Ask Liz Weston

Get smart with your money

Credit Scoring

Q&A: Limiting your rate shopping window

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Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Q&A: How to boost your credit score before you buy a house

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Dear Liz: I am trying to purchase my first home. I have a 20% down payment for the price range that I am looking for. The issue I am running into is that I have relatively new credit and my credit score is not great at all. I had to go to the emergency room two years back with no insurance and have medical expenses that went into collections. I am now in a financial spot to pay them off. These are the only negatives on my credit report that are unresolved. Will paying these off get my credit to the point that I can buy a home? I am lost as to how to get my score where it needs to be.

Answer: Unfortunately, paying collection accounts typically doesn’t help your credit scores, especially the scores used by most mortgage lenders.

Since you’re new to credit, you may not realize that you don’t have just one credit score. You have many. The two major types are FICO and VantageScore. The latest versions of each (FICO 9 and VantageScore 3.0 and 4.0), ignore paid collections. In addition, FICO 9 and VantageScore 4.0 count unpaid medical collections less heavily against you than other unpaid debts.

But mortgage lenders typically use much older versions of the FICO score, which count all collections against you even if they’re paid.

That said, it would be tough to get a mortgage with unpaid collections on your credit report. Since you have the cash, you may be able to negotiate discounts so that you can resolve these debts at a somewhat lower cost. (Collectors typically would much rather get a lump-sum settlement than wait to be paid over time.)

You’ll also want to get some positive information reported to the credit bureaus to help offset the negative information. The fastest way to do that would be to persuade someone you know who has good credit to add you as an authorized user to one of his or her credit cards. This person doesn’t have to give you the card or any access to the account. Typically, the account history will be “imported” to your credit reports, which can help your scores as long as the person continues to use the card responsibly.

Another way to add positive information is with a credit-builder loan, offered by many credit unions and Self Lender, an online loan site. Usually, credit-builder loans put the money you borrow into a savings account or certificate of deposit that you can claim after you’ve made 12 on-time payments. This helps you build savings at the same time you’re building your credit.

Secured credit cards also can help. With a secured card, you make a deposit with the issuing bank of $200 or more. You get a credit limit that’s typically equal to that deposit. Making small charges on the account and paying it off in full every month can help you build credit without paying interest. You’ll want a card that reports to all three credit bureaus, because mortgage lenders typically pull FICO scores from all three bureaus and use the middle of the three scores to determine your rate and terms.

Q&A: Take a look behind the credit-score numbers game

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Dear Liz: I recently got an email from my credit card issuer stating my credit score had just dropped 21 points. Having a good credit score and not aware of any recent adverse actions, my first reaction was alarm.

Checking with the issuer online, I saw only advertisements for “protect your credit” services, so I phoned. I was informed the numbers came from Equifax credit bureau. I contacted Equifax as well as TransUnion and Experian, which resulted only in more offers of products to protect my credit. I downloaded my free credit reports from AnnualCreditReport.com and found nothing suspicious. I was finally directed to FICO, but an email sent more than a month ago remains unanswered.

Is it legal for these companies to market their products through presumably fictitious or even fraudulent means? What is the best way to find out my true credit score? Can my credit score suffer because I ask these questions in a public forum?

Answer: Knowing a little more about how credit scoring works may put your mind at ease.

There is no one “true” credit score. Lenders and other companies use many different kinds. FICO is the leading credit scoring company and the FICO 8 is the most commonly used score, but many companies use older versions or ones modified for their specific industry (such as the FICO Auto Score 5, for example). Plus, your FICO 8 from Experian may be different from your FICO 8 from TransUnion or Equifax because the scores are based on the information in your credit bureau files and the bureaus are separate, competing businesses that don’t always have the same information.

Then there’s the VantageScore, a rival to the FICO, which is used by some lenders and by many sites that offer people their credit scores for free. The VantageScore formula is different from the FICO formula, so your numbers could be different as well.

All these credit scores, however, are created solely using the information in your credit reports. Your income, gender, address, political opinions, computer operating system and online comments are not included in credit score calculations.

Some people are understandably confused about that. Various start-ups and researchers have suggested that non-credit information — such as information gleaned from someone’s social media postings or online surveys — could replace credit information in loan decisions. But the U.S. has fair credit reporting laws that probably would make such alternatives unworkable. (It would be nice if start-ups checked to see what regulations apply to their industry before sending out press releases, but that doesn’t always happen.)

Given that you didn’t see anything obviously wrong on your credit reports, you don’t need to worry too much. The credit score drop you describe might be because you charged more on a credit card than usual, had a credit limit lowered or applied for a bunch of credit in a short period of time. It probably will reverse itself over time.

Alerting you to credit score changes isn’t an illegal practice, even if the company’s primary purpose in keeping you up to date is to market credit-monitoring services to you. (Credit protection is a misnomer because these services can’t prevent identity theft. They can only alert you if it’s already happened.)

You did exactly what you should have done when you were alerted to the point drop — you went to AnnualCreditReport.com and checked your credit reports. If you want to put your mind further at ease, consider freezing your credit, a process that could prevent identity thieves from opening new accounts in your name.

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

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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

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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.

Q&A: Why you should keep credit use low

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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.