Q&A: Taking a look at the confusing world of credit scores

Dear Liz: I was recently denied a credit card and told my score was 150 points lower than what my credit reports show. Why would this be? Am I being deceived by the credit reporting agencies? It was such a low number that it’s a little hard to believe since I have been approved for other cards recently.

Answer: The creditor that denied you should have told you which score it used and from which credit bureau in addition to the actual number. Lenders employ a variety of different scores, but most use some variation of the FICO formula. Credit card lenders tend to use FICO Bankcard scores, which are on a 250 to 900 scale in contrast to the usual FICO 300 to 850 scale. Your numbers will vary depending on the version and bureau that lenders use. For example, a card company may pull a FICO Bankcard 4 from TransUnion, a FICO Bankcard 2 from Experian or a FICO Bankcard 5 from Equifax, although many issuers use the latest version, which is FICO Bankcard 8.

If that isn’t confusing enough, FICOs aren’t the only scores in town. The scores you get directly from credit bureaus, for example, typically won’t be FICOs. You may have been looking at VantageScores or at a proprietary score. The free scores offered at many websites tend to be VantageScores, which are on a 300 to 850 scale but may not be the same as your FICOs.

If you want a clearer snapshot of where you stand before applying for credit, you can pay $20 at MyFico.com to see a bunch of your FICO scores from a single credit bureau or $60 to see FICOs from all three bureaus.

You may not be able to determine in advance which score from which bureau a lender uses, however. You also should understand that whether a score is good enough may depend on the lender and on the product. Many lenders require higher FICO scores for their better credit card deals, for instance. Sites that track credit card deals may give you some idea of how high your scores generally need to be to get approved, but there are no guarantees.

Your best course is to make sure all your scores are as good as they possibly can be. That means, among other things, paying your bills on time, not letting disputes turn into collections and using your credit cards lightly but regularly. You don’t need to carry a credit card balance to have good scores, and you should try to use 30% or less of your available credit limit at any given time. Finally, apply for credit sparingly, and don’t close credit accounts if you’re trying to improve your scores.

Q&A: Credit cards just keep coming

Dear Liz: I use only two credit cards. But I have several credit cards I never use. When the cards expire, the issuers send me new ones. I just received two more cards, with new expiration dates, which I will not use. I keep hearing that cancellation of cards results in lower credit scores. How can I cancel all the unused cards I have without affecting my 797 score, and how can I stop them from sending me new ones without my authorization?

Answer: Your issuers can continue sending you new cards until the accounts are canceled. Your “authorization” isn’t necessary once you’ve applied for the card. Some credit card companies will close an account that hasn’t been used in more than a year, but others will keep accounts open hoping you’ll start using the cards again someday.

Having several credit cards is typically good for your scores — of which you have many, by the way, not just one. But you don’t have to keep unwanted cards forever. If your scores are in the high 700s you can close the occasional credit card account.

What you don’t want to do is shut down a bunch of cards at once, or close your highest limit cards. Credit scoring formulas are sensitive to the amount of your available credit you’re using. Anything that significantly reduces the amount of available credit you have can hurt your scores.

Q&A: Credit score after bankruptcy

Dear Liz: This is just to add to your observation that credit scores tend to improve after a bankruptcy. I filed Chapter 13, which required a five-year repayment plan. At that point my score was around 640. The day of the discharge, I was able to get a car loan at 3% interest. Also, the bankruptcy dropped off my credit reports seven years from the filing date, and my scores actually dropped a good bit.

Answer: It’s pretty unusual for scores to go down after a bankruptcy drops off your credit reports. It’s possible you weren’t looking at the same type of score because there are many different formulas in use. It also could be there were other changes that happened simultaneously, such as a high balance on a credit account or an old, paid-off loan that a creditor stopped reporting.

It’s not unusual, though, for someone who completes a Chapter 13 to get a competitive rate on a loan where there’s collateral, such as an auto loan, assuming he has a job, credit score expert John Ulzheimer said.

“Debt free plus employed equals not a bad risk, especially if they put down a decent down payment,” Ulzheimer said.

Q&A: Getting help with credit scores after identity theft

Dear Liz: Would you please help readers learn how to fix credit scores after identity theft? I have been a victim at least eight times in the past five years. I have filed three police reports regarding these matters and sent them along with other proof to the big three credit report agencies. Only one quickly answered and deleted the false entries.

Answer: You have a friend in the Consumer Financial Protection Bureau.

In the past, complaints about credit bureaus went into a black hole. The Federal Trade Commission collected them but warned consumers that it couldn’t expect any action on their individual cases. The Consumer Financial Protection Bureau, by contrast, forwards consumer complaints directly to the financial company and works to get problems solved. The bureau says 97% of complaints get a timely response.

Before you make your complaints, though, you should check your credit reports again. One bureau may have been faster in responding, but the other two may have since deleted the bogus accounts.

Q&A: Fixing your credit scores after a bankruptcy

Dear Liz: How do you repair credit scores after filing for bankruptcy? My husband and I are in this situation and are looking to reestablish credit and increase our credit scores. Also, how long do closed accounts appear on the credit report?

Answer: Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.

You can continue the upward trend with a credit-builder loan. These loans, typically offered by credit unions, put the money you borrow — usually $500 to $1,000 — into a certificate of deposit or savings account that you can claim once you’ve made 12 monthly payments. Your payments are reported to the credit bureaus, so you can build a decent credit history and your savings at the same time. If your local credit union doesn’t offer these loans, check to see if there’s a community development financial institution near you that does. You can find links to these at www.cdfifund.gov. Another option is Self Lender, an online company that makes credit-builder loans.

