Q&A: The reasons behind falling credit score

Dear Liz: Please explain to me how one’s credit depreciates. After paying off my home, my credit score went from mid-700 to mid-600. There were no changes or inquiries. I built it back up to 734, got into a tight spot and took a loan from my bank. I just checked the score again and now it’s 687. I have not been late or missed a payment. I thought keeping current on all payments and in some cases paying more would help, but it’s not. I need some help and direction.

Answer: We’ll assume that you’ve been monitoring the same type of score from the same credit bureau. (You don’t have just one credit score, you have many, and they can vary quite a bit depending on the credit bureau report on which they’re based and the formula used.)

Paying off a mortgage could have a minor negative impact on your credit scores if that was your only installment loan. Credit score formulas typically reward you for having a mix of installment loans and revolving accounts, such as credit cards.

But the drop shouldn’t have been that big. Something else probably triggered the decline, such as an unusually large balance on one of your credit cards.

Scoring formulas are sensitive to how much of your available credit you’re using, so you may be able to restore points by paying down your debt if you carry a balance or charging less if you pay in full each month. There’s no advantage to carrying a balance, by the way, so it’s better to pay off your cards every month.

Q&A: Building an emergency fund beats out building credit

Dear Liz: I am trying to raise my credit scores, which are very low. I have one negative mark on my account from a paid collection and I just got my first secured credit card. I have a bit of extra money right now and I’m wondering what’s the best way to use it to raise my scores. Should I get another secured credit card from a different issuer, get a secured 12-month loan through my financial institution or something else?

Answer: People rebuilding their credit often overlook the importance of an emergency fund. Having even a small amount of savings can keep a financial setback, such as a decrease in income or an unexpected expense, from causing you to miss a payment and undoing all your efforts to boost your scores. You can start with just a few hundred dollars and slowly build the fund over time.

Adding an installment loan can assist with building credit as well, but a secured loan may not be the best option if money is tight. The cash you deposit with the lender as collateral for the loan won’t be available again until you pay off the loan. Consider instead a credit-builder loan, in which the money you borrow is placed in a savings account or certificate of deposit to be claimed when you’ve finished making the monthly payments, typically after one year. That means you can keep the cash you already have for emergencies. Credit-builder loans are available from some credit unions and Self Lender, an online company.

You’ll want to make sure both the credit card issuer and the installment loan lender are reporting your payments to the three credit bureaus. If your accounts don’t show up on your credit reports, they’re not helping to build your scores.

In addition to making payments on time, you’ll want to avoid using too much of the available credit on the card. There’s no bright line for how much to charge, but typically 30% or less is good, 20% or less is better and 10% or less is best. Use the card lightly but regularly and pay it off in full every month because there’s no advantage to carrying a balance.

Q&A: Here are some ways you can improve your credit scores

Dear Liz: Two years ago I got out of prison after being there for nine years. I lost everything that I had. When I got out, my credit rating was 565. I recently bought a car and have made four payments so far. Can you tell me when I might have good credit again?

Answer: As long as you continue to make on-time payments, you should see gradual improvement in your scores. It’s impossible to predict how long it might take to achieve “good” scores, though. That depends on the information that’s in your credit reports, what credit score formula is used and what’s considered “good” by whichever lender is evaluating your application.

You should first make sure your payments are being reported to all three credit bureaus. Unfortunately, some car dealerships that specialize in bad-credit lending don’t report their loans, which means your payments wouldn’t be helping your scores. If that’s the case, consider getting a credit builder loan. These loans, typically offered by credit bureaus, put the amount you borrow into a savings account that you can claim after making 12 monthly payments.

Payments should always be made on time, by the way. A big chunk of your credit scores is determined by your payment history. Your low scores mean you fell seriously behind on your obligations, but even a single skipped payment can hurt. Consider putting payments on automatic so there’s no chance of a lapse.

Another large portion of your scores is determined by credit utilization, or how much of your available credit you’re using. Paying down an installment loan over time helps that ratio. So, too, does paying down or lightly using a revolving account such as a credit card. If you don’t have a card, consider applying for one. There may be a small initial hit to your credit scores, but that will fade quickly. People with bad credit often need to start with a secured credit card, which requires you to deposit a certain amount — typically $200 or more — with the issuing bank. Use only a small portion of your available credit — 30% or less is good, 20% or less is better, 10% or less is best. Pay the bill in full each month, since there’s no advantage to carrying a balance.

Another way to speed up your credit rehabilitation is to be added as an authorized user to the credit card of someone with a solid credit history. This other person doesn’t have to give you access to the card itself, but naming you as an authorized user may allow that person’s history with the card to be imported into your credit reports. Not all credit card issuers report this information, though, so the primary cardholder would need to ask. It’s also important that the other person continue to behave responsibly with credit. If the primary cardholder misses a payment or maxes out the card, your scores could be hurt, too.

You can track your progress using one of the many websites offering free credit scores. Your bank or the credit card issuer may offer free scores as well. The scores likely won’t be the same score a lender might use to evaluate you, but they should give you a general idea of where you stand.

Wednesday’s need-to-know money news

Today’s top story: What a travel agent can do for you that a search engine can’t. Also in the news: How one couple paid off over $200,000 in debt, 6 ways to weed out shady schools, and why your credit score may not be as good as you think it is.

What a Travel Agent Can Do for You That a Search Engine Can’t
More than just booking a ticket.

How I Ditched Debt: Setting Pride Aside and Asking for Help
One couple’s story.

6 Ways to Weed Out Shady Schools
Just because it has “university” in the name doesn’t mean it’s legit.

Why Your Credit Score May Not Be As Good As You Think It Is
So many scores.

