Q&A: Don’t value credit rewards over scores

Dear Liz: You’ve advised people that “it’s important to keep your credit utilization down, even if you pay in full (as you should).” That may be good advice regarding one’s credit score, but there is another perspective. Although we pay in full every month (and have paid no credit card interest since 1971), charging almost every purchase or expense has earned us three pairs of round-trip frequent flier miles tickets to Paris — one pair first class and the other two business class — in the last 15 years.

Answer: Maximizing rewards shouldn’t come at the cost of your credit scores, particularly if you want to qualify for future cards that offer tempting sign-up bonuses. You can continue to charge away, as long as you either spread the charges across several cards or make two or three payments every month on each card you use to keep the balances from getting too high.

Q&A: One auto-pay misstep and her credit score falls off a cliff

Dear Liz: I recently took a deduction in my Experian FICO score of more than 100 points due to a single late payment to my mortgage. My score of 810 dropped to 704.

The mortgage company notified me several months ago that my impound account would go up $51 a month due to higher homeowners insurance premiums. I believed my auto-pay would adjust automatically as it used to, but that didn’t happen. About 10 days after it was “past due,” I received a letter saying I owed the $51 plus a $53 late fee. I promptly sent the money and asked that the late payment be deleted from my credit reports. The mortgage company refused, saying they would not and could not because of federal regulations.

I am about to get a mortgage loan to buy my daughter’s house, but now the rate will be at least 1 percentage point higher. Why would FICO scores drop over 100 points on one late payment? Anything I can do about this? How long will it be before my FICO scores are above at least 750 if there are no more late payments and my credit utilization stays below 10%?

Answer: “Federal regulations” can be a convenient punching bag for financial services companies, but they don’t prevent a lender or mortgage servicing company from deleting a late-payment notification for a good customer. The company should own up to the fact that this is its policy, not something imposed by the feds.

Your experience does show the potential downside of automatic payments and of impound accounts. (For those who don’t have impound accounts: They’re an arrangement by which the mortgage company collects payments for insurance and property taxes.) They can be enormously helpful when everything goes right, but they’re not “set it and forget it.”

Ideally, you would have made a note on your calendar to check that the larger payment was made on time and been able to quickly correct the error. There’s not much you can do now except ensure that all your bills are paid in full and on time from now on. It may take up to three years of stellar credit-handling behavior for your scores to break 800 again. Credit scores are like mountains — you can fall pretty quickly, but it takes a long time to regain lost ground.

The scores are extremely sensitive to late payments because that’s often the first sign of financial troubles that will end up in defaults, collections and bankruptcy. Credit reports and credit scores make no distinction between a late payment caused by human error versus one caused by lack of funds.

Wednesday’s need-to-know money news

Today’s top story: What to buy every month in 2019. Also in the news: Giving income updates to credit card companies, Experian adds a new way to strengthen your credit, and how the latest Fed decision affects rates on credit cards, mortgages and savings accounts.

What to Buy Every Month in 2019
Plan your purchases accordingly.

Should You Give Income Updates to Your Credit Card Issuer?
The pros and cons.

Experian ‘Boost’ Adds a New Way to Strengthen Your Credit
Utility bills can become a factor.

How the latest Fed rate decision affects rates on credit cards, mortgages, savings accounts
Understanding what it all means.

Friday’s need-to-know money news

Today’s top story: New scoring could help credit-shy millennials. Also in the news: Giving yourself the gift of a $0 credit card balance, 5 key steps to joining the 401(k) Millionaires Club, and why you should only share your credit card info at a hotel at the front desk.

New Scoring Could Help Credit-Shy Millennials
Introducing UltraFICO.

Give Yourself the Gift of a $0 Credit Card Balance
A gift with long lasting impact.

5 Key Steps to Join the 401(k) Millionaires Club
Starting early is crucial.

Only Share Your Credit Card Info at a Hotel at the Front Desk
Protecting your info during your stay.

New scoring could help credit-shy millennials

Millennials’ aversion to credit cards can make it hard for them to build good credit scores. A recently announced scoring system, the UltraFICO, may someday help them and other consumers get loans and credit based on how they use their bank accounts.

People who don’t overdraw and who keep a few hundred dollars in their accounts could get enough points added to their traditional FICO credit scores to qualify for approvals or better rates and terms. Others who don’t have FICO scores at all could get UltraFICO scores that allow them to get approved for credit.

In my latest for the Associated Press, learn more about UltraFICO.

Q&A: Why you should keep credit use low

Dear Liz: You recently said you don’t need debt to have good credit, but I was told that “credit utilization” — the amount of credit you use compared with your credit limits — is important. Paying off the cards each month means zero balances are reported to the credit bureaus and result in no utilization. Also, older credit accounts help scores, and my older accounts dropped off after a period of time, lowering my average age of credit accounts to four years. How can I fix this? Good credit doesn’t stay on forever.

Answer: It’s not true that paying off your cards results in zero credit utilization. The balance that the card issuers report to the credit bureaus is typically the balance on your statement date. You could pay it off in full the very next day, and the statement date balance would still show up on your credit reports and get calculated into your credit scores.

That’s why it’s important to keep your credit utilization down, even if you pay in full (as you should). It’s good to keep charges below about 30% of your credit limit. Below 20% is even better, and below 10% is best.

Accounts typically won’t drop off your credit reports unless they’re closed. Even then, the closed accounts can remain on your credit reports for many years, contributing to the average age of your accounts. The key to having good scores is to keep a few accounts open and in use, not to carry debt.

Monday’s need-to-know money news

Today’s top story: How today’s low taxes can nurture your nest egg. Also in the news: 4 questions to ask before you DIY, how a single mom masterminded a $700K swing from debt to savings, and how the new UltraFICO credit score will work.

How Today’s Low Taxes Can Nurture Your Nest Egg
New tax laws present a golden opportunity.

4 Questions to Ask Before You DIY
Doing it yourself could end up costing more.

Single Mom Masterminds $700K Swing From Debt to Savings
Learn how she did it.

Here’s How the New UltraFICO Credit Score Will Work
FICO scores are in for a big change.

Friday’s need-to-know money news

Today’s top story: How to keep investing when the stock market trembles. Also in the news: What to buy (and skip) on Black Friday, financial companies are hiding complaints, and how age affects your credit score.

When the Stock Market Trembles, Fight Your Fear and Keep Investing
Keep calm and invest on.

What to Buy (and Skip) on Black Friday 2018
Putting your Black Friday gameplan together.

Financial Companies Rack Up Complaints, but Good Luck Finding Them
Companies are hiding their complaints.

What does age have to do with credit scores? Plenty
A lot more than you’d think.

Monday’s need-to-know money news

Today’s top story: Why your financial advisor has a financial advisor. Also in the news: Is a rent-to-own home right for you, what really matters with your first credit card, and why FICO credit scores are now at their highest levels ever.

Why Your Financial Advisor Has a Financial Advisor
Taking off the blinders.

Is a Rent-to-Own Home Right for You?
The pros and cons.

What Really Matters With Your First Credit Card
Knowing the basics.

FICO credit scores are now at their highest levels ever … here’s why
The average score is now 704.