Incomes don’t count in credit scores
Dear Liz: I have high student loan debt. When I pull my FICO scores from Equifax and TransUnion, the only thing that’s keeping my scores low is that I have a 99% debt-to-income ratio on my student loans. The length of credit history and payment history are fine. I have two credit cards and I use 20% or less of the credit limits, paying in full every month, but I still have mediocre scores of 620 to 680. What to do in this situation?
Answer: Income is not a factor in calculating your FICO credit scores, so your debt-to-income ratio wouldn’t affect your scores. What you may be referring to is your credit utilization — how much of your available credit you’re using. While high utilization of credit cards and other revolving accounts can hurt your scores, it’s unlikely that high balances on installment accounts would be enough of a negative to make your scores so low.
What you need to do is pull your credit reports and examine them closely to see what’s wrong. You may have late payments or collection accounts you don’t know about, or you could be the victim of identity theft.
Debts rising? It’s time to cut spending
Dear Liz: You’ve made it clear that we should try to keep our credit card balances to no more than 30% of the credit limits. Many of us haven’t been able to do that because we’ve needed to put charges on or take cash advances from credit cards while we’ve had no work, so 50% was the revised goal. However, if still more charges or advances have to be done, is it better to still spread them around so that all credit cards are over 50% but below 60%, or is it better to just “max out” one card and keep the rest of them under 50%?
Answer: How about plugging the leaks that are causing your financial ship to sink, rather than musing over how much water you can take on before you’re swamped?
Steadily growing credit card debt is a clear sign it’s time to make changes to get your spending in balance with your current income. That’s because carrying credit card debt is simply too dangerous to your financial health and can lead you straight to Bankruptcy Court. It’s too easy to see something as a “need” and charge it, rather than make the tough decisions to cut back on what you can no longer afford.
For credit scoring purposes, it’s better to spread out the balances. For life purposes, it’s better to stop charging.
Don’t stick your head in the sand about debt
Dear Liz: I just got a letter from a collection agency saying I owe a phone carrier $498 for an ISDN line I thought I had terminated two years ago. I had no idea about this outstanding amount because we moved and the carrier didn’t get my forwarding address. I can’t find any hard evidence that I closed the account, and so much was going on then (I was expecting our first child, my father was dying and our landlord decided to sell the apartment) that I’m terrified I could have screwed up. We are otherwise always responsible with money. I’ve been too scared to check my credit reports, but I dread to think what this has done to my credit scores. I’m in a position to pay in full immediately, but I want to try to have this expunged from my credit reports if I can do so. My other concern is that if Verizon doesn’t think I terminated the account, could it have been billing me all this time? Is it the tip of the iceberg?
Answer: The chances are slim the carrier continued to bill you after turning this account over to collections. So your first assignment is to pull your head out of the sand and see whether this collection account has appeared on your credit reports. Torturing yourself with worry about what’s happening to your credit is worse than simply knowing. Go find out.
Once you do, and you realize you’re still breathing, you can get started on the next steps.
Understand that you may well not owe this debt. Plenty of people have been dunned for accounts that were properly closed and paid in full. That’s why it’s so important to hang on to your last statement, showing a zero balance, from any creditor, utility or other biller — it can quickly short-circuit bogus debt collection efforts.
You’re not out of ammunition because you don’t have your last statement, however. Federal law requires the collector to provide proof, once you ask for it, that this is actually your debt. Make your request in writing and send it certified mail, return receipt requested. If the collector can’t provide such proof, it’s supposed to stop collection attempts and delete any mention of the debt from your credit reports.
If the debt is yours, you can begin negotiations to either delete it from your credit reports or prevent it from showing up, if the collector has yet to report it. Get the collector’s promise in writing before you send any money.
How credit card balances affect your scores
Dear Liz: I am confused about how my credit limits and balances are affecting my credit scores. I haven’t paid any interest on my credit cards in more than two years because I always pay off my balance before the due date. Then I figured out that the issuer was reporting my balance on the last day of the previous month instead of on the due date, so it looked like I was carrying high balances. So I started paying the balance in full before the first.
The first time I did this, my Experian FICO score shot up 30 points. But the next month I did the same thing, and it dropped back down. I was told my score was lowered because it “shows no recent balances.” Is this valid? Does it mean I should be paying the balance minus $20 before the first, then pay the rest after the first? This seems like making a system overly complicated.
Answer: First of all, the credit score you’re monitoring is not a FICO score. Although Experian sells FICO scores to lenders, it sells other scores to consumers. What you’re probably looking at is a PLUS score, which isn’t currently used by lenders. So any gyrations you’re seeing don’t necessarily reflect what’s happening with your FICO scores — and your FICO scores are the ones most lenders use. Although you can’t buy a FICO score for Experian, you can get FICO scores for the other two bureaus at MyFico.com for $19.95 each. Along with the three-digit numbers, you’ll get reasons behind your score and suggestions for improvement.
And paying down a balance before it’s reported to the credit bureaus is one way to improve your FICO scores, since it’s the reported balance that’s used to calculate your credit utilization — an important part of the FICO scoring formula. But you also can improve your credit utilization simply by limiting how much you charge to any card in a given month. A limit of 30% is good, and 10% is even better.
Zombie debt may still hurt credit scores
Dear Liz: You just saved me $69! Eleven months after I was treated at a health clinic — where I paid the bill in full — I received a bill for $69. Because I have read so much from you on debt collection scams and zombie debt, I refrained from paying it. Before reading all your columns, I would have paid it without question, to save my credit score and avoid a headache. Instead I called the clinic’s billing department, with a receipt from last May that said my balance was zero. The billing representative told me that I do not owe anything and to disregard the new bill. It may not be a lot of money to most people, but it is money, and I am grateful to you for erasing biases taught to me as a child that have cost me in the past.
Answer: You’re not quite done yet. If you’re contacted by a debt collection agency, you need to send a copy of the proof you paid the bill to the agency, along with a letter saying that you don’t owe the debt and that reporting the debt to the credit bureaus would be a violation of fair credit reporting and debt collecting laws.
If the debt collector insists on reporting the debt to the credit bureaus, it could affect your scores. Continue monitoring your credit reports and be ready to dispute the bogus collection account if it appears. You may be able to sue the debt collector if it persists in reporting a false debt. You can find more information at DebtCollectionAnswers.com.