If you don’t already have a credit card, you can accelerate your scores’ rehabilitation with a secured credit card. You make a deposit, typically $200 to $2,000, with the issuing bank and get a credit line equal to that deposit. You should use the card lightly but regularly, being careful not to charge more than about 30% of its credit limit and paying the balance in full each month.

Another option is to wait until your scores are in the mid-600s and then apply for a regular credit card.

The bankruptcy will remain on your credit report for 10 years, but it will have less effect on your scores as time goes by as long as you continue to use credit responsibly.

Q&A: Effects of closing credit card accounts

Dear Liz: I would like to know how to close credit card accounts and not get a bad credit rating for doing so. We are trying to improve our credit after filing for bankruptcy seven years ago.

Answer: If you’re trying to improve your credit, then avoid closing credit accounts. Doing so can’t help your scores and may hurt them. Credit-scoring formulas are sensitive to how much of your available credit you’re using. The formulas like to see a wide gap between your credit limits and the amount you charge, both on individual cards and in the aggregate. When you close an account, you reduce your available credit, which narrows that gap and can ding your scores.

If you want to speed up your recovery from the bankruptcy, continue using the cards lightly but regularly and paying the balances in full every month. Make sure to pay all your bills on time so that a skipped payment doesn’t undo all the progress you’ve made. Review your credit reports and dispute any errors, including accounts that were included in the bankruptcy but are still showing up as active debts.

That doesn’t mean you can never close unwanted credit accounts. You just don’t want to do so now, or when you’re in the market for a major loan. You can close an account or two once your scores are in the high 700s on the 300-to-850 FICO scale and you don’t plan to apply for credit in the near future.

Q&A: Removing a quit-claim house mortgage from your credit

Dear Liz: I recently divorced and quit-claimed my house over to my ex-wife. She has been making all the payments on time but the mortgage still shows up on my credit. Because of this, I can’t borrow as it is considered my indebtedness still. Do you know of anyway of having it expunged from my credit reports?

Answer: She will have to refinance the mortgage in her own name to get you off the loan. The contract you signed with the lender otherwise remains in force and isn’t affected by the divorce agreement.

It’s good that she’s making payments on time, since a single skipped payment could trash your credit scores.

It’s unfortunate your attorney didn’t advise you of the consequences of quit-claiming the property while remaining on the mortgage. It’s rarely a good idea to give up an asset while keeping the liability. A better approach is to separate your credit before the divorce is final. That means closing all joint accounts and transferring the debt to separate accounts in the name of the person who will be responsible for the payments. If your ex wasn’t able to get approved for a refinance, the house could have been sold so that you wouldn’t be on the hook indefinitely.

Q&A: Free credit score? Be careful

Dear Liz: As a financial planner, I am surprised you pointed someone in the direction of paying for a credit score. Your score can be accessed at several credit sites for free. Why would you want your readers to pay for something they could get free? 

Answer: As a financial planner, you should understand that “free” is a squishy concept.

Some sites do offer free credit scores in return for your private financial information, including your Social Security number. Most of these sites are committed to protecting your information — the credit bureaus they’re working with insist on that — but the sites may use your data to market financial products and services to you. As the saying goes, if something on the Internet is free, then the product being sold is you.

Many people are comfortable with that trade-off. Others aren’t. The other and perhaps more important reason to buy your credit scores from MyFico.com is that you’ll be getting numbers created from the same FICO formulas that most lenders use. The sites handing out free scores typically offer VantageScores, which is a FICO competitor. This particular reader wanted to see the auto FICO scores his lenders would use, and for that the best source is MyFico.com.

Q&A: Could new job affect credit rating?

Dear Liz: I have been employed at a small business, a sole proprietorship, for 34 years. My boss is going to just shut down the business, with no plan for succession. I have a job offer from a rival firm, so I don’t plan on being out of work for very long. How will this affect my credit rating? If I apply for a loan after being employed for, say, six months at the new firm, will the short time at that job be a negative mark against me? Should I hurry to apply for a loan before the business shuts down? Would that be illegal or unethical, since I know that I won’t be there much longer?

Answer: Few people know with any certainty how long they’ll remain in their current jobs. If only those who planned to stick with their employers indefinitely were allowed to apply for credit, lenders would go out of business.

That said, a recent job change can complicate the process for getting some loans, such as a mortgage. If you’re planning to borrow the money anyway and can complete the loan process before changing jobs, you’ll likely have an easier time getting approved.

While some lenders take job stability into account, your credit scores do not. Credit scoring formulas don’t include any information about employment or income. You get and keep good scores by using credit responsibly. But part of responsible credit management is not applying for loans you don’t need, so don’t rush out to borrow money just because you can.

Q&A: Where to find FICO scores

Dear Liz: I’m looking to buy a car and I’d like to see the FICO scores that lenders use. I already visited MyFico.com, but I want another site that shows my real FICO scores for auto lending. If you could point me in the right direction, that would be great.

Answer: You were at the right site. When you buy one credit score for $19.95 from MyFico.com, you actually get several scores from the same credit bureau. Those include FICO 8, the most commonly-used score, as well as the FICOs that bureau typically supplies to mortgage, auto and credit card lenders. If you want to see FICOs from all three bureaus, you can buy them for $59.85 and get a total of 25 different scores.

The scores lenders actually use to price your loan may be somewhat higher or lower from the ones you’ll see because credit scores change all the time. But if you apply for a loan shortly after buying your scores, they should be pretty close to the ones you see.