Q&A: How to get a higher credit limit after the card company turns you down

Dear Liz: I asked for a credit limit increase on my Visa card from $5,000 to $20,000. I was turned down because of not enough income. I was very disappointed and wonder what if anything I can do to reverse the situation.

I am a 77-year-old retired widow who owns my home with no mortgage. My annual income is around $50,000 from Social Security and my required minimum distributions from IRAs. I have no debt. My investments and savings obviously don’t count. I was about to charge $12,000 in airline tickets and wanted to take advantage of the cash back on the credit card. I always pay my credit card bill in full every month. I feel discriminated against.

Answer: Imagine you’re a lender and one of your customers suddenly demands that you quadruple the amount you’ve agreed to lend her, with the resulting credit line equal to 40% of her income. That might give you pause.

Or perhaps not. Credit card issuers have different policies about when to grant or deny credit, and those policies can change over time as they try to manage the risks of their lending portfolios. Also, issuers may be less generous to their longtime customers than they are to the new customers they’re trying to attract.

Understanding all that can help you formulate a game plan to get what you want. One option is to call the issuer, explain your situation and ask for a temporary credit line increase so you can book those tickets.

Another (and certainly more lucrative) option would be to apply for a new credit card with a fat sign-up bonus from a different issuer. Several cash-back cards offer rewards of $150 to $200 once you spend a certain amount within the first few months, and you would meet that requirement easily with your ticket purchases.

If you’re willing to consider something other than a cash-back card, you can check out travel rewards cards that offer points or miles. Several have bonuses that can translate into $400 or more of free travel.

Applying for a new card might temporarily drop your credit scores a few points, but that shouldn’t be a concern if you’re not planning to apply for a major loan in the next few months.

Friday’s need-to-know money news

Today’s top story: Why free life insurance at work might not be enough. Also in the news: 5 personal finance books to read this year, picking a career you’ll actually like, and why your debt to income ration matters.

Why Free Life Insurance at Work Might Not Be Enough
Making sure you’re fully covered.

5 Personal Finance Books to Read This Year
Help from the experts.

Ask Brianna: How Do I Pick a Career I’ll Actually Like?
One of life’s biggest decisions.

Why Your Debt to Income Ratio Matters, and How to Find It
Measuring your financial health.

Thursday’s need-to-know money news

Today’s top story: 3 ways debt settlement may not be the fix you expect. Also in the news: NFL great Eric Dickerson shares money and life lessons, where to find low-cost checking and the reason why most people get rejected for a personal loan.

3 Ways Debt Settlement May Not Be the Fix You Expect
What debt settlement companies won’t tell you.

NFL Great Eric Dickerson Shares Money and Life Lessons
Tips from the Hall of Famer.

Consumers Can Find Low-Cost Checking, Despite Bank of America Move
Alternatives to BoA.

The reason why most people get rejected for a personal loan
Know the score.

Q&A: Get your credit score ready for the home-buying process

Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Q&A: How to improve your credit score and whether you should bother

Dear Liz: My credit scores are good, but I was wondering if there is a way to bring your scores to 800 or more if your income isn’t that high. I always pay my bills on time and my credit card off each month. In the last two years, I took out a small loan to pay off a car, then paid off furniture and now am paying on six new windows for my home.

My FICO scores run from 747 to 781. I’m told the reason they aren’t higher is that the number of accounts I have is too low and that my credit report shows no recent nonmortgage installment loans or “insufficient recent information” about such loans. I’m pleased that my scores are that high, but they say you get the best low-interest loans with a score over 800.

Answer: It’s not true that you need FICO scores of 800 or above to get the best deals. The best rates and terms typically are available once your scores are above 760 or so on the usual 300-to-850 FICO scale. Some lenders set the bar lower, to 740, 720 or even less. Also, your income is not a direct factor in your credit scores — although having a higher income can lead to creditors granting larger lines of credit, which could favorably impact your scores.

If what you’re after is bragging rights, there are some ways to boost good scores even higher.

The easiest may be to make more frequent payments on your credit card to reduce your credit utilization, or the amount of available credit you’re using. If your issuer reports your statement balance each month to the credit bureaus, paying off what you owe a few days before the statement closing date will reduce your apparent credit utilization. Just remember to pay off any remaining balance once you get your bill.

Another approach would be to apply for another credit card and spread your purchases between the two cards, which also can lower your credit utilization. Either way, continue to pay your cards in full, since there’s no credit scoring advantage to carrying a balance.

Taking out another installment loan could boost your scores, but it’s not smart to borrow money you don’t need if your scores are already good.

Remember, too, that there are many different credit scoring formulas. There are different versions and generations of the FICO score as well as FICO rivals such as VantageScore.

If you achieve an 800 with one type of score, you might not with another — and whatever score you achieve, you might not keep for long. Your scores fluctuate all the time, based on the changing information in your credit files.

It’s worth the effort to improve bad or mediocre scores because those can cost you in many ways such as higher interest rates, higher insurance premiums, bigger utility deposits and fewer options for cellphone service. Improving already good scores doesn’t offer much if any payoff, so it’s usually not worth incurring extra costs to do so.

Thursday’s need-to-know money news

Today’s top story: Whittle down your debt while having bad credit. Also in the news: 6 secrets from flight crews to stave off jet lag, what to buy every month of the year in 2018, and 3 ways you can better save for retirement.

Bad Credit? You Still Have Tools to Whittle Down Debt
You must be proactive.

6 Secrets From Flight Crews to Stave Off Travel Exhaustion
Keeping jet lag away.

What to Buy Every Month of the Year in 2018
Plan your shopping accordingly.

3 ways you can save better for retirement
Every penny counts.