it’s important to build credit in your own name rather than continue to rely on the record of someone else.

Free credit scores aren’t FICOs

Dear Liz: You recently wrote that it wasn’t possible to get all three of your FICO scores. In fact, you can get all three credit bureaus’ FICO scores at the same time at http://www.creditchecktotal.com on a one-time or subscription basis. I have the subscription at $29.95 per month and I can run all three as often as I want. They also have online inquiry to two of the three bureaus.

Answer: You’re getting access to credit scores at that site, but they’re not the FICO scores that most lenders use.

CreditCheck Total is a credit monitoring site run by the credit bureau Experian, which stopped selling FICO scores to consumers in 2009, although it continues to sell them to lenders. Instead, Experian typically sells consumers its own in-house credit score, the PLUS, which is no longer used by lenders. As the site says, “Lenders and insurers use several different credit scoring models, so don’t be surprised if your lender gives you a score that’s different from the PLUS Score you receive online.”

Currently the only place to buy two of your three FICO scores is at http://www.myfico.com.

How to score 800+

Dear Liz: You have done a number of articles on credit repair but have never told people how to raise a score into the 800s on the 300-to-850 FICO scale. How is that done? We make close to $100,000 a year, own four properties, have no debts except small mortgages on two properties, and have credit cards with high limits that we pay off each month, yet we can’t raise our score. What is the secret?

Answer: Your income and assets have no effect on your credit scores.

And there’s no benefit to having scores over 800. Lenders typically reserve their best rates and terms for anyone with scores that exceed lower benchmarks, such as 740 or 760. Furthermore, nothing in credit scoring is permanent — even if you vault over the 800 mark, you may not stay there.

If you want to play the game of trying to max out your FICOs, however, there are a few steps you can take. Make sure your mortgages and your credit cards are being reported to all three credit bureaus, since having both installment and revolving credit will help your scores. Continue to make all your payments on time. Don’t use more than 10% of your credit limit on any card, don’t apply for new credit, and don’t close any accounts. Finally, grow older. A longer credit history is a better credit history in FICO’s eyes.

You can’t buy one of your 3 FICOs, thanks to Experian

Dear Liz: I would like to get all three of my credit scores at one time, and I’m willing to pay. But I find no options on either the MyFico website or on the Equifax site to do this without having to sign up for some complex and expensive program. Didn’t it used to be possible to buy all the scores for about $30? If you know of a way to do so, I would appreciate your sharing it.

Answer: Each of the three credit bureaus sells its own, proprietary score to consumers, but those aren’t the FICO scores used by most lenders.

The only place you can buy two of your three FICO scores is MyFico.com for $19.95 each. MyFico once sold FICOs from all three bureaus, but Experian no longer sells FICOs to consumers (although it continues to sell them to lenders).