Ask Liz Weston

Get smart with your money

Credit Scoring

Q&A: Credit scores measure Dad’s accounts, too

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Dear Liz: I recently added myself onto my 95-year-old father’s two credit card accounts as an authorized user. I am his agent under a power of attorney and handle his finances. I noticed that after being added to those accounts, my credit scores increased. When he passes on, I plan to close those accounts. Will my credit score be negatively affected?

Answer: Possibly. Closing accounts doesn’t help your scores and may hurt them. Scoring formulas are sensitive to the amount of credit you have versus how much you’re using. Closing an account shrinks your available credit, and the formulas don’t like that.

If you have good scores and plenty of other open accounts, though, the damage from closing these accounts probably will be minor and short-lived.

Q&A: Too many credit cards? Protect your credit scores while closing accounts

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Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.

Q&A: Be strategic when closing credit accounts

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Dear Liz: I recently moved to a new state and would like to open a credit card at my new credit union. I’m concerned that closing my old credit union account and card will hurt my credit scores, which are over 800. The old card, which I no longer use, has a high credit limit. My income is also lower, so I’m not sure how that will affect the credit limit I get.

Answer: Closing credit accounts can ding your credit scores, but that doesn’t mean you should never close an unwanted account. You just need to do so strategically.

First, understand that the more credit accounts you have, the less impact opening or closing an account typically has on your scores. If you have a dozen credit cards, for example, closing one will likely have less impact than if you only have two.

Still, you’d be wise to open the new account before closing the old one. That’s because closing an account lowers the amount of available credit you have, and that has a large impact on your scores.

If the new issuer doesn’t give you a credit limit close to that of the old card, you’re still probably fine closing the old account if you have a bunch of other cards. If you don’t, though, you may want to hold on to the old account to protect your scores.

Q&A: This is why credit scores are so confusing

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Dear Liz: I am from Germany. I have had a bank account in America for over one year. Now I get my FICO score. After six months it was 738, half a year later, it was 771 and one month after that, 759. Why does it change in such a short time? Is it the real FICO score?

Answer: Welcome to the U.S. and its sometimes-baffling credit scoring systems. Even people who were born here often misunderstand how credit scores work.

You don’t have just one score; you have many, and they change all the time to reflect the changing information in your credit reports. Higher or lower balances on a credit card, a new credit application or the simple passage of time can make the numbers change.

The FICO scoring system is the most dominant, but lenders also use VantageScore, a FICO rival created by the three credit bureaus (Equifax, Experian and TransUnion), plus proprietary scores.

You also will see different numbers depending on which credit bureau report is used to create the score and which version of the score is used. Credit scoring formulas may be designed for certain industries and formulas are updated over time.

So your FICO Auto Score 6 from Experian likely won’t be the same as your FICO 4 from TransUnion, your FICO Bankcard Score 4 from Equifax or your VantageScore 3 from any of the bureaus, even if you get all the scores on the same day.

It can be hard to predict which score a lender will use, but the same behaviors tend to be rewarded by all of them. Those behaviors include paying bills on time, using only a small portion of your available credit, having different types of credit (installment loans and revolving accounts, such as credit cards) and applying for new credit sparingly.

If you’re using a score to monitor your credit, it’s important to use the same kind from the same bureau — otherwise you’re comparing apples and oranges, as we say in English.

Q&A: How asking for a credit limit increase can help your credit score

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Dear Liz: Does requesting a credit limit increase on a credit card affect your credit score in any way?

Answer: Such a request can result in a hard inquiry on your credit reports, which can slightly ding your scores. If you get the increase, though, that usually has a positive effect on your scores.

Credit scoring formulas, including those developed by FICO and VantageScore, are sensitive to how much of your available credit you’re using. That’s especially true on revolving accounts, such as credit cards. The less of your available credit you use, the better: 30% or less is good, 20% or less is better, 10% or less is best.

It’s important to keep your balances low relative to your limits even if you pay those balances in full every month (as you should). The balances that are reported to the credit bureaus, and used in calculating your scores, are typically your statement balances. If those amounts are high relative to your credit limits, your scores probably will suffer, even if you pay that balance off immediately.

People keep their credit utilization low in a number of ways. They can spread their purchases across a number of cards, make more than one payment every month (typically one right before the statement closing date, and another before the due date) or ask for credit limit increases. Any of those actions can help increase the gap between the credit they’re using and their available credit, which can help their scores.

Q&A: Adding a child as a credit card user

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Dear Liz: I’ve read that adding a child as an authorized user on your credit card could help build his or her credit history. But I was specifically told that this was not the case, as the child’s Social Security number was not primary.

Answer: Whoever told you may not have understood how authorized user activity typically is reported, or may have been talking about a specific issuer’s policy.

Adding someone as an authorized user to a credit card typically results in the history for that card being added to the authorized user’s credit report. That in turn can help the authorized user build credit history and improve his or her credit scores.

Some smaller issuers, such as credit unions or regional banks, may not report authorized user activity to the three credit bureaus, but all of the major credit card companies do. Some of these big issuers, however, don’t report the information if the authorized user is younger than a certain age or if the information is negative. The age cutoff varies by issuer. For American Express and Wells Fargo, for example, it’s 18; for Barclays, it’s 16 and for Discover, it’s 15. Other major issuers don’t have an age cutoff. American Express and U.S. Bank also won’t report to the authorized user’s credit file if the account is delinquent.

The credit bureaus, in turn, have their own policies. TransUnion includes whatever the issuers report. Equifax adds the information to the credit report if the authorized user is at least 16. Experian adds the information supplied by the issuers, regardless of age, but will remove it if the original account becomes “derogatory” — which typically means payments are skipped or the account is charged off.

If you want to help a child build credit by adding the child as an authorized user, you’ll want to make sure you’re adding him or her to a card that will actually do some good. A quick call to the issuer can help you find out its policy on reporting authorized user activity